Klarna is trying to raise fresh cash at less than half its peak $46bn valuation, a dramatic drop that highlights the crisis of the “buy now, pay later” business model that helped make it Europe’s largest privately held company, according to people briefed about the matter.
The Swedish fintech group has been forced to cut its valuation multiple times in recent months as it has attempted to convince investors to provide it with fresh liquidity, those people said.
A month ago the SoftBank-backed company was tapping investors, including institutional investment firms and family offices, for new cash at a $25bn valuation but failed to get any significant traction, those people said.
More recently some investors were approached again with the opportunity to invest at a valuation below $20bn, according to those people. The Wall Street Journal reported that Klarna was discussing raising cash at a valuation of about $15bn.
Klarna’s valuation shot up during the coronavirus pandemic as customers embraced online shopping rather than buying goods in retail stores. Since August 2019, its value has gone up from $5.5bn to a peak of $46bn in June 2021.
The sharp drop in Klarna’s value comes as the market capitalisation of publicly listed tech companies have plunged about 25 per cent since the start of the year. Tech investors have also been spooked by actions taken by central banks to tame inflation and the war in Ukraine.
In May the Stockholm-based company cut 10 per cent of its workforce of more than 7,000 people, blaming the Russian invasion as well as rising inflation, market volatility and a shift in consumer behaviour.
Buy now, pay later services, which allow consumers to delay or spread out payments over instalments, are facing a trifecta of threats from falling discretionary spending, the likelihood of higher customer defaults and rising interest rates as the economic situation sours.
Shares in Affirm, a US buy now, pay later provider that partners with Amazon and Walmart, are down 80 per cent this year.
According to polling commissioned by debt advice charity StepChange, half of those with buy now, pay later loans in the UK said they found it hard to keep up with household bills and credit repayments.
The sector is facing growing scrutiny from regulators and investors, who are wary about whether there are sufficient checks in place to make sure consumers can afford to use these products.
Last year, Klarna overhauled its services in the UK, including offering a “pay now” option, as it faced criticism that it encouraged young or vulnerable people to spend excessively. It also removed all late fees.
In May, it said that it would start sharing data about buy now, pay later transactions with UK credit bureaus Experian and TransUnion, offering greater clarity to other lenders on whether customers can afford credit.
On Thursday, the UK government committed to an overhaul of the Consumer Credit Act, which covers credit cards and personal loans including buy now, pay later. Separately, the outcome of a UK Treasury’s consultation into the sector is expected soon, after which the Financial Conduct Authority said it planned to launch its own dialogue on regulation.
Apple’s decision to enter the buy now, pay later earlier this month has piled further pressure on Klarna. The move has the potential to disrupt the sector, given that more than 1bn people use its iPhone handset.