Klarna’s announcement that it will bring “buy now, pay later” loans to food delivery app DoorDash two weeks ago was intended to showcase the Swedish fintech’s US growth before its long-awaited initial public offering.
Instead, it triggered a backlash. The tie-up prompted a flurry of jokes on social media with users comparing taking on debt to pay for food deliveries to the subprime loans that caused the last financial crisis.
Klarna’s outspoken chief executive, Sebastian Siemiatkowski, took to X to defend the partnership despite the “quiet period” restricting his public statements ahead of the listing. “DoorDash offers many products beyond food! . . . “I know we are most famous for pay in 4. But you can use a credit card at DoorDash as well,” he wrote.
The outcry illustrates the scepticism around the “BNPL” loans that have fuelled Klarna’s growth: interest-free instalments offered to shoppers at checkout, often for low-value purchases.
Its advocates see Klarna’s New York IPO — for which it is targeting a $15bn valuation — as a tipping point that will finally cement the sector as a staple of consumer finance.
But Klarna sceptics point out the vulnerabilities of the short-term, interest free lending model that has underpinned its growth so far, its potential exposure to consumer downturns and sensitivity to higher interest rates, which push up funding costs.
Confidence has already fluctuated dramatically in recent years. Klarna’s valuation crashed from $46bn in 2021 — when it was Europe’s most valuable start-up — to $6.7bn a year later as rising interest rates put a halt to frothy investments in lossmaking start-ups.
Buy-now, pay, later has grown to be ubiquitous. The deferred payment method was used for $342bn worth of global ecommerce payment volumes last year, up from $2.3bn a decade earlier according to Worldpay. Even legacy banks such as Citigroup now offer it.
But it is 20-year-old Klarna that has popularised the product, thanks in part to distinctive pink branding that targeted a new generation of shoppers. Last year the company generated $2.81bn in revenues across 26 countries and more than 600,000 merchants, including Asos, Samsung, Sephora and Apple.
“Buy now, pay later meets a real need, largely for people who do not have access [to credit] through Visa and Mastercard but want to buy a product online and [not] get charged interest for it” said Nigel Morris, co-founder of venture fund QED and a former Klarna board member.
Klarna declined to comment for this article, citing its quiet period.
Its partnership with DoorDash is the latest of a string of deals with companies including Walmart, Stripe and JPMorgan that Klarna has struck as part of an aggressive push into the US, where it is seeking to catch up with Silicon Valley rival Affirm — and ensure it can justify a valuation on par with its listed peer.
Despite being Klarna’s main competitor, Affirm has a much higher share of traditional loans, with more than 70 per cent of its portfolio interest-bearing. By contrast, nearly 80 per cent of Klarna’s loans come from interest-free, “pay in four” and “pay in 30” loans — which are typically lower value and less profitable.
Klarna did appear to have one-upped Affirm when it signed a partnership with retail giant Walmart last month, sending shares in its competitor down as much as 14 per cent on the day.
To seal the deal, Klarna offered the retailer 15.3mn warrants that can be converted into Klarna shares at a weighted average price of $34 each — a total of more than $500mn worth of stock. Dan Dovel, an analyst at Mizuho, described the announcement as “a publicity stunt” designed to boost sentiment ahead of the IPO.
“It’s really an expensive press release”, said Dovel. Shares in Affirm recovered after the Silicon Valley company announced that it was still working with Walmart.
Klarna’s bread and butter of BNPL loans is under pressure, however.
Although Klarna primarily makes money by collecting from fees from retailers when it processes payments — as well as earning interest on some of its loans — consumer champions say interest-free BNPL lending is predatory because the lender generates fees should customers fail to make their instalments on time.
According to its IPO filing, 13.6 per cent of Klarna’s revenue last year came from late fees, which include “reminder fees” and “snooze fees”.
Consumer advocates also argue that shoppers risk finding themselves under unmanageable levels of debt by racking up loans from multiple providers. Research published by the Consumer Financial Protection Bureau earlier this year found that nearly a third of BNPL consumers had “stacked” loans from several providers between 2021 and 2022.
“People who’ve never used our service criticise it as promoting debt,” said Siemiatkowski, as he acknowledged the company’s “long list of sceptics” in his pre-IPO letter to investors. “What they miss is this: credit cards lump all your spending into a single bill, encouraging larger balances and revolving debt.”
While the light-touch approach to consumer protection championed by US President Donald Trump has assuaged fears of a wider regulatory crackdown, Klarna’s consumer loans also potentially expose it to rising credit losses in the face of an economic downturn.
Threats of tariffs and doubts about the resilience of the US economy have in recent weeks prompted a stock market sell-off and sent consumer confidence to a four-year low.
“There is short-term risk relating to the strength of the US consumer [but] longer term, the US will remain a consumption-driven economy,” said Erik Arnetz, chief executive of Swedish advisory firm and Klarna broker SV Ventures.
Klarna deliberately accepted losses when it entered the US market in 2015, counting on VC cash to fuel its expansion while it was fine-tuning its underwriting model. But there are concerns that a US recession could result in another spike in losses and strain the company’s business model. Last year, the company made a net profit of $21mn, up from a loss of $244mn the previous year.
QED’s Morris said that Klarna had tools to handle an economic downturn and avoid credit losses, such as by increasing the credit score required to borrow. “I would hunker down a bit . . . grow a little bit less as I watch the economy. But this is a business that if managed prudently can ride out a recession,” he said.
BNPL has also come under pressure on the funding side after central banks raised interest rates in 2022, squeezing margins.
“The increase in interest rates has resulted in challenges for BNPL and consumer credit providers,” said Liam Evans from PwC. “BNPL firms need capital to loan money to consumers. However, debt financing from banks has become more expensive.” Klarna’s funding costs rose from $147mn to $503mn between 2022 and 2024, according to SEC filings.
This is partly why Klarna — which calls itself an “AI-powered global payments network and shopping assistant” — has sought to position itself as more than a BNPL lender in recent years. It is looking to diversify away from short-term, interest free instalments towards more traditional interest-bearing credit and retail banking.
“Klarna has been on a transformation journey over the last several years [which has consisted of] repositioning the business and having both investors and the market at large understand that its business model and ambitions go beyond BNPL,” said Arnetz.
The company became a licensed bank in Europe in 2017. This allows it to fund 94 per cent of its loans with deposits, which it says “are highly stable and lower-cost than other non-bank funding strategies, such as asset-backed financing”. It has launched new features including cashback rewards and savings accounts.
Investors say part of Klarna’s promise is the potential to use its reach in multiple countries to roll out a wide-ranging suite of consumer financial products.
One such growth area is advertising and the indirect monetisation of customer data. Klarna made $180mn from advertising revenue last year. The group is seeking to build an “AI powered” shopping assistant tool to connect shoppers with targeted deals.
Siemiatkowski also hinted the company would offer crypto in coming years — fuelling speculation that it will allow trading or offer stablecoin payments.
“OK. I give up. Klarna and me will embrace crypto! More to come . . . Last large fintech in the world to embrace it”, he wrote on X in February.
But despite the announcement, no crypto activity was mentioned in the IPO prospectus filed in March.
“Their destiny will be to become a full service digital neobank, as is the destiny of Revolut, Monzo and Chime,” said QED’s Morris. “They’re all on a collision course, but the market is so big because the banks largely abdicated that segment.”
Institutional and high net worth investors looking to get a slice of Klarna ahead of the IPO are also buying into that long-term vision, said broker Arnetz who has advised investors on buying the company’s shares in the secondary market since 2020.
“This is really a fintech story more than it is a BNPL story,” he said.