Klarna is rediscovering an old banking truth

Swedish payments firm Klarna Bank AB is nearing a deal to raise fresh capital at a valuation of about $6 billion from existing investors led by Sequoia Capital, according to a person familiar with the matter.

That’s down from a valuation of $46 billion at least investment round.

The hard truth being rediscovered here – as was also found with the last financial innovation, peer to peer lending – is that we’ve not got a shortage of interesting ways of lending money to people. We always have had a shortage of people it’s worth lending money to.

21 thoughts on “Klarna is rediscovering an old banking truth”

  1. When I used to watc telly. I would occasionally trip over Can’t Pay? We’ll take ut away !

    Quite a few of the unfortunates were guarantors for people who had goofed off on their loans. It is pretty bad to be stiffed by someone that one thought was a mate and that one was only being polite by going along with this. But really, how loud do the alarm bells have to ring ? Same goes for these clever marketing types who invent these companies. If it was a good Idea it would already have been done by some bank.

  2. For a small insurance premium, will defaults still make you money, because the premium is invested in things that go up as defaults rise?

    In other words if Trump can’t repay, you just roll his loan because you’ve shorted casinos?

  3. Maybe. I’m generally sceptical of FinTechs, but I’m guessing this drop is due to market conditions and coming/threatened regulation of Buy Now Pay Later.

  4. It’s like the Grattan catalogue, but on t’internet was never an attractive business plan.

    Most of these ‘unicorns’ are basically ponzi schemes. See also, crypto.

  5. This seems to be another Vision Fund washout. I wonder when the Arabs are going to come for Son and cut his extremities off?

  6. I had some Klarna AB query appear on my credit report, despite never having heard of them before and never needing that level of poverty lending.

    I queried it with TransUnion (on whose credit report it appeared, but not Experian or Equifax) and they removed it. I presumed it was a failed attempt at fraud, but maybe Klarna AB is just dodgy.

  7. J. P. Morgan:

    “The first thing [in credit] is character … A man I do not trust could not get money from me on all the bonds in Christendom.”

  8. Bloke near Worcester

    I think Apple is about to enter the ‘buy now, pay over 3 months’ space, so maybe Klarna is uncomfortable.

  9. I think Apple is about to enter the ‘buy now, pay over 3 months’ space, so maybe Klarna is uncomfortable.

    I’m assuming that’s a joke? 🙂

    One of the things I saw was clothing marked as “Pay in 30 days” and also “Pay in 3 instalments” (3 * 30 days), which is certainly the “Provident Finance” end of the credit market.

    Last time I took up that sort of offer was a £200 suit from Burton’s which got chalked up on credit on a Burton’s Store Card (at 29.9% interest IIRC), that would be about 30 years ago, possibly more.

    I notice a lot of these “Klarna shops” are flogging ladies clothes and accessories. That’s probably your answer there.

  10. Yes, the apple thing might be a joke, but see this from MacRumors`: https://www.macrumors.com/2022/06/08/apple-pay-later-in-house-lending/

    Okay, I guess they see margin in this going to others and want a slice of that themselves. Perfectly reasonable. The last Apple items I bought (Mac Mini 2020 running M1, a MacBook Pro and iPad were all bought from Amazon for 0% finance over a couple of months per item (typical term being 3 to 6 instalments).

    I thought that was pretty good value, even though I could have purchased them outright, it helped my cashflow to pay in installments.

  11. @ John Galt

    I had some Klarna AB query appear on my credit report, despite never having heard of them before and never needing that level of poverty lending.

    all bought from Amazon for 0% finance over a couple of months per item (typical term being 3 to 6 instalments).

    These statements are directly contradictory – the base business model of Kalarna is to offer short term credit which spreads the cost of a purchase over 3-5 months interest free. The retailer pays a small premium to Klarna for securing the sale. As you say, it helps consumers with cashflow; it’s very much not poverty lending.

    I’ve used Klarna and other similar services several times and really like them. And yes, I did make purchases that I otherwise would not have, or would have postponed indefinitely as I didn’t want to stump up all the cash in one go.

  12. You may well be right and the Amazon thing was actually Klarna Ab wrapped inside an Amazon wrapper, that had honestly never occurred to me, since I naturally assumed that Klarna would be something explicit to the purchase.

    I will double check the timing on my purchases.

  13. To be fair, I lent through Zopa when all this PtPL was new. Can’t complain at all. Excellent ROI. The only reason I withdrew was to avoid having a UK tax position.

  14. These statements are directly contradictory – the base business model of Kalarna is to offer short term credit which spreads the cost of a purchase over 3-5 months interest free. The retailer pays a small premium to Klarna for securing the sale. As you say, it helps consumers with cashflow; it’s very much not poverty lending.

    Double checked my Amazon purchases for July 2020 (when the Klarna Ab entry is shown on the credit report) and there were no purchases that could be related, the first credit purchase being later that year.

  15. John,

    I wasn’t so much questioning a single transaction, rather your general alignment towards buy now pay later finance offerings. In your first post you described them as “poverty lending”, then later described how you actually found their services to be useful, whilst making clear that you didn’t really need the credit at all so the whole thing was just a convenience.

    So which is it – “poverty lending” or a convenient way for solvent people to spread the cost of luxury purchases?

  16. No. I was refering to how I’d actually seen Klarna Ab implementing their solution on clothing stores and my argument that the level it is pitched at “30 days credit on a dress” or “3 * 30 days credit on a jacket” was more similar to small loans providers like “Provident Financial” (doorstep loans people) who make small loans and then collect £5 or £10 per week on house-to-house visits until the loan (and the associated interest) are paid off.

    Now Klarna Ab say they don’t do this (charge excessive interest), but given that there are bad debtors out there, maybe this is why their model is failing, because they aren’t making sufficient money in interest to cover the bad debts (i.e. Tim’s original point).

    I guess I’m just biased because I’ve seen the doorstep loans business (both legal and illegal) as a kid and it’s often difficult to keep out of the trap of spiralling debt.

  17. The goal of BNPL firms is to embed themselves and clip as much spending as possible. Like Visa, but at four times the price. The offer to consumers needs to be looked at not as credit, or poverty lending, but as cashflow smoothing designed to get those who have happily transitioned from owning intangible things (music, software, movies etc) to renting them for a monthly fee to seeing paying for tangible things in a similar way… basically, boiling an entire lifestyle down into a monthly payment. That’s why they are popping up with their ‘offer’ in pubs, restaurants, supermarkets etc.

    The strategy to justify those huge valuations was, of course, to establish a big enough market presence… probably a duopoly… and seek all that lovely rent as people embed these devices into their lifestyle without realising, and whilst everyone pays for it via increased pricing at the retail level.

    Fortunately, it’s probably going to fail. The establishment is muscling in (apple, banks, etc) and the regulators are catching up and will start to impose things like credit checks and prohibitions on clauses that prevent retailers disclosing/passing on the BNPL fees. The firms might have to work out how to make a return based on the service and customer profile they have today, as they won’t ever be able to scale up and be the insidious leeches they were hoping to be.

  18. Apple’s specific use-case could be interesting. If you miss a payment, perhaps they can downgrade your phone’s performance or functionality (“no TikTok until you pay up”), thereby giving them more leverage than a standard lender.

  19. @Andrew M
    Indeed: Apple’s case is somewhat special…

    They don’t tend to have the kind of clientele that are that close to the bread-line (and for those who are, the phone is the last thing to go)
    They certainly have the potential to technically prevent resale of any product that is not fully paid off by refusing to allow a new apple id to own it — IDK whether they actually do that but it would seem prudent.
    The products have a sufficient resale value that they can foreclose, sell on as refurbished and in many cases still come out ahead of the game.

    I BNPLed my iPhone in 2019 because it made budgeting easier and didn’t cost anything. Adding that to a SIM-only contract was much, much cheaper than doing it via the carrier which is the “traditional” way of financing a phone — as in cheaper per month _and_ paid off in 20 months instead of 36.

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