Klarna/credit apps: buy now, panic later

There are few things more satisfying than instant gratification on the never-never. Swedish private group Klarna, one of a growing crowd of “buy now pay later” (BNPL) fintech apps, makes it happen. Shoppers can purchase Lululemon yoga pants or a Peloton bike immediately and spread payments over instalments. Finger-wagging personal finance pundits warn it may all end in tears.

Paid over three instalments, these unregulated products carry no interest charges – Klarna bears the risk of non-payment. Separate, regulated, financing products offered by the financial services group charge an annual standard rate of 18.9 per cent. Other fees, for late payment, paper statements and debt collection, add up.

It has been a terrific model for investors. Klarna is closing a funding round that will reportedly value it at $31bn, 15 years after launch. That is three times the valuation secured just six months ago. London-based Checkout.com’s valuation rise to $15bn was similarly meteoric. Both are positioned to list on public markets, where Australia’s Afterpay has seen shares rise 134-fold from its 2017 flotation price. 

Is Klarna already overvalued? Assume sales grow at 40 per cent again this year; not a stretch for a nascent market. That gives $1.5bn of revenues and a forward multiple of 21 times, comfortably below rivals.

This is a growth market. Worldpay expects BNPL to account for 4.2 per cent of global payments by 2024, double last year’s level. Algorithms are improving, to better gauge creditworthiness. There are precedents too. In Japan it has long been possible to stagger payments for goods purchased by credit card.

Regulation is the biggest blot on the horizon. The sector’s “soft” credit checks, not shared with other credit agencies, have raised eyebrows. Some surveys justify the angst: one by comparethemarket.com found a fifth of shoppers use BNPL for most purchases, up from a tenth before Covid-19, and for bigger amounts. Britain’s Financial Conduct Authority, which is pushing for “urgent” changes, says usage nearly quadrupled in 2020 to £2.7bn. 

It may seem an odd moment to protest, with household savings at elevated levels. But that is skewed towards wealthier people. In total, more households have seen their savings fall than rise, according to an Ipsos/MORI survey. UK households have nearly £250bn of outstanding consumer debt, says the FCA. The risk for the BNPL sector is a double-whammy: more regulation and more bad debts.

This article has been amended to clarify the distinction between financial products offered

The Lex team is interested in hearing more from readers. Please tell us what you think of the BNPL sector in the comments section below