The Down Round of Klarna and Rise of the UK BNPL Market

A new round of funding is being sought by fintech giant Klarna which will lower its valuation to around $30 billion. The firm had a previous public valuation of $45.6 (a figure reported in The Wall Street Journal) and is considered to be one of Europe’s most valuable private fintech firms. However, the proposed down round of the platform will plunge its valuation by around a third and may lead to UK firms such as Zilch, Revolut and overtaking Klarna in European fintech valuation rankings. 

Founded in 2005, Klarna has raised billions from some of the biggest names in tech investment, including notable firms such as Japan’s SoftBank. According to the Wall Street Journal, Klarna is now seeking around $1 billion in its new funding round. 

BNPL Tech Companies in Trouble 

The down round of the firm indicates that its value has dropped to below what it was in the previous financing round. Yet this significant decrease in funding requested by Klarna comes amid wider problems in the technology sector and resides in a period of an increasingly uncertain economic climate. 

Investors have been selling off technology stock, suggesting that Version controls (VCs) are becoming more cautious as a result of rising interest rates and soaring inflation. A regulatory crackdown may also be a possibility in the scale back of Klarna’s valuation.

Despite the company – which offers a buy-now-pay-later (BNPL) credit to shoppers – operating in twenty markets globally, its yearly operating losses have almost doubled in 2021 to $487 million. 

Furthermore, offering online shoppers the option to pay in instalments has come under scrutiny from regulators. Regarding these BNPL issues, concerns have already risen in the UK and Sweden. Last year, due to the increasing popularity of the market Klarna resides in, the UK stated that interest-free BNPL purchases will begin to be regulated. The government took this step amid mounting pressure from regulators and consumer groups.

As a consequence of these actions, in a pre-emptive move ahead of new customer protection regulatory requirements,  Klarna recently announced that it will start reporting BNPL purchases by UK customers to credit report agencies.  

In May 2022, the Swedish Authority for Privacy Protection also launched an investigation into the payments firm’s checkout service. 

This, of course, all comes in May – a month when the stock market has already experienced a drop. This, as well as the continuing effects of the Covid pandemic and the ongoing Ukraine war continuing to surge inflation levels, have all contributed to feelings of general uncertainty regarding the global economic climate. According to CB Insights, this quarter will see the number of tech companies going public at its lowest since 2016.

Shareholders in other high-flying private tech companies such as Instacart Inc. and Stripe Inc. have also marked down the value of their holdings of the firms. 

Consequences for UK BNPL Market

Despite this, Klarna currently continues to dominate the BNPL market. However, it has been forced to face competition from more recently founded firms. This includes London-based Zilch (which recently expanded to the US) which offers a BNPL system across a period of six weeks with the opportunity for rewards for customers. The platform is linking with high-end brands such as Nike and Sephora and can be used with a further 38.7 million retailers globally. 

In the 18 months since its UK launch, Zilch has attracted more than 2 million customers, making it one of the country’s largest BNPL providers. The platform is now entering into an increasingly competitive U.S BNPL market where Klarna, as well as other companies such as PayPal and Afterpay, dominate. Competitive BNPL marketplaces in the UK and U.S in addition to the general uncertainty surrounding the market means companies such as Klarna will be forced to face the potentially damaging consequences.