Fintech Startup Klarna Under Pressure As Consumers Use Micro-Loans To Pay For Necessities

A Swedish fintech company that has a unique premise is now facing problems as consumers use micro-loans for basic needs such as rent or groceries. This could threaten the company’s financial model.

Klarna Bank AB, the above-mentioned fintech company, has seen a rapid drop in its valuation after a disappointing round of financing drew in only $800 million, as investors become warier of the company’s ability to maintain its unique business model.

Klarna allows you to get small interest-free loans to help pay for short-term expenses such as rent or groceries.

The financial anxiety that causes Americans to apply for micro-loans could be partly due to rising inflation. This has been increasing steadily since the first wave of CCP virus lockdowns.

On Wednesday, the U.S. Bureau of Labor Statistics released its latest Consumer Price Index report, attesting to a rate of inflation of 9.1 percent between June 2021 and June 2022–an annual rate of inflation not seen since November 1981. Consumers may have to cut back on their spending to meet inflation. Klarna is an appealing option to help pay the bills when wages are not keeping up with inflation.

However, the same elements that make Klarna appealing to struggling consumers can also pose a threat to the business model. Klarna does not charge interest for the loans it offers, rather its revenue comes from small fees.

But, Klarna’s borrowing costs have risen due to the Federal Reserve raising interest rates. The increasing likelihood of recession could also affect the ability of the borrowers to repay Klarna’s personal loans. These factors have made Klarna’s micro-loan business model more unstable and less resilient to the economic storm.

These challenges have led to Klarna’s value plummeting in recent years as investors are more skeptical about the company’s ability weather inflation and potential recession. Whereas the company last year was valued at $46 billion, it is now estimated at a fraction of its former value at just $6.7 billion.

“Today Klarna announces an $800m financing round during the worst stock downturn and challenging macro in decades,” said Klarna CEO Sebastion Siemiatkowski on Monday. “We are not immune to public peers being down 75-90% and hence our valuation is down on par… What does not kill you makes you stronger…”

Not Alone

Certainly, Klarna is not alone in suffering under the weight of the current economy: Fintech has been one of the major casualties of the ongoing equity sell-off, with even the massive PayPal falling by over 60 percent since the start of the year. Klarna’s financial ruin has left investors wondering if the company will survive the next decade.

Perhaps more relevantly, Klarna’s situation reflects everyday consumer struggles, who have had to resort to these means to survive in the face of economic hardships.

“Three years ago, people talked about Peloton bikes, now people are buying sneakers, jeans, socks,” said financial consultant and Harvard business professor Marshall Lux in a recent interview. When people begin to buy household goods with credit it is a sign of a problem .”

More than anything, Klarna’s challenges and other buy-now, pay-later fintech companies are a reflection of the increasing desperation among American consumers who find it increasingly difficult to save money in order to survive.

Read More