Klarna valuation plummets as buy now, pay later market faces pressures

Digital
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In its latest financing round, buy now, pay later giant Klarna saw its valuation plummet by 85%.

Following the financing round, the Swedish company announced that it had raised $800 million from investors at a $6.7 billion valuation. However, this was down sharply from the $45.6 billion value it secured in a 2021 cash injection led by Japan’s SoftBank.

Rumours had circulated for weeks that Klarna was in a so-called ‘down round’, where a privately-valued firm raises capital at a valuation lower than when it last sold investors new shares.

Klarna CEO Sebastian Siemiatkowski attempted to downplay the significance of the company’s valuation decline, insisting the deal was a “testament to the strength of Klarna’s business”. He added that “during the steepest drop in global stock markets in over fifty years, investors recognized our strong position and continued progress in revolutionizing the retail banking industry”.

Klarna said it would use the funding to continue pursuing expansion in the United States. The company added that it now has almost 30 million US users in total.

What does this mean for the buy now, pay later market?

Klarna’s struggles are symbolic of a wider market trend. Over the past few months, numerous venture capital-backed tech firms have seen their valuations fall due to fears of a recession. These businesses have also made a series of layoffs and other cost-cutting measures in a bid to appease skittish investors.

Similarly, the development is also an indication of trouble in the buy now, pay later market. Service providers like Klarna and rival Affirm have recently faced questions over their business models; particularly against a backdrop of rising inflation and interest rates.

On top of this, these buy now, pay later companies are also facing escalating competition from a multitude of new entrants in the space — including Apple, which announced the launch of its own instalment loans feature in June as part of the company’s iOS 16 launch.

Klarna and the buy now, pay later market – the view from Spike

Apple’s foray into the space suggests that we’re not witnessing the death of the buy now, pay later market, which has been key to e-commerce growth over the past few years.

However, with providers currently being squeezed by inflationary pressures, rising interest rates and growing competition, it appears as though the market may be evolving and fundamentally changing the way it operates.

Over the next 6-12 months, we expect to see Apple’s new offering shape the future of the market. But, if Apple cannot capture a share of the market and make the service work in the current economic climate, it will be interesting to see how other buy now, pay later companies innovate and respond.