Klarna, the large buy-now-pay-later payments company that has been expanding very rapidly across multiple regions has seen its operating losses for the second quarter become $111 million which is much more than the $10 million losses during the same quarter last year.
This has been due to a combination of factors that include rapid expansion to new regions which involve setup, staff augmentation, and marketing expenses, and credit defaults, as well as the expansion, happens at breakneck speed which makes credit checks difficult at that pace and so regular defaulters who would slip in through the net especially in regions where the company launches newly.
The transaction volumes and the userbase have jumped as well as the company now boasts of a userbase of over 20 million in the US alone but for a consistently profitable company, this is indeed a turnaround though it is clear that this is only going to be a temporary blip as the market opportunity is there for anyone to take it and Klarna, with huge investment backing, a valuation of over $40 billion and an IPO in the pipeline, would be primed to avail this.
“If you’re a small bank you’ll have small losses, if you’re a big bank you can have bigger losses. At the same point of time that we’re growing this bank at a fast pace, then you’re going to have more losses as you’re going to have more revenues and volume,” said Chief executive Sebastian Siemiatkowski.
As the company begins to expand, critics have been saying that their business model doesn’t help the user but on the contrary, encourages the users to accumulate debt without them even realizing that they are getting into it. The BNPL model allows the user to convert large payments for their purchases into smaller installments for 3 or 4 months and the defaulters would be charged a late fee as well, quite similar to what the credit card companies do. But while the card companies have a well-established model to track defaulters and make sure that their credit history is correctly updated and tracked, this is not yet the case with BNPL companies which makes it easier for defaulting users to get away initially. They are likely to be made to pay for their credit eventually after charges but this encourages irresponsible financial behavior on the part of the users. This is something that the BNPL companies like Klarna would have to address at some point in time.