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The mental gymnastics it takes to justify a $400 pair of designer sneakers becomes a mere somersault when it only costs you $100 per paycheck. And no one understood this better than the buy now, pay later (BNPL) startups that exploded in popularity during the pandemic’s e-commerce boom.
Now those same companies are seeing their quick wins plummet. BNPL giant Klarna, Europe’s largest private technology company, mentioned yesterday, he laid off 10% of the company’s approximately 7,000 employees.
It’s a bit like a set aside: BNPL companies Klarna, Affirm, Afterpay and a number of other startups named after quirky verbs offer point-of-sale installment loans for online shoppers. Last year, American consumers spent more than $20 billion through these services, just over 2% of the $870 billion they spent on online purchases in total. And Klarna, the leader in helping you pay for your ASOS transport, boosted its valuation from $11 billion in September 2020 to $46 billion last June.
Last week, the WSJ reported that Klarna was currently looking to raise funds at a valuation closer to $30 billion, a 30% reduction from its peak valuation. The company’s job postings also fell sharply from March 24.
Why the slowdown? Online shopping in general has been a drag: the number of e-commerce transactions has decreased by 1.8% a year ago, according to a Mastercard SpendingPulse report released earlier this month.
Additionally, as investors seek companies with positive cash flow ahead of a potential economic downturn, BNPL startups are racking up heavy losses.
- Klarna lost $700 million in 2021 (65% of which came from credit defaults).
- Affirm’s net losses widened to $430.9 million in fiscal 2021 from $112.6 million in fiscal 2020.
- Afterpay, which was acquired by Square (now Block) last year, posted losses of $345.5 million for 2021.
Big Picture: Blame the BNPL outage on a perfect storm. Numerous US and UK agencies have launched investigations into potentially predatory corporate lending practices. In December, the US Consumer Financial Protection Bureau said it was reviewing BNPLs, citing concerns about consumer debt accumulating.MM