Has Klarna’s buy now, pay later bubble burst?
Buy now, pay later services have exploded in the last decade and industry titan Klarna has spearheaded growth.
The global BNPL market is expected to top $560.1bn (£412.8bn) in 2025 with 13.7 per cent annual growth.
Swedish fintech Klarna has historically dominated the space, notching a net operating income of $1.087bn in 2020. The firm processed a record $53bn worth of total goods and services in the year as it ramped up its stronghold on e-commerce.
But recent years have marked a series of headwinds for the BNPL leader.
As global interest rates rose in the aftermath of the COVID-19 pandemic, borrowing costs spiked, taking a significant chunk out of Klarna’s bottom line.
Klarna posted over $1bn in losses for 2022, as operating expenses increased 35 per cent to $1.6bn.
The fintech was dealt a major blow in July 2022, when a new funding round valued it at $6.7bn – a 85 per cent staggering drop from $45.6bn the previous year.
Firing, hiring and AI
In a bid to curb mounting losses and turn to profitability Klarna cut 10 per cent of its workforce. The firm cited economic challenges, such as inflation, changing consumer behaviour and Russia’s invasion of Ukraine for the layoffs.
Klarna’s pause on hiring led to a 40 per cent reduction of its workforce in the last two years as it turned to artificial intelligence.
Chief executive Sebastian Siemiatkowski said this week at the SXSW London conference that the firm had saved around $2m after trading Salesforce platforms for AI.
The fintech giant had previously held relationships with merchants through Salesforce platforms, but has since leveraged AI to consolidate the data.
Siemiatkowski said the business had closed down “1,200 small software services” in favour of “AI to help us accelerate the cleaning and standardisation of that information”.
But the company boss had conceded earlier this year Klarna’s AI pursuit had gone too far, as the firm plotted a rare hiring spree.
Siemiatkowski said the recruitment drive would aim to recruit “an Uber type setup” for customer service freelancers where employees can log in and work remotely.
Pause now, IPO later
Whilst the fintech dominated headlines at the beginning of the year as the subject of a hotly anticipated IPO, its public listing efforts have quickly stalled.
Klarna filed for an US IPO in March, where it sought a valuation of over $15bn, but bosses hit pause on the plans in April after President Donald Trump’s trade offensives unleashed havoc through global markets.
The following month, Klarna revealed a net loss of $99m for the first quarter of 2025 after a surge in failed loan repayments.
Consumer credit losses topped $136m – marking a 17 per cent rise. The proportion of loans not paid back – its credit loss rate – edged up to 0.54 per cent from 0.51 per cent.
The firm blamed the profit miss on several one-off costs, relating to share-based payments and restructuring efforts.
Still, revenue managed to jump 13 per cent year-on-year to $701m, as active users reached 100 million.
The business has also been forced to battle with a more competitive market in the last year with the growth of firms such as Zilch and Clearpay.
Klarna has diversified its product range on the back of rising competition with a new “Klarna Plus” subscription services and most recently the launch of physical cards – something rival Zilch has also introduced.
In the US, the Swedish fintech was able to displace rival Affirm as the sole provider of BNPL services to supermarket juggernaut Walmart.
The regulation question
Klarna’s first-quarter results came almost simultaneously with a UK government crackdown on buy now, pay later providers.
Firms will be made to adhere to stricter regulatory frameworks under the supervision of the Financial Conduct Authority. This will include thorough checks on consumers, such as checking incomes, spending and existing financial commitments to ensure they can harness new debts.
This comes amid a rapid rise in popularity for the services with nearly one in five 18 to 24 year-olds starting to use BNPL in the last 12 months according to data from Sum Sub.
Corin Camenisch, marketing and growth lead at SumUp, said: “The rapid uptake of Buy Now, Pay Later, driven by its undeniable convenience and frictionless access, has outpaced necessary consumer safeguards.
“The ease of adoption, while a growth catalyst, has also exposed vulnerabilities, risking significant financial hardship for individuals unaware of the full implications of missed payments.”
Many industry names have been vocal in calling for regulation on their industry. Klarna had already adhered to its internal regulatory principles which included the use of external data for transactions and affordability assessments.
Zilch chief executive Philip Belamant had said regulation would be a “critical step forward,” with the firm being one of few providers already FCA-regulated. Klarna received FCA regulation in 2023 for regulated and payment products.
A spokesperson for Klarna said: “Interest-free BNPL is an important alternative to high-cost credit for millions of Brits and we’ve supported regulation to keep it safe and accessible since 2020.
“It’s good to see progress on regulation, and we look forward to working with the FCA on rules to protect consumers and encourage innovation.”
Whilst the firm welcomed the clamp down, speculation arose for how it will meet new measures.
But expansion plans and IPO ambitions indicate Klarna is more than willing to double down on its place in the BNPL industry – and, even more so, fight for its top spot.