Klarna’s layoffs signal a broader buy now, pay later slowdown

The mental gymnastics it takes to justify buying a $400 pair of designer sneakers becomes a mere somersault when it only costs you $100 every paycheck. And no one understood that better than the buy now, pay later (BNPL) startups that skyrocketed in popularity during the pandemic’s e-commerce boom.

Now, along with the rest of the tech sector, those companies are watching their rapid gains crumble. BNPL giant Klarna, Europe’s largest private tech firm, said yesterday it was laying off 10% of the company’s roughly 7,000 employees.

CEO Sebastian Siemiatkowski cited the war in Ukraine, soaring inflation, and a likely recession as reasons for the cuts. “While crucial to stay calm in stormy weather, it’s also crucial not to turn a blind eye to reality,” he said.

Quick refresher: BNPL companies Klarna, Affirm, Afterpay, and a number of other startups offer point-of-sale installment loans for online shoppers. Last year, US consumers spent over $20 billion through these services—just over 2% of the $870 billion they spent shopping online in total. And Klarna, the leader in helping you pay for your ASOS haul, grew its valuation from $11 billion in September 2020 to $46 billion last June.

It did not stay there

Last week, the WSJ reported that Klarna was currently looking to raise money at a valuation closer to $30 billion, a 30% cut from its valuation peak. And Klarna’s not the only one getting a shave: Shares of Affirm, the US BNPL giant, have dropped almost 75% this year.

Why the slowdown? For all the reasons Siemiatkowski mentioned, but also because companies made investments assuming that pandemic growth = forever growth. It wasn’t. The number of e-commerce transactions has actually declined 1.8% from a year ago, per a Mastercard SpendingPulse report released earlier this month.

Big picture: On top of all that, BNPL companies are dealing with another threat: regulation. Numerous US and UK agencies have launched investigations into the companies’ potentially predatory lending practices, accusing them of irresponsibly allowing young consumers to rack up debt.—MM