Klarna installment payment – interest rate wrap puts payment service providers in trouble

But the industry gold rush could be coming to an end. This is because higher interest rates and more cautious consumers are driving up the financing costs of BNPL companies. “Right now there is more caution and less investor interest in BNPL companies because of the financial risks that could arise if we are in a period of economic slowdown or a potential recession,” said Bryan Keane, a payment analyst at Deutsche Bank. .

Klarna has fired 700 employees
Swedish BNPL company Klarna, one of the industry’s flagships in Europe, which was valued at $46 billion a year ago following a financing round, recently laid off 700 employees, or 10 percent of its workforce. Klarna reported a change in consumer confidence, inflation and the war in Ukraine, among other things.

Smaller companies, including many start-ups, may find it more difficult to access finance. “Most buy now, pay later providers don’t have access to deposits, they’re generally not financial institutions,” said Jordan McKee, senior analyst at 451 Research. There are exceptions. In general, however, they would have to borrow these funds themselves in order to lend them. But with the interest rates associated with borrowing rising, the deal is getting more expensive for them. “And that hurts their margins,” says McKee.

Industry experienced enormous growth
According to GlobalData, BNPL firms have created one of the fastest growing segments in consumer finance in recent years. In 2021, the industry had a transaction volume of $120 billion. Before the 2019 pandemic, it was just $33 billion. The business model has long benefited from the very low interest rate environment. This enabled BNPL firms to raise capital at a relatively low cost and to offer point-of-sale loans to customers on the Internet through online shopping sites. Consumers then pay for their purchases spread over a certain period and usually interest-free. BNPL companies charge online merchants for every transaction. According to 451 Research, there are currently more than 100 BNPL companies worldwide.

Apple entry will increase competitive pressure
Apple’s recent announcement of its own installment payment service is likely to intensify competition further. Share prices of listed BNPL companies came under pressure after the announcement. The American industry leader Affirm Holdings and the American competitor Block, among others, recorded price losses. But the share prices of Australian companies such as Zip and Sezzle also had to bounce. The sector is also increasingly on the radar of regulators. For example, the UK Treasury has launched consultations on how BNPL companies should be regulated in the future. And in Australia, members of the government are pushing to regulate BNPL providers through credit laws.

Customers will be further investigated in the future
Tim Waterman, Chief Commercial Officer of the British start-up Zopa, expects that future regulations will in particular tighten controls on customers who can make their payments. “The audits will add even more friction to the customer experience and will potentially be critical for retailers,” he said. BNPL is currently very efficient, but that could change. According to Deutsche Bank analyst Keane, traders may face higher fees as BNPL firms attract more customers to their websites. He estimates that this will mainly benefit large companies. Keane expects more acquisitions and mergers in the industry. Other experts also assume that large financial institutions may also be interested in acquisition opportunities in the sector.