Fintech startup Klarna faces pressure as consumers take out micro-loans to pay for necessities

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A Swedish fintech company with a new premise faces complications as a surge of consumers taking out micro-loans to pay for necessities like rent and groceries threatens the company’s business model.

Klarna Bank AB, the aforementioned fintech company, has seen a rapid decline in its valuation after a disappointing funding round that attracted just $800m as investors grew increasingly wary of the ability of the company to maintain its unique business model.

Klarna is a company that allows users to take out small, interest-free loans to pay short-term bills such as groceries, rent, and gas.

The financial insecurity driving ordinary Americans to seek out these micro-loans may be largely attributable to the rising rate of inflation, which has continued to rise throughout the period following the initial wave of coronavirus lockdowns. CCP (Chinese Communist Party).

On Wednesday, the US Bureau of Labor Statistics released its latest Consumer Price Index report, showing an inflation rate of 9.1% between June 2021 and June 2022, an annual inflation rate not seen since November 1981. As wages struggle to keep pace with inflation, consumers may find themselves having to tighten their belts to pay for basic necessities such as food and shelter for their families, making Klarna an attractive option for paying bills in the blink of an eye.

However, those same factors that make Klarna attractive to beleaguered consumers also threaten the foundations of the company’s business model. In particular, Klarna does not charge interest on the loans it grants, but rather derives its income from charging small fees.

However, the company’s own debt has metastasized as the Federal Reserve’s interest rate hike regime has increased borrowing costs for Klarna itself. At the same time, it is assumed that the increasing probability of a recession will compromise the ability of borrowers to repay their personal debts to Klarna. The convergence of these factors made the business model of the microcredit company increasingly unstable and vulnerable in a struggling economy.

These challenges have sent Klarna’s valuation plummeting in recent years as investors have grown increasingly skeptical of the company’s ability to weather the storm of inflation and potential recession. While last year the company was valued at $46 billion, it is now valued at a fraction of its previous value at just $6.7 billion.

“Today Klarna announces an $800 million funding round during the worst equity downturn and challenging macro in decades,” said On Monday, Klarna CEO Sebastion Siemiatkowski. “We are not immune to a 75-90% decline in our public peers and therefore our valuation is on par…What doesn’t kill you makes you stronger…”

Not alone

Certainly, Klarna is not the only one to suffer from the weight of the current economy: Fintech has been one of the main victims of the massive sale of shares in progress, even the huge PayPal has fallen by more than 60 % since the beginning of the year. However, the damage to Klarna has been particularly severe, leaving investors wondering if the company can survive into the future.

Perhaps more pertinently, however, the situation at Klarna reflects the tribulations of everyday consumers, many of whom have been forced to resort to such means to support themselves in light of the economic difficulties that have plagued the nation.

“Three years ago people were talking about Peloton bikes, now people are buying sneakers, jeans, socks,” said Marshall Lux, a financial consultant and Harvard business professor. interview. “When people start buying household goods on credit, it signals a problem.”

More than anything, the challenges facing Klarna and other similar companies buy now, pay later reflect the growing desperation of American consumers, who find themselves increasingly pressured to borrow money just to make ends meet. in today’s economy.

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Nicholas Dolinger is a business reporter for The Epoch Times.

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