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The mental gymnastics it takes to justify buying a $400 pair of designer sneakers becomes a mere somersault when it’s only costing 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, along with the rest of the tech sector, these companies are seeing their quick wins plummet. BNPL giant Klarna, Europe’s largest private tech company, said yesterday it was dismiss 10% of the company’s approximately 7,000 employees.
CEO Sebastian Siemiatkowski cited war in Ukraine, soaring inflation and a likely recession as reasons for the cuts. “While staying calm in stormy weather is crucial, it’s also crucial not to turn a blind eye to reality,” he said.
Quick reminder: BNPL companies Klarna, Affirm, Afterpay and a number of other startups 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.
It didn’t stop there
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. And Klarna is not alone in shaving: shares of Affirm, the American giant BNPL, have fallen nearly 75% this year.
Why the slowdown? For all the reasons mentioned by Siemiatkowski, but also because companies have made investments assuming that pandemic growth = eternal growth. This was not the case. The number of e-commerce transactions has actually decreased by 1.8% a year ago, according to a Mastercard SpendingPulse report released earlier this month.
Big Picture: On top of all this, BNPL companies face another threat: regulation. Multiple US and UK agencies have launched investigations into the companies’ potentially predatory lending practices, accusing them of irresponsibly allowing young consumers to take on debt.MM