Breakingviews: Basic rules of banking apply to Klarna too

Lending is easy, one old banking adage states. It’s getting the money back that’s hard. Klarna, the Swedish buy now, pay later firm aiming for a U.S. market debut, wants to convince customers and investors that it has discovered a smoother alternative. But while Klarna would like to present itself as closer to Google than Goldman Sachs, conventional metrics suggest it is far from disrupting the laws of lending.

Like other BNPL providers, Klarna specializes in short-term loans borrowers can pay back in instalments and often without interest. The initial public offering prospectus touts a loan loss rate of 0.47% for 2024, meaning customers returned more than 99 cents of every dollar. Impressive, considering that U.S. banks collectively wrote off 5.2% of credit card loans as unrecoverable, according to Bankregdata.com.

Klarna’s lending is not as safe as it appears, though. It set aside $495 million last year to cover potential unpaid customer debt, 40% more than in 2023. The company, led by CEO Sebastian Siemiatkowski, compares that figure to the $105 billion customers spent through its BNPL platform, a metric it calls gross merchandise value.

Calculate it the way other banks do, however, and the outcome is less flattering. Klarna’s loan losses, which the industry calls net charge-offs, are 5.5% of outstanding balances. That rate is nearly 12 times higher than its preferred method, and slightly worse than what the average bank loses on credit card loans. Klarna includes this industry standard in its offering document, but not until page 177, while featuring the alternative measure on page 5.

Granted, Klarna’s customers typically pay off their instalment loans within two months, versus an average of 10 months for credit cards. This means its losses are spread over a bigger number of loans. Other BNPL companies also compare losses to total loans originated, but rival Affirm says the figure investors care most about is its volume of delinquent loans, a figure Klarna does not disclose.

It’s not clear that Klarna’s business model, once valued at a whopping $46 billion, is so different that it requires a new metric. Many credit card users pay off balances every month, avoiding interest entirely. JPMorgan’s customers spent $1.2 trillion with the bank’s plastic last year. On Klarna’s methodology, JPMorgan’s loss rate would be a higher 0.74%; using the conventional measure, it’s 3.1%.

The idea that Klarna shares should be valued like those of a high-growth company is partly based on the idea that its more efficient BNPL loans will keep taking market share from regular lenders. If, however, Klarna’s efficiency is not that different, investors may conclude it deserves a more bank-like valuation.