Seeking to stave off losses and withstand macroeconomic headwinds, buy now-pay later provider Klarna and some of its fintech peers are tightening underwriting standards and chasing cost savings.
Swedish firm Klarna said last week it’s shedding more workers, after already cutting 10% of its workforce earlier this year and reporting losses quadrupled for the first half of the year. The BNPL provider now looks to restructure as it tries to become a smaller company balancing profitability pursuits and growth desires, Bloomberg reported.
Other fintechs, too, have taken similar steps. This year, digital payments company PayPal has cut employees, closed an office and lowered its growth outlook for the year. Checkout startup Bolt also shed workers, and recently dropped its planned acquisition of crypto payments company Wyre. Payments fintech Stripe saw its valuation tank in July, as did Klarna when it raised capital that same month.
Especially for younger companies lending to consumers, such as Klarna, the days of growth overshadowing delinquencies and losses are gone, said Patrick DellaValle, a director in consulting firm Guidehouse’s financial services practice. As these firms find they “need to focus a little bit more on cash flow management,” some are pursuing transformation, he said in an interview.
Some BNPL and fintech players have realized they need to use more fiscal discipline to match investors’ desires. “I’m seeing a lot of fintechs take a really close look at their underwriting, their portfolio performance, their collections activities,” DellaValle said. He wouldn’t identify Guidehouse’s clients, but said the firm works with major fintechs and BNPL companies.
BNPL providers adjust
Within Klarna, rising credit losses in the first half of the year have prompted the company to make underwriting improvements, a spokesperson for the firm said. That includes lending less, particularly to new consumers, the spokesperson said, since it’s more challenging to underwrite a new customer than a returning one.
Still, Klarna said its default rates are lower than 1%, and a spokesperson asserted the BNPL firm is more agile than traditional lenders in responding to market conditions. The company constantly re-evaluates its lending criteria, and underwriting changes are reflected in half of the company’s balance sheet within two months due to the nature of the short-term loans it provides, that Klarna spokesperson said.
A spokesperson for BNPL rival Affirm pointed to comments made during the company’s fiscal fourth quarter earnings conference call in August. Affirm, which has noticed some signs of stress among certain consumer segments, is carefully watching credit performance and is “taking a fairly conservative posture,” CEO Max Levchin said during that call.
But, as Klarna also noted, Affirm benefits from offering shorter duration loans, which mean higher turnover on its book, Chief Financial Officer Michael Linford said at that time.
Affirm evaluates each transaction individually and has dials to manage risk, the spokesperson said. The company’s risk management tools include requesting “a transaction-specific down payment, or additional income information,” Levchin said during the earnings call.
A spokesperson for Block-owned Afterpay said the BNPL provider has not announced any plans to change how it underwrites transactions.
It can take newer payments companies more time to calibrate their lending standards after they’ve initially focused on building their brand and acquiring customers, DellaValle noted. As they transition to “defensive mode,” BNPL providers might look to make fairly dramatic lending changes.
Those firms might reduce available credit for consumers in higher risk categories, and consider involving third parties like call centers in collections efforts, he added.
With an eye on efficiency, BNPL companies also might shelve “pie in the sky” innovation initiatives and narrow their marketing focus, DellaValle said. Additionally, forthcoming products might not have “as much panache” but offer solid revenue streams, he said.
On regulators’ radar
BNPL companies also are keenly aware they’re on regulators’ radar. Since the firms scaled quickly, they’ve thus far operated in more of a regulatory gray area, and players operating in different regions of the world have varying regulatory environments to contend with, DellaValle said.
As the regulatory landscape evolves, those companies are now playing catch-up from the consumer protection standpoint, he said. In the U.S., the CFPB has said it’s considering rules to ensure BNPL providers adhere to laws that apply to credit card companies.
In the competitive BNPL arena, how quickly these companies can make lending and other adjustments “is going to be huge,” DellaValle said. Leadership plays an important part: Seasoned veterans of financial ups and downs can adapt more quickly than those with traditional tech backgrounds, he said.
“I’ve seen some firms that, if they can adopt some of those changes pretty quickly, they can right the ship and be able to actually swing back and start to really focus on growth and acquiring customers, while others are still getting their ducks in a row,” DellaValle said.