Payments players PayPal, Klarna and Bolt all recently moved to restructure their businesses in the face of new economic pressures, and another peer, Fast, shuttered altogether, highlighting the emerging macro-economic perils for fintechs.
San Jose, California-based PayPal has pared jobs worldwide, with cuts in San Francisco, Chicago and Ireland while Stockholm-based Klarna said it plans to eliminate about 700 employees, or about 10% of its workforce, and California checkout upstart Bolt shaved about 185 workers, a third of its headcount, according to reports in recent weeks.
The workforce reductions and related restructurings come as the digital payments companies grapple with rising interest rates, significant inflation and less plentiful capital. With their operating results under duress from those economic conditions, strategic flaws are coming to light and investors have become wary.
This is the type of cyclical economic hardship that some fintechs, also including buy now-pay later player Affirm and a multitude of other venture-backed firms, have never encountered in their short lifespans and it will test their business models in a way that separates the strong from the weak, industry professionals say.
“We haven't seen how this specific industry, particularly some of the newer firms, like a Klarna or an Affirm, will perform,” said Fitch Ratings analyst Mike Taiano.
Inflation is the latest specter overshadowing the businesses, with the consumer price index rising to a 40-year high. With many paytech companies pitching their services as more cost-effective alternatives to traditional tools, demand from commercial clients with pinched budgets could increase, but it could prove harder to boost prices. For those payments companies offering credit services, inflation also means the possibility of customers taking on too much debt and defaulting on commitments.
Digital payments pioneer PayPal and Swedish BNPL provider Klarna are both in the business of extending credit to consumers so they face a double-edged sword. For now, delinquencies and defaults aren’t an issue, but analysts say that could change, given the current economic environment.
For BNPL in particular, the questions are: what will their business models look like in a higher interest rate environment and what do they look like in an environment where credit is not as easy to come by, Taiano said.
On the positive side for the companies, the inflationary environment may make consumers, particularly the subprime group that they target, more eager to tap their BNPL financing option, he noted. “Those folks will struggle a bit more with an inflationary environment and thus need products like buy now-pay later in order to finance some of their transactions," Taiano said.
The trouble with that, though, is that those same consumers may be less well-situated to take on and pay off the debt they’re accumulating, increasing the risk for the companies longer-term. “The financing costs as well as the credit losses, I think, will become a bigger issue as we move forward,” Taiano said.
All of that could leave the BNPL companies particularly exposed, though the risk is mitigated by the short duration of their loans and the underwriting of each transaction separately, he said. "The jury's out on how well they’re going to perform,” Taiano said.
Venture investor concerns
For its part, Klarna’s CEO Sebastian Siemiatkowski said last month: “We have re-evaluated our organizational setup to make sure we can continue to deliver on our ambitious targets.”
That’s actually a good thing in the view of Krista Morgan, whose Denver venture capital firm Stage Fund has invested in fintechs and is considering a payment firm investment now.
“If I’m an investor right now I want to see my CEOs making tough decisions fast because if you're burning $1 million, $2 million or $5 million a month, the sooner you cut, the better off you are,” said Morgan, who is a general partner at Stage. “I just think there are no guarantees of funding right now.”
While the Federal Reserve’s move last month to increase interest rates is aimed at holding down inflation, it presents its own set of challenges for businesses, namely increasing the cost of capital after a long period in which companies, particularly startups, benefited from easy money.
Investors will be sitting on the sidelines until they see whether the Fed is getting inflation under control and whether a recession arrives in the second quarter, Morgan said.
“We’re no longer in a growth-at-all-costs environment,” she said. “Growth does not trump everything anymore.”
If a U.S. recession materializes, as some economists have predicted, that could create a double-whammy scenario for companies that lose investor support at the same time that revenue declines. That can be especially devastating for startups that are still posting losses.
That scenario is a big reversal for fledgling companies that have been showered with investment dollars in recent years. Payments startups raised record amounts of capital last year, with Klarna as one of the biggest beneficiaries. Now, Klarna and Bolt have reportedly had difficulty raising new rounds of funding.
“Given the change in environment and the fact that the Fed is tightening monetary conditions, I think (that) has created more demand from investors to see that profitability sooner rather than later,” Taiano said.
The BNPL companies are likely to be forced to expand their portfolio of products and services, or consider consolidation, as has unfolded already with Square parent Block buying Afterpay last year and Zip purchasing Sezzle this year, he said.
Bolt CEO Maju Kuruvilla last week blamed “macro challenges” for the employee cuts and restructuring, saying “the leadership team and I have made the decision to secure our financial position, extend our runway, and reach profitability with the money we have already raised.”
Is there a silver lining?
Another payments startup, the smaller New York-based virtual commercial card company Extend, sees the new environment delivering a mixed bag. There is more available talent, thanks to tech companies shedding workers, and salary requests aren’t as exorbitant as they were just a few months ago, when prospective employees with little experience could command sky-high salaries, said Extend CEO and co-founder Andrew Jamison. “That sort of ridiculousness has now calmed down,” he said.
Still, venture capital investors consider recruiting “a luxury” at this point because they’re more focused on efficiency and profitability, Jamison said. There’s a “sobering message” for venture-backed companies that have to raise money and may be forced into the "painful" position of rethinking valuations, he said.
Larger companies, like PayPal, will most likely have the financial wherewithal to power through the economic turbulence. “Fitch views PayPal's modest amount of debt/leverage and significant amounts of cash on its balance sheet as a clear differentiator versus other issuers in the payments and technology sectors,” the ratings company said in a May 16 report. It noted PayPal’s $11.9 billion in cash and investments, plus $5.5 billion in credit capacity.
Smaller companies won’t have that kind of cushion to fall back on. However, if they outlast the economic headwinds, “it will make them so much more valuable,” Morgan predicts.