Klarna's Downside: Buy Now, Pay Later Users Overspend And Miss Payments

Buy now, pay later provider Klarna took another step toward a U.S. listing last week, reporting progress on its transition into internally developed AI systems. AI-driven staff reductions of 700 contractors have generated "significant efficiency" according to the Swedish company, which now expects revenue per employee to reach $1 million, higher than the $575,000 reported last year.

Buy now, pay later payment processing services let retailers offer short-term installment loans at the time of purchase, allowing buyers to spread out payments. The loans are usually interest-free and without service charges, potentially encouraging customers to buy more than they can afford. Not surprisingly, these firms have come under investigation. Notably, the Swedish Financial Supervisory Authority hit Klarna with $46 million in fines in December after accusing it of money laundering in 2021 and 2022.

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The company filed with the U.S. Securities and Exchange Commission for an IPO in March, citing an American domicile in Columbus Ohio. It postponed plans after President Donald Trump announced tariffs on Europe in April and hasn't responded to the latest rejection by U.S. Federal courts. Klarna reported a 13% revenue increase to $710 million in the first quarter of 2025 but still hasn't said when it will proceed with the offering. 

The BNPL business model works by charging fees to merchants, like card processors. There may also be flat transaction fees and late fees for missed payments. The second issue could upend the industry after a recent Bankrate survey reported that about "half of buy now, pay later users have experienced issues like overspending and missing payments." While these companies depend on late fees, high incidence rates may attract the attention of regulators. 

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Almost one-third of Americans have used BNPL, according to the survey. Klarna captured 9% of the report’s market share while PayPal PYPL led the pack with 15%. Half of customers reported "issues related to service." Of those, 24% mentioned "overspending," 16% "missed payments" and 15% "regretting a purchase." Gen Z users reported the highest rate of these issues, across all generations. It also revealed "consistent use across all income levels," which is surprising, given the greater financial struggles of the lower classes.

The survey highlights a consumer base increasingly burdened by inflation and stubbornly high credit card rates. Bankrate Senior Industry Analyst Ted Rossman summed up the findings, noting that "BNPL can be a good deal if you use it responsibly. It provides access to credit and can help users smooth out their cash flow. But sometimes it can lead to overspending, and you would have been better off waiting until you could pay for the item up front."

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It's hard to predict Klarna's success as a publicly traded company, given the moral hazards of this business model and financial challenges imposed by a potential trade war. However, things look brighter on the regulatory front because the Trump administration is pulling back on oversight, similar to its first term, scheduling budget reductions in consumer and banking regulations. 

For now, it's best to just follow the money. Q1 2025 marked Klarna's fourth consecutive profitable quarter. It also reported an impressive 100 million active consumers while merchant growth surged 27%. Those are impressive numbers for this rapidly growing financial services startup.

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