Sarah O’Connor knows the score. Readers familiar with the Financial Times journalist’s efforts will recognise her column on the world of work. She’s reported on low-pay Britain, job satisfaction, and intergenerational workplace issues. But CEOs are employees too, so this week she’s been talking about bosses – and one in particular. Sebastian Siemiatkowski.
Siemiatkowski is co-founder and chief executive of Klarna Bank, the Swedish fintech that claims to be changing the way we shop. From his profile picture, you might think him some form of artist. It's all part of emphasising that his business is different.
"We partner with retailers all over the world, so that you can shop smoooth [sic] directly from their sites," the Klarna website says.
What that means in practice is Klarna is in the business of debt, and specifically buy now pay later, or BNPL. But it’s more than just a standard BNPL machine.
Klarna’s interest-free model has permeated e-commerce sites and shopfronts to create a much more palatable experience of borrowing. Even where the business doesn’t partner with specific brands to offer customers credit on the best brands, you can still use Klarna to buy pretty much anything. A normal credit card it ain’t.
Customers seem to agree. A carefully-chosen review of Klarna's app from "Sue Wyatt" on its website cites "another smooth and easy transaction with Klarna, gentle reminder my payment was due, decided to pay off a little earlier, all went through easily." What a delightful tale of useability, fair dealing and financial responsibility.
A Different Credit Company
For his part, Siemiatkowski says his firm is defying gravity in a tough arena. In its 2022 financial results this week, Klarna boasted the US had become its largest market by revenue in December, and, in the final quarter of the year, its gross merchandise volume (the value of goods purchased through its platform) grew by 19%.
"Through a challenging macro environment we have once again proven our resilience delivering high profitability across our established markets while launching products and services helping to diversify our revenues and solving problems for consumers," he said.
I am curious that this should be in any way a surprise. The final quarter of the year is vital to retailers and card providers. It's almost too exceptional for its own good. Christmas approaches, and, as bills increase, it's little wonder customers take the easy option.
In addition, if people’s real incomes are being eaten up by inflation and the cost of living is rising so dramatically, then it shouldn’t really be a surprise that the answer for many will be debt. According to the price comparison website Nerd Wallet, around 15% of consumers currently in debt owe money to BNPL providers like Klarna or competitor Clearpay.
As an aside, demand for BNPL is particularly high among Millennials – 22% of adults aged 25-34 admit to being in debt to such short-term credit providers. Gen Z isn’t far behind. 21% of 18 to 24 year-olds currently rely on BNPL to cope with rising financial pressures.
It’s easy to see why. The bar is low, but Klarna couldn’t look or sound trendier.
One Klarna advert on Spotify greets listeners with the words "Hey rockstar!" (Yes, before you ask, I’ve ditched my Spotify Premium subscription). A whole half of the ad is then taken up with a risk warning. "Shop with Klarna – interest free. Borrowing irresponsibly may negatively impact your ability to obtain credit. T&Cs and late fees apply. Visit Klarna.com."
I asked Klarna directly whether it truly believed risk warnings were enough to ward irresponsible users of credit away from serious arrears.
"When you pay with Klarna, we make it clear it is a credit option, with transparent terms and conditions, consequences of missed payments and a structured short-term repayment plan with no ability to revolve," a spokesperson said.
"Our products are designed to encourage responsible spending and to give consumers the added flexibility and transparency to manage their money.
"Our business model relies on people paying us back on time and in full – so our intent is that people spend responsibly and our underwriting capabilities support that goal. We restrict the use of our services if you miss a payment to stop debt building up. A credit card company would never do this as people with late and missed payments are their most profitable customers.
"It's also worth noting that compared to credit cards, our BNPL customers have a much lower outstanding balance, in the UK the average outstanding balance of our BNPL customers is £150, compared with £1,203 for credit cards (figures from The Money Charity).
"The above measures clearly work – in Q2 last year we reported our UK default rate had reached the historic low of 0.4%. It remains very low and the UK is one of the countries where it’s lowest. As reported in our results this week, our global default rate for 2022 was 0.58%."
Klarna seems remarkably confident its users are responsible and that the UK market is a good one to do business in. But a dose of scepticism is required. For one, the UK isn't its biggest market. For two, Klarna is introducing late payment fees from March 16, which could be interpreted as an act of caution.
Customers will be hit with £5 charges if they miss payments. Fees will be capped at 25% of the order value with no more than two fees per order. I know nothing of how this idea was arrived at, but I would love to have been a fly on the wall when it was decided. How do you toe the line between treating customers fairly and making bank?
Payday Problems
But that’s not all. Back to Sarah O’Connor, who has rightly expressed surprise that a company like Klarna would hand its boss a 35% pay bump in the middle of a tight market, and when it doesn’t even turn a profit. Last year, its valuation was slashed to $6.7 billion from $46 billion.
Klarna says it increased Siemiatkowski’s pay in order to "hire and retain the best talent". When I specifically pressed the company on this point it issued a lengthy statement that landed in my inbox after the agreed deadline.
"Klarna’s remuneration packages for senior management are aligned to other global tech companies. These were decided by the remuneration committee at the beginning of last year when both the world and Klarna’s business plans looked very different," it said.
"The CEO is not part of his own salary decisions which are proposed by Klarna’s Remuneration Committee composed of independent directors."
It then added that its humongous losses are not the main story.
"In the first half of 2022 we had a higher rate of investment that we then successively decreased as the shift in the macroeconomic environment became evident," a spokesperson said.
"Following the changes we made to our business in May 2022, costs dropped significantly in Q3 2022 from Q2 2022. Q4 is our peak season when we invest in growth for both Klarna and our retailers – for example investing more in marketing, so it’s not surprising costs would rise in the quarter.
"A better indicator of the progress we have made is to compare Q4 2021 with Q4 2022 – when you’ll see that costs are down – while revenue grew 20%. That’s pretty impressive in any quarter – to increase revenue while lowering costs – let alone in peak season."
I am taking a couple of points away from this. Klarna is clearly attempting to be a fine example of a business that does right by its customers. But aside from the moral maze that is consumer credit, it faces a couple of serious headwinds.
Klarna wouldn’t be the first business to have a peak season. That is a good and a bad thing: it’s a focal point for activity, and also a business risk. Businesses that don’t have good peak seasons make shareholders very unhappy.
And on the CEO pay point? Fair enough. But it’s still too high. Just because something was decided before a tricky patch doesn't mean it can't be undecided.
Why would it do that? Because CEOs of unprofitable companies don’t get to jump the queue on remuneration when profits are so poor, nay nonexistent. Nor is it great optics to enjoy the fruits of unprofitability while everyone else feels poor. To that end, Klarna may be big, but it's not big enough for the "rockstar" CEO pay game just yet, if it ever will be.
I’ll end where I began: on Twitter. James Tarry, a Northampton-based former financial consultant for Scotsdale Moneywise, had his say when I highlighted O'Connor's tweet.
"Executive pay is outrageous across the board," he said.
"At every annual general meeting I get a vote on, I vote against executive compensation. If you’re earning more than 30 times the average worker, that’s too much."
I totally agree. Klarna may be a trendy lender. But a lender it still is, and an unprofitable one at that. Whether it's experiencing growing pains aplenty, is desperate to impress, or is just too nice to its customers to make any money, customers would be right to be cautious. With a 2022 IPO postponed because of market wobbles, investors would be forgiven if they took a similar approach.
Ollie Smith is UK Editor at Morningstar
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When Klarna answered my questions about its business practices, it also gave me a lengthy statement on its corporate and social responsibility activities, which I have included here for investors interested in ESG, who can make their own minds up about its impact.
"In the UK, we’ve recently announced a new debt recovery programme, which offers a unique package of financial support to help the minority of customers who fall far behind on payments to get back on track," a spokesperson said.
"The initiatives provide Klarna’s customers with the tools to stay on top of payments, while also directing specific support towards those who may need it most, especially important during a cost of living crisis. You can find more information in the press release here.
"In addition to this, we have a comprehensive ESG strategy, which we report on in tandem with our latest financial reports, in our recently-released Klarna’s Annual ESG report which details the CSR activities Klarna engages in across all markets. Some highlights:
- We have pledged to give 1% of all money raised to sustainability projects;
- Through our CO2 emissions tracker, 324,000 consumers track the carbon emissions of their purchases across 60 million items each month;
- We have contributed $2.6 million to the removal of 11,588 tons of CO2 from the atmosphere;
- We have launched ‘conscious collections’ of sustainable fashion in 18 countries worldwide;
- We put $100 million back into the pockets of consumers through the removal of unnecessary fees."
