Swedish “buy-now-pay-later” lender Klarna is launching in Canada, as a boom in online shopping is intensifying competition in the sector.
Klarna, which already has more than 100 million customers globally, is announcing the Canadian launch on Tuesday. The company is opening a product-development office in Toronto – its first such “tech hub” in North America – with plans to hire more than 500 engineers in the next three years, adding to the competition for tech talent in Canada.
Klarna lets users pay for purchases in four instalments, every two weeks. Instalment plans used to be associated mostly with big-ticket items such as furniture, cars and appliances, requiring onerous loan applications. But Klarna is one of a number of companies that have popularized buy-now-pay-later (BNPL) financing even for smaller purchases, including makeup and clothing.
Providers such as Klarna, PayBright, Sezzle and Afterpay have also simplified the process, allowing online shoppers to choose BNPL plans with one click. Last August, e-commerce giant Amazon.com Inc. latched on to the trend, striking a deal with Affirm to launch a buy-now-pay-later option at checkout for U.S. customers.
Although some BNPL providers (including Klarna) also offer such plans in bricks-and-mortar stores, their popularity has largely been fuelled by online shopping, which has grown over the course of the pandemic. E-commerce sales in Canada grew by 14.2 per cent in 2021 to more than $41-billion, according to Statistics Canada.
“It’s been a massive acceleration for us in the last two years,” Klarna co-founder and CEO Sebastian Siemiatkowski said in an interview, adding that the company now finances roughly US$80-billion worth of purchases each year globally, growing about 40 per cent in the past year.
BNPL providers make their money by charging retailers a commission on every purchase they finance. Many, including Klarna, offer instalments at zero interest to customers – although some also charge late fees to customers who miss payments. (Klarna is not charging late fees in Canada.)
Roughly 70 per cent of the company’s revenue comes from retailers’ fees, Mr. Siemiatkowski said. Retailers pay to offer BNPL because it can help persuade customers to make a purchase or to spend more.
But this has also attracted the attention of regulators. In December, the U.S. Consumer Financial Protection Bureau asked five companies – Affirm, Afterpay, Klarna, PayPal and Zip – for information about the risks and benefits of these loans, citing concerns about “accumulating debt, regulatory arbitrage, and data harvesting in a consumer credit market already quickly changing with technology.”
In Britain, the Financial Conduct Authority announced this week that BNPL firms Klarna, Clearpay, Laybuy and Openpay agreed to change terms in their contracts to make them “fairer and easier to understand.” The British government is considering more regulation for the industry.
“Regulators may start looking at [BNPL] more closely in terms of, how can we prevent some of the dangers that might occur if people aren’t paying it back,” said Brigitte Goulard, co-head of the Consumer Protection practice and Fintech group at law firm Torys LLP, and a former deputy commissioner of the Financial Consumer Agency of Canada (FCAC).
“… It’s a good product if it’s used properly; it can be a not-so-good product if people use it too much, if people abuse it or they don’t pay down the debt in time.”
Younger shoppers are most likely to be drawn to BNPL services online. In November, the FCAC published a study on BNPL. While its sample size was quite small – just 66 out of 1,034 people surveyed had used such a service – it found people aged 18 to 34 were most likely to use them online.
Criticisms that such services encourage people to take on debt are not “entirely unfounded,” Mr. Siemiatkowski said.
“I think Klarna could have done, historically, a better job at this, but we try now to be very clear … preferably you should use money that’s on your account. However, occasionally there may be areas where credit makes sense,” he said.
“What we have been trying to do is construct a product that is a better alternative [to credit cards].” Most Klarna customers link their instalment payments to a debit card, he said.
Adoption of BNPL services is growing in Canada. In a report last summer, Dublin-based research firm ResearchandMarkets.com estimated BNPL payments would jump by 41 per cent to US$3.6-billion in Canada in 2021.
Growing competition has led to a flurry of deals in the sector. Last year, Square Inc. acquired Australian lender Afterpay in a US$29-billion deal; and PayPal Holdings – which launched a “Pay in 4″ product in 2020 – bought Japanese BNPL provider Paidy for US$2.7-billion. Canadian startups have also been acquisition targets: Affirm Holdings Inc. acquired PayBright in late 2020 for $340-million, and CURO Group Holdings Corp. bought Flexiti Financial Inc. for $144-million last year.
Banks have raced to compete as well, with Bank of Nova Scotia, Canadian Imperial Bank of Commerce and Royal Bank of Canada all launching their own BNPL offers, as have credit-card providers Visa and MasterCard.
Klarna originally planned to launch in Canada in the summer of 2021, but the regulatory approval process took longer than expected, Mr. Siemiatkowski said. Klarna is launching in Canada with retail partners including Adidas, Frank and Oak, GameStop, Harry Rosen, L’Oreal, Mejuri and Sephora.
As e-commerce continues to grow, Klarna is planning new features in its app to help shoppers keep track of purchases and returns – something that is “becoming like a new admin job at home” the more people buy online, Mr. Siemiatkowski said. The app also has itemized digital receipts, and Klarna can use that data to offer targeted marketing services to retailers.
In other markets, Klarna offers additional banking and payments services, including payment in full with its “pay now” online payment processing, and a physical Visa card that works on a “pay-in-four” model. It also offers other deferred-payment plans, such as a lump-sum payment after 30 days, and longer-term plans for bigger-ticket items. The company hopes to eventually launch those services in Canada as well, Mr. Siemiatkowski said.
“We’re quite optimistic because as much as we get labelled as a buy-now-pay-later product company, what people don’t know is that half of our volume is pay now,” he said. “And so as much as the trend has benefited us, it’s actually only a subset of what we do.”
Editor’s note: An earlier version of this story had an incorrect dollar figure for Square's acquisition of Afterpay.
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