The Australian arm of a buy now, pay later provider haemorraghed $56 million in losses last year in a performance described “catastrophic” with questions hanging over the viability of the business.
The Swedish payments firm called Klarna has had billions knocked off its global valuation this year, while it sacked 10 per cent of its workforce in an effort to cut costs in May, with its chief executive Sebastian Siemiatkowski advertising 570 staff members on LinkedIn.
But an audit of the 2021 financial accounts for Klarna Australia conducted by Ernst & Young and lodged with local regulators has revealed that the Australian arm may not survive.
The accounts revealed that Klarna Australia had posted a 12-month net loss of $56 million, which was four times bigger than when it launched in the country in 2020, when it reported a $14 million loss.
The company also had a net asset deficiency of more than $70 million on 31 December last year and the audit revealed that the Stockholm-based parent company has been forced to prop up the Australian arm.
Ernst and Young partner Michael Byrne said in the audit that operating losses and the net asset deficiency caused material uncertainty “that may cast significant doubt on the group’s ability to continue as a going concern”.
However, Klarna’s three member board which includes Mr Siemiatkowski that oversees the Australian arm of the business, said the company is projecting a continued improvement in operating results for future years, according to notes attached to the audit.
“A letter of support has been obtained from the company’s parent entity to support the company for at least 12 months from the date of signing of this report,” said notes dated on August 19.
A Klarna spokesperson added it was “committed and dedicated to Australia as ever before and has never exited a market”.
Commonwealth Bank owns a 5 per cent stake in Klarna after a $US300 million ($A433 million) investment in 2019 and 2020.
Payments expert Brad Kelly said despite CBA’s $400 million investment, Klarna’s move into the Australian buy now, pay later (BNPL) market had been an “abject failure” with bad debts blowing out and marketing costs exploding.
“It shows a business that has been burning cash, so everyone else was peaking in December last year and they were going down the toilet,” he told news.com.au.
“So Zip and Afterpay were doing victory laps and their share prices were going through the roof and meanwhile Klarna is setting fire to cash and not getting anywhere – at least Afterpay and Zip got some transactions but Klarna seems to be going backwards.
“So they have failed to get a stronghold in the market despite being invested in by CBA and its failed dismally and the question is what happens now? It is catastrophic and I don’t know if it can be saved.”
Mr Kelly warned it could be businesses and their owners at risk if the company failed in Australia.
“Merchants are at risk if buy now, pay later fails. If the merchant hasn’t been paid for goods shipped or purchased, they could end up as an unsecured creditor,” he said.
“What does happen if merchant doesn’t get reimbursed and becomes an unsecured creditor?”
Mr Kelly said Klarna’s woes were a reflection of the broader trend in the sector, with warnings there was a potential “carnage” coming as BNPL providers burn through cash, bad debts balloon and customers retreat from using the service.
Popular providers such as Afterpay and Zip are facing massive pressure in the current economic climate with Zip’s shares plummeting an extraordinary 76 per cent this year, while Afterpay posted a staggering mid-year loss just months after being acquired for $39 billion.
The Klarna Australia audit also revealed that it had suffered a 71 per cent slide in merchant and consumer commission revenue to only $3.1 million in 2021, compared to $10.8 million the previous year.
It also saw a blowout in credit loss charges from $169,271 in 2020 to $8.5 million, while it spent a whopping $27 million on marketing costs.
The accounts also indicated Klarna had only a 1.1 per cent share of the national BNPL market, according to one expert.
“These are catastrophic losses, they are burning through cash with marketing and are getting absolutely no where,” Mr Kelly added.
“They are the smallest of the small but they are doing a lot of damage along the way specifically to young women as that’s their target in my opinion, with fashion and beauty, and they end up getting over their heads with debt.”
However, a Klarna spokesperson said the analysis was inaccurate and 2020 reflects a significant contribution from the Klarna Group of more than $10 million.
“Subsequent financial contributions have been in the form of debt which are reflected elsewhere in the accounts in 2021. We are very pleased with our performance in Australia where revenue more than tripled in 2021, and Gross Merchandise Volume increased 5 times with continued strong progress in 2022,” they said.
“We now have over 4 million consumers and partner with major brands including most recently The Iconic.”
Jacqueline Liddell was one woman news.com.au recently spoke to who was “drowning” in $40,000 debt racked up by her “addiction” to buy now, pay later, a world she was drawn into with her love for fashion.
Mr Kelly said Klarna appeared to be a “failed experiment”, adding the overall market seems to be unsustainable, with no profit, no road to profitability and increasing pressure from regulatory bodies.
Globally, it’s a rapid fall in fortune for the payment giant, who was previously profitable until 2019, when it hiked its spending to expand and earlier this year it reported an eye-watering pre-tax loss of $850 million for the overall brand.
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