Investors to Scrutinize Fintech’s Digital Bank Pivot

As Klarna prepares for its highly anticipated initial public offering, investors are keenly observing the fintech firm’s strategy to transition into a comprehensive digital bank. Initially recognized for its buy now, pay later (BNPL) model, Klarna is now aiming to broaden its appeal and position itself as a digital retail bank, rather than a specialized BNPL provider. Klarna’s CEO has articulated this shift, emphasizing their goal to be recognized as having a “PayPal wallet type of experience.”

The upcoming IPO will be a critical test of investor confidence in this transformation. Klarna expects its shares to be priced between $35 and $37 each, potentially valuing the company at up to $14 billion, according to estimates. While significantly lower than the $45.6 billion valuation from a 2021 funding round led by SoftBank, this still represents a recovery from the $6.7 billion valuation during a “down round” the following year.

A central question is whether Klarna can effectively convince investors of its “neobank” pivot. While the company is largely known for its short-term, 0% interest financing products in markets like the U.S. and U.K., it has operated with a Swedish banking license in the European Union since 2017 and offers personal bank accounts in Germany. Klarna has been gradually introducing banking services, including deposit accounts and debit cards, in both the U.S. and Europe.

The company’s success will depend on investor sentiment regarding its financial performance. Klarna reported a net loss of $53 million in the second quarter, a notable increase from the $18 million loss in the same period the previous year. However, revenues also showed growth, climbing 20% year-over-year to $823 million.

The valuation of Klarna presents a complex challenge, particularly given the current economic landscape. The appeal of short-term, 0% interest financing options may be waning in an environment with elevated interest rates. However, proponents argue that Klarna’s model remains attractive to both consumers and retailers, with revenue streams from merchant fees, interest on longer-term financing products, and late fees. Expansion into advertising also presents a potential future revenue source, although it remains a smaller part of the business.

Compared to publicly-traded peers like Affirm, Klarna faces both opportunities and challenges. Affirm, which also experienced valuation declines in 2022, currently has a higher market capitalization, exceeding $29 billion. While Affirm has achieved profitability on a quarterly basis, Klarna is still working towards improving its unit economics as it scales.

The performance of recent fintech IPOs, such as Circle and Bullish, may not be directly indicative of Klarna’s potential. The market is increasingly focused on the specific attributes of each business, rather than treating fintech as a homogeneous industry. Each company is being assessed based on its own market position and growth prospects. Klarna’s success relies on its ability to demonstrate a viable path to profitability and sustain growth in a rapidly evolving market.