Klarna says it expects to post a profit — in the second half of 2023

Klarna's financial performance approaching the end of 2022 is a mixed bag, as the buy now/pay later lender has suffered a year of financial losses but insists its most recent performance is showing signs of improvement. 

The Swedish company's third-quarter results show a loss of $200 million, nearly double the $106 million it lost during the third quarter of 2021, and 41% lower than the second quarter 2022's loss of about $340 million. Klarna has lost about $790 million in the first nine months of 2022, or about triple its losses for the first nine months of 2021.

But there's a light at the end of this tunnel, according to Sebastian Siemiatkowski, co-founder and CEO of Klarna.

"Klarna has made huge progress on our path to profitability, which we expect to hit on a monthly basis in the second half of 2023," Siemiatkowski said in a statement issued through the company's public relations office. Klarna did not make an executive available for an interview. 

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Klarna also reported gross merchandise volume of $60.2 billion, up 22% from the prior year's GMV of about $49 billion. Klarna attributes that performance to growing its payment processing business. Klarna reports its current credit loss rate is 0.7% of GMV, down from about 0.8% of GMV during the second quarter. The company is on path to be profitable by the second half of 2023, though Siemiatkowski said Klarna may still post a full-year loss in 2023. 

The Wednesday earnings report is the first since Klarna took what it called "actions" in May, which included firing about 10% of its workforce. It reportedly shed more jobs earlier in the fall.  

Klarna has also diversified its product line in recent months. The company in June introduced the Klarna Card, a Visa debit card that allows consumers to shop at stores and websites that offer installment payments. Klarna additionally also boosted its marketing over the past year to build its brand in the U.S. and other countries. 

In its earnings statement, Klarna said it has launched a search tool in the U.S., U.K. and Nordics, allowing consumers to compare prices across hundreds of retailers. It also launched automatic coupons at checkout in the U.S. and U.K., shoppable videos in the U.S., and a creator platform that helps retailers and influencers collaborate on marketing content for merchants. 

"We have achieved this while maintaining credit loss rates at very low levels," Siemiatkowski said in his statement. 

BNPL lenders have been under severe pressure over the past year, making Klarna's earnings an early look at the months ahead for one of the BNPL market's largest and best-known fintechs. 

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Over the past year, as inflation has spiked and fears of an economic downturn mount, Klarna and other firms that offer BNPL loans have seen their valuations or stock prices plummet. Both Klarna and Affirm, another well-known fintech that offers BNPL lending, have seen their valuations fall from about $45 billion to around $7 billion. This trend is not unique to the BNPL market; other fintechs are experiencing similar issues.

Most of these firms are still aggressively adding products. Affirm, for example, has embedded its service in Fiserv products such as the Carat system for businesses and Fiserv's Clover point-of-sale system for small businesses. BNPL lenders have also diversified into new product lines and specialization, such as travel and health care financing. 

"Because BNPL and fintech firms have focused on growth more aggressively as opposed to traditional profitability metrics, a shift to profitability or reduction in losses would be positive and an important step to demonstrating the sustainability of those products and firms," said Patrick DellaValle, a director at Guidehouse, a consulting firm. 

But there are challenges that go beyond the macro economy. More traditional financial institutions are pursuing BNPL. Citizens, for example, has offered BNPL for years and has expanded its strategy as more consumers look for BNPL loans as an alternative to credit cards. Recognizing the demand for credit card alternatives, the card networks have also gotten more aggressive in offering BNPL integrations to banks. This trend is attracting technology companies that have developed software that makes it easier for banks to offer BNPL. 

And fintechs that offer BNPL products are also under scrutiny from the Consumer Financial Protection Bureau and regulators outside of the U.S. over concerns the product encourages consumers to build debt quickly. 

With the last funding round putting its market valuation at $7 billion, Klarna has a long way to go to get its valuation back up to the $46 billion experienced during its peak, said Brian Riley, director of Mercator Advisory Group's credit advisory service.

Klarna was profitable in 2018, and was profitable for 14 of its first 17 years, according to Klarna's public relations department.

The company will also have to prepare for a changing economic climate, Riley said, adding higher interest rates will post challenges.

As a licensed bank in Sweden, Klarna has access to a range of funding sources that aren't available to all fintechs, such as short and long term wholesale funding, retail deposits and other sources, the firms' public relations office said.