Forgot Klarna? Investors bet new startups will ‘buy now, pay later’

Klarna is in talks to fundraise at a sharp discount to its latest valuation, according to a report from the Wall Street Journal. A company spokesperson said it would not comment on “speculation”.

Jakub Porzycki | NurPhoto via Getty Images

As the hype about the “buy now, pay later” trend fades, some investors are betting they’ve found the next big thing.

Buy now, pay later Companies like Klarna and Affirm, which let customers defer payments to a later date or split purchases into interest-free installments, are under enormous pressure as consumers become more wary of spending due to the rising cost of living, and because higher interest rates drive up borrowing costs. They also face increasing competition, with tech giant Apple entering the ring with its own BNPL offering.

But venture capitalists are betting that a new breed of startups from Europe will be the real winners in the space. Companies like Mondu, Hokodo, and Billie have raked in huge amounts of money from investors with a simple pitch: companies — not consumers — are a more lucrative clientele for the buy now, pay later trend.

“There is a big opportunity with regard to ‘buy now, pay later’ for the B2B [business-to-business] space,” said Malte Huffman, co-CEO of Mondu, a Berlin-based startup.

Huffman, whose company recently raised $43 million in funding from investors including Valar Ventures, Silicon Valley billionaire Peter Thiel, predicts the market for BNPL in B2B transactions in Europe and the US will reach $200 billion in the coming years.

While services like Klarna grant credit for consumer purchases, say, a new pair of jeans or a flashy speaker system, B2B BNPL firms strive to settle transactions between businesses. It is different from some other existing forms of short-term financing, such as working capital loans, which cover a company’s day-to-day operating costs, and invoice factoring, where a company sells all or part of an invoice to get faster access to the money they owe.

scalapay Italy $727.5 million
Billie Germany $146 million
player United Kingdom $58.4 million
Hokodo United Kingdom $56.9M
World Germany $56.9M
trade Sweden $12.3 million

Source: crunch base

Patrick Norris, a general partner at private equity firm Notion Capital, said the market for B2B BNPL was “much larger” than that of business-to-consumer or B2C. Notion recently led a $40 million investment in Hokodo, a UK-based B2B BNPL company

“The average shopping basket in B2B is much larger than the average consumer basket,” Norris said, adding that this makes it easier for businesses to generate revenue and scale.

‘B2C’ players falter

Shares of major consumer-oriented BNPL players fell sharply in 2022 as concerns about a potential recession weigh on the sector.

Sweden’s Klarna is in talks to raise funds at a sharp discount to its latest valuation, according to a report by the Wall Street Journal – to $15 billion from $46 billion in 2021. A Klarna spokesperson said the company will not comment. on “speculation.”

US-listed fintech Affirm has seen its shares fall by more than 75% since the beginning of the year, while shares of Block, which bought Australian BNPL firm Afterpay for $29 billion, are down 57%. PayPal, which offers its own installment loan feature, is down 60% since the beginning of the year.

BNPL took off during the coronavirus pandemic, providing shoppers with a convenient way to split payments into smaller chunks with just a few clicks on retailers’ checkout pages. Now companies are capitalizing on the trend.

“Companies are still facing cash flow problems in light of deteriorating macroeconomic conditions and the ongoing supply chain crisis, so any way to receive money faster and more flexibly will be attractive,” said Philip Benton, fintech analyst at market research agency Omdia.

Mondu and Hodoko have not disclosed their valuations publicly, but Scalapay and Billie, two B2B BNPL companies from Italy, were last valued at $1 billion and $640 million respectively.

BNPL services are proving particularly popular with small and medium-sized businesses, which are also bearing the brunt of rising inflation. According to Mondu chief Huffman, SMBs have long been “undersized” by big banks.

“Banks can’t really cut ticket size to make it economical because the contribution margin they would get with such a loan doesn’t cover the associated costs,” he said.

“At the same time, fintech companies have proven that a more data-driven approach and a more automated approach to credit can really make it work and expand the addressable market.”

recession risk

BNPL products have faced pushback from some regulators over fears of driving people into debt they can’t afford, as well as a lack of transparency about late payment fees and other charges.

The UK has led the way on regulation, with government officials hoping to introduce stricter rules for the sector as early as 2023. Still, Norris said business-oriented BNPL companies face less regulatory risk than companies like Klarna.

“Regulation in B2C will provide consumers with much-needed protection and help them shop smart and avoid debt,” he said. “In B2B, the risk of companies overspending on items they don’t need is negligible.”

However, one thing the B2B players need to pay attention to is the level of risk they take. With a potential recession looming, it is a major challenge for B2B BNPL startups to sustain high growth while also preparing for potential insolvencies, Norris said.

“B2B will generally be high value, low volume, so naturally risk appetite will be higher and affordability controls more important,” said Omdia’s Benton.