As Klarna and Affirm Falter, a New Breed of ‘Buy Now, Pay Later’ Startups are Stealing the Spotlight

In July of 2022, Klarna saw its valuation drop from the $45.6 billion it was valued at a year ago, to $6.7 billion, representing a significant drop of 85%. Also this year, shares of Affirm fell by 75%, with predictions that they may fall even further.

Klarna’s valuation occurred during a new financing round, where the company successfully raised $800 million in fresh funds. Klarna CEO Sebastian Siemiatkowski felt that, in spite of the drop in company valuation, the fundraising round went well and it was a “testament to the strength of Klarna’s business” particularly given the backdrop of one of the steepest drops in the history of global stock markets. Others believe, however, that it is a sign that Klarna and Affirm may not have such a strong monopoly on the buy now pay later market going forward.

What does Klarna and Affirm’s crash mean for buy now pay later?

Klarna and Affirm are not alone in facing a drop in valuation. Many venture capital-backed tech firms have experienced the same setback due to the challenging economic climate following the Covid-19 pandemic. Many of these tech firms have been forced to lay off staff and implement cost-cutting measures, including Klarna, which cut 10% of its global workforce in 2022.

These drawbacks have led to questions about the sustainability of buy now pay later business models. Around the world, economies are seeing increasing inflation and higher interest rates, which undermines many buy now pay later business models.

Are new startups muscling in on Klarna’s buy now pay later market share?

While experts believe the marketplace for buy now pay later is currently under intense strain due to the economic downturn felt in many countries post-pandemic, which is causing shoppers to be more cautious, it is also predicted that new startups may be well positioned to establish themselves in this challenging market.

While Apple has already made a play for control of the market, with its Apple Pay Later offering, venture capitalists are backing a new breed of startups that they believe will gain control of the space.

Mondu, Hokodo, and Billie are new buy now pay later startups that have recently raised significant amounts of funds from investors. These new startups are looking at the buy now pay later market from a different perspective, they believe that a business-to-business (b2b) offering may be more lucrative than business-to-consumer (b2c) in this space. This updated business model has gained much attention and support. It is possible that we may see the buy now pay later sector begin to focus more on b2b solutions as the market evolves.

This new breed of startups may prove important for facilitating b2b international trade in the current economic climate. Buy now pay later schemes for businesses may just be the support they need to boost confidence in buying from international traders. This may be particularly important to the UK, where businesses are faced with navigating the uncertain post-Brexit trading landscape. It may also help SMEs in all regions grow their businesses by entering unexplored markets. Given that 92% of SMEs have reported struggling with rising costs since the beginning of the pandemic, by now pay later schemes may appeal to those struggling to put up capital upfront.

Sweet Tips from Ally

It is clear that the buy now, pay later industry is booming and there are many new startups vying for a piece of the pie. However, with the recent failures of Klarna and Affirm, it remains to be seen whether these new startups can weather the storm. Only time will tell.