The precarious financial position of Klarna’s Australian buy now pay later business could have implications for local merchants subscribed to its service and one of the firm’s investors, Commonwealth Bank of Australia.
CBA is one of the largest investors on the register of Klarna’s global business and recently was forced to write down the carrying value of its stake by more than A$2 billion after the Swedish company reported big group losses and completed a heavily discounted capital raising.
Disclosures in the financial accounts of Klarna’s local holding company show that CBA also has specific exposure to the Swedish company’s Australian and New Zealand operations.
While the precise value of CBA’s exposure has never been disclosed it holds convertible notes issued by Klarna’s local holding company, including an issue in March of this year valued at US$15 million (A$22 million).
CBA’s ongoing support provides a key funding line for the local Klarna business, but given the fraught financial condition of the Australian arm it’s fair to ask how long is the country’s largest bank prepared to stick it out?
While Klarna is a leading global player in the profit-challenged buy now pay later market, it barely accounts for one per cent of the local sector.
It’s a bit-player, dwarfed by two of its profitless peers, Afterpay and Zip.
Unless Klarna’s Australian management is able to engineer a miraculous reversal in the subsidiary’s performance, CBA’s chief executive Matt Comyn faces some big hits on his bank’s exposures.
It also faces potential reputational risk if Klarna’s global boss Sebastian Siemiatkowski decides to pull the plug on the Australian business if the net asset deficiency on its balance sheet continues to balloon.
Local merchants are already jittery about the BNPL sector’s loss-making habits and how it magnifies the settlement risks they are exposed to when customers pay for goods and services using a buy now pay later scheme.
BNPL players take two or more days to reimburse merchants for accepting their payment services on transactions.
The risk for merchants is that they will be marooned with unsettled accounts on the day that one or more BNPL providers close or withdraw from the local market.
Some payments consultants are already advising merchants to review and rationalise the BNPL services they accept.
“Merchants will be left holding the bag when the inevitable failure of a BNPL happens and they become unsecured creditors for goods they have sold and not been paid for,” said Brad Kelly, managing director of the Payments Services consultancy.
Kelly believes the value of buy now pay later schemes as customer generators for merchants has been overhyped by effective but misleading marketing campaigns.
He is now advising his merchant clients to exit their arrangements with Klarna in Australia.
“No amount of flashy presentations, home-made graphs and promises of a retail nirvana are enough to save Klarna in Australia from its inevitable fate,” Kelly said.
“Merchants need to reconsider the risk of accepting Klarna given these catastrophic results.
“Based on these financial results, I will be advising merchants to exit their Klarna agreements as soon as possible.”
If Klarna was to withdraw from the Australian market and left thousands of merchants as creditors, pressure might grow on its equity and funding partner – the Commonwealth Bank – to settle on the debts.
CBA would have no legal obligation to take on such a responsibility but merchants might hold that expectation given that Klarna’s products have been marketed through the bank’s online channels.
That looms as a reputational risk for the bank.