The heavily promoted Australian arm of global buy now pay later poster child Klarna is under extreme pressure and continues to trade only with explicit financial support from its Stockholm-based parent company.
An official audit of the 2021 financial accounts for Klarna Australia Pty Ltd was only completed by Ernst & Young in the middle of August and lodged with local regulators last month.
The accounts show the company had a net asset deficiency of more than A$70 million on 31 December last year after it posted a 12-month net loss of $56 million.
The loss was more than four times bigger than the bottom line performance in 2020 – the year Klarna launched in Australia - when a net loss of $14 million was reported.
E&Y partner Michael Byrne observed in his audit opinion that the existence of the operating losses and the net asset deficiency indicated there was a material uncertainty “that may cast significant doubt on the group’s ability to continue as a going concern”.
Despite the parlous condition of the local entity’s balance sheet, the subsidiary’s directors decided to continue trading in Australia.
“The company is projecting a continued improvement in operating results for future years,” they stated in notes to the accounts signed on 19 August.
“A letter of support has been obtained from the company’s parent entity to support the company for at least 12 months from the date of signing of this report.”
Klarna Australia is overseen by a three-member board headed by Sebastian Siemiatkowski – the global chief executive of the Klarna group.
Neither Siemiatkowski nor the other directors articulated in the accounts the rationale driving their belief that Klarna Australia would improve its operating performance.
The latest accounts show that the company’s operating expenses have not only grown faster than revenue, but that the amount of commission income collected from merchants and consumers for using buy now pay later services actually fell in 2021.
Klarna Australia suffered a 71 per cent slide in merchant and consumer commission revenue to only $3.1 million in 2021.
In 2020, it generated $10.8 million of income from commissions.
One of the most worrying features of Klarna’s business performance in Australia is that the massive revenue slide occurred in a year that the marketing and advertising budget more than doubled to $27 million.
An equally worrying signpost of the company’s troubled performance was the blowout in credit loss charges from $169,271 in 2020 to $8.5 million.
This means that credit loss expenses are running at almost three times top-line revenue.
Moreover, total credit loss expenses in 2021 equated to about 56 per cent of the $15.1 million worth of receivables reported on the Australian balance sheet.
Payments experts expressed disbelief and horror when they were shown copies of Klarna Australia’s 2021 accounts by Banking Day.
Grant Halverson, a longstanding critic of buy now pay later business models, said the company’s credit loss numbers were the worst he has seen in the international buy now pay later market.
“The business performance reported in these accounts is horrendous,” he said.
“I’ve never seen credit losses for any BNPL provider running at 56 per cent of receivables – even in Latin America.
“It’s unprecedented, even in the buy now pay later space.”
Sydney-based payments consultant Brad Kelly believes Klarna’s Australian business is now hanging by a thread and likely to fold.
“The future of Klarna is sealed with these catastrophic results and it’s just a matter of time before the doors are shut for good,” he said.
“Klarna is the biggest BNPL in the world and these Australian results are nothing short of an embarrassment and a bellwether for the rest of the BNPL industry.”
Halverson questioned whether Klarna had a sustainable future in Australia, saying that disclosures in the 2021 accounts indicated it had only a 1.1 per cent share of the national BNPL market.
“It’s incompetence -there’s no other way to describe it – because Klarna is a global leader in the BNPL industry,” he said.
“Even the auditors from Ernst & Young must have fallen off their chairs when he saw these numbers.”
Halverson also drew Banking Day’s attention to potential inconsistencies between disclosures in the accounts of Klarna Australia Pty Ltd and Klarna Australia Holding Pty Ltd.
The holding company reflects the combined operating performance of the Australian and New Zealand operations of Klarna.
According to the accounts of Klarna Australia Pty Ltd, the Australian business incurred net finance expenses of $886,878 in 2021, but the accounts for the holding company show net finance costs of only $273,628.