Klarna's BNPL Collapse and Digital Bank Pivot: Key Takeaways

Klarna, a pioneer in the Buy Now Pay Later (BNPL) trend, is facing significant challenges despite its initial success and ambitious pivot towards becoming a digital bank. The company, once valued at $17 billion with growing revenue and millions of users, has seen its stock plummet by 60% and is grappling with substantial losses. Compounding these issues, Klarna is now embroiled in a major lawsuit alleging a misleading IPO.

The Unsustainable BNPL Model

Klarna's core business model involves merchants adding Klarna as a payment option, with Klarna charging a 3-6% commission. Customers are offered various payment plans, most commonly four installments, but also options like paying in 30 days or financing up to 36 months. Klarna fronts the payment to the merchant and then collects the debt from the customer.

While this model generated significant revenue, it also created inherent problems:

• Debt Collection: Klarna essentially functions as a debt collection company, albeit with sophisticated branding. They profit from failed payments, charging $7 fees and high interest rates, sometimes as high as 35.9%. They even faced legal action for charging a €1.20 reminder email fee.
• Rising Credit Losses: In 2025, customer credit losses surged by 17%, totaling $136 million, indicating an increasing number of customers failing to repay their debts.
• Expensive Debt Financing: Klarna often uses its own debt to pay merchants upfront. As customer repayments falter, Klarna's own debt becomes more expensive. Debt financing expenses climbed to $130 million in Q1 2025, a 15% increase. This cost of debt, rather than Klarna's actual debt, highlights a significant financial burden.
• Vulnerable Customer Base: BNPL users are disproportionately financially vulnerable. A study revealed that 41% of customers had been late on a payment, an increase from the previous year.
• Ethical Concerns and Financial Losses: Despite reporting $3 million in profit on $700 million in revenue (EBITDA), Klarna actually lost $99 million in one quarter due to these underlying issues.

The IPO and the Pivot to a Digital Bank

Klarna had delayed its IPO, citing tariffs, but CEO Sebastian Siemiatkowski likely recognized the unsustainability of the BNPL model on its own. To appeal to Wall Street, Klarna needed a new narrative.

In September 2025, Klarna went public on the NYSE, pricing shares at $40, above the guidance range. Demand was 25 times the supply, and shares opened at $52, closing at $45.82, valuing the company at $17.4 billion and raising $1.37 billion. This appeared to be a massive success.

However, the stock's performance quickly deteriorated, with its market cap falling by over 50%. This decline coincided with Klarna's strategic rebranding as a "global digital bank and flexible payments provider."

The "Global Digital Bank" Strategy

Klarna's pivot involved several key initiatives:

• Walmart Partnership: The same week as its IPO filing, Klarna partnered with OnePay (Walmart's payment company) to become Walmart's exclusive BNPL provider, replacing Affirm. Klarna issued OnePay warrants for 15.3 million Klarna shares at an average price of $34, indicating the importance of this partnership.
• "Fair Financing": Klarna began offering longer-term installment loans, typically 6 to 24 months, with interest rates ranging from 10% to 36%. This marked a significant shift from its previous model, where 99% of transactions were interest-free in 2024.
• Debit Card Launch: In 2025, Klarna launched a debit card to diversify beyond short-term credit products.
• Banking-as-a-Service Model: While Klarna holds a full banking license in the EU, it lacks one in the US. To offer FDIC-insured deposits and withdrawals, it partnered with WebBank, a small financial institution in Utah. This "Banking-as-a-Service" model allows Klarna to operate like a neobank without the slow process of obtaining its own US bank charter.

This strategic shift was driven by the low margins of BNPL loans and the need for a more appealing story for investors.

Post-IPO Performance and Challenges

Despite the successful IPO, Klarna's financial performance quickly soured:

• Q3 Financials (Post-IPO):
  • Gross Merchandise Volume (GMV) increased by 43% to $32.7 billion, driven by long-term loans.
  • Revenue rose to $900 million from $706 million year-over-year.
  • Net income, however, was a loss of $95 million, down from a $12 million profit the previous year.
  • Transaction Margin Dollars (TMD), a key metric for Klarna's core business profitability, decreased from the previous year to $281 million.
• Q4 2025: Klarna missed its TMD projections, reaching $372 million instead of the guided $390-400 million. CEO Sebastian Siemiatkowski attributed this miss to the faster-than-forecast growth of "Fair Financing." These long-term loans have significant upfront costs, with profits lagging. In that quarter, $2.5 billion in new loans resulted in $80 million in upfront losses against only $40 million in upfront revenue.
• Q1 2026: Klarna finally reported a positive income of $1 million on $1 billion in revenue. TMD was $389 million, a slight increase.

The stock, by this point, had fallen more than 75% from its IPO price.

Lawsuit and AI Obsession

In December 2025, a shareholder class action lawsuit was filed against Klarna, alleging that the company misled investors during its IPO by downplaying credit risks in its BNPL business. Weeks after the IPO, Klarna reported a 102% year-over-year increase in its provision for credit losses, causing shares to plunge. Hagens Berman partner Reed Kathrein questioned the transparency of the IPO documents given this rapid increase in credit loss provisions. Klarna maintains that the allegations lack merit.

Adding to its woes, Klarna's aggressive adoption of AI for customer service and subsequent layoffs have reportedly backfired, leading to regrets within the company.

While Klarna has achieved a sliver of profit, the long-term growth prospects remain uncertain, and the company faces significant hurdles in proving the profitability and sustainability of its new digital banking strategy.