Is SoftBank right to back the buy now, pay later app ahead of Klarna’s IPO?

Klarna’s IPO took another step towards becoming a reality, with a blistering funding round that gave the Swedish payments company a $45.6bn valuation.

Japan’s SoftBank [9984.T] led the charge, stumping up $639m through its legendary Vision Fund 2. Other investors in the round include Silver Lake, China’s Ant Group and H&M [HM-B.STO].

Becoming Europe’s highest-value start-up means having a product people want. Klarna streamlines the payment process for online shopping, and allows users to spread payments out in interest-free instalments. Instead of customers paying interest, like on a credit card, Klarna makes its money with a merchant fee.

As consumers look to indulge in some post-lockdown retail therapy, Klarna is in high demand.

The Swedish company’s valuation has shot up from the $31bn at which it was valued in March — itself was a huge jump from the $11bn valuation of September 2020. This has fuelled rumours of an upcoming IPO, which could potentially take place in London.

“I’m very proud of the investors who are supporting Klarna’s ambition to challenge these outdated [credit] models”, said Sebastian Siemiatkowski, the company’s founder and chief executive.

Klarna eyes US market to drive growth

March’s funding round saw Klarna raise $1bn, which the company said it will use to “accelerate international expansion and further capture global retail growth.” Operating the largest Open Banking network in Europe, the company recently added eight more countries: Portugal, Denmark, Luxembourg, Ireland, Croatia, Estonia, Lithuania, and Latvia.

Klarna had a global GMV of $18.7bn in the first quarter of 2021, up from $9.9bn in 2019. Revenues hit a record-breaking $1.2bn in 2020. That said, losses have also grown in its pursuit for growth.

Klarna said that investor demand has been driven by expansion in the US, which it reckons will overtake Germany as its biggest market by the end of 2021. In April, the number of US consumers on the app was 17 million, more than double the number at the same time last year. App downloads in the country increased 125% year on year, while 24 of the top 100 US retailers now accept the payment method.

Will Klarna IPO in London?

The City of London’s ambitions to be a key destination for European IPOs post-Brexit has had a mixed time so far. Deliveroo’s [ROO] much-hyped listing underwhelmed, while cybersecurity firm DarkTrace’s [DARK] share price surged 43% when it listed at the end of April.

Sebastian Siemiatkowski telling the Financial Times that Klarna’s IPO could happen in London may help to calm nerves over the City’s future as a destination for top-tech debuts — even more so if it actually happens. Brexit, according to Siemiatkowski, gives London the opportunity to shape itself favourably when compared to the EU.

“As Brexit has happened, it gives London an opportunity to write even better regulations for the financial sector. That is going to benefit London’s standing outside of the EU . . . People expected all the banks will move away [from the UK]; I think it’s the opposite,” he said.

Siemiatkowski added that he had been meeting with UK regulators, and favoured risk-based regulation over prescriptive rules.

However, there has been a vocal backlash, with critics saying the app encourages a reliance on debt. The UK’s Advertising Standards Authority banned several Klarna ads fronted by Instagram influencers on concerns that they “encouraged the use of debt to improve people’s mood”. There is also competition from rivals Affirm [AFRM], Afterpay [APT.ASX] and PayPal [PYPL], which introduced its own buy now, pay later feature in December.

A Klarna IPO could still be a couple of years away but, as the payments provider continues to grow, SoftBank suggests it’s one to keep tabs on.

“Klarna’s growth is founded on a deep understanding of how the purchasing behaviours of consumers are changing, an evolution which we believe is accelerating,” said Yanni Pipilis, managing partner for SoftBank Investment Advisers.