Klarna Under Pressure: Rising Defaults Signal Cracks in the BNPL Model

05/21/2025

Reading Time : 5 min

Summary: Klarna’s first-quarter report reveals a significant 17% increase in consumer credit losses, doubling its net losses, even as revenue and user base grew. This comes amidst a broader national trend of increasing consumer debt and late BNPL payments, with many users relying on these loans for everyday necessities like groceries. Simultaneously, recent regulatory changes are softening oversight on BNPL providers, raising concerns about consumer protection.

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Navigating the Debt Storm: Are Klarna Users Saying “Buy Now, Pay Never?”

Klarna, a leading “buy now, pay later” (BNPL) service, is facing rising consumer credit losses as more users struggle to repay loans. This trend aligns with a record surge in U.S. household debt, now at $18.2 trillion. Despite these challenges, Klarna continues to expand, while regulatory oversight for BNPL services appears to be easing.

Klarna Under Pressure Rising Defaults Signal Cracks in the BNPL Model — Klarna Under Pressure: Rising Defaults Signal Cracks in the BNPL Model

Buy Now, Pay Never? Klarna Users Face Mounting Repayment Struggles as U.S. Consumer Debt Soars

The popular “buy now, pay later” (BNPL) landscape is showing signs of strain, with Klarna, a Swedish fintech giant, reporting a significant increase in consumer credit losses.

This alarming trend for Klarna mirrors a broader national crisis as U.S. household debt hits a record $18.2 trillion, prompting questions about the long-term sustainability of the BNPL model and the financial well-being of consumers.

Klarna’s Q1 Woes: Growth Amidst Mounting Losses

Klarna‘s first-quarter financial report painted a mixed picture. While the company saw growth in its user base and revenue, its net losses doubled, largely due to a substantial 17% surge in consumer credit losses, reaching $136 million. This comes just weeks after Klarna decided to pause its plans to go public, citing concerns about tariffs and economic uncertainty.

A spokesperson for Klarna downplayed the 17% jump in credit losses, emphasizing the company’s credit losses as a share of its total loaned amount (gross merchandise value).

This metric, they noted, rose only slightly from 0.51% to 0.54%, which they still consider “very low.” However, the absolute increase in losses remains a point of concern for investors and market observers, particularly when considering the broader economic climate.

A Ticking Debt Bomb: The Broader Consumer Landscape

The challenges faced by Klarna are not isolated. Across the entire BNPL industry, borrowers are increasingly falling behind on their payments. A recent survey by LendingTree revealed that 41% of BNPL users admitted to paying late within the last year, a noticeable jump from 34% in the previous year.

Even more concerning, a quarter of BNPL users reported taking out loans for basic necessities like groceries, a significant increase from just 14% a year prior. This indicates a growing reliance on BNPL services for essential spending, potentially masking deeper financial distress.

This heightened debt strain among BNPL customers is directly correlated with a worrying rise in overall U.S. consumer debt. The Federal Reserve Bank of New York recently reported a record $18.2 trillion in total household debt in the first quarter, marking a substantial increase of $167 billion.

While credit card balances and auto loan debt saw typical post-holiday dips, student loan delinquencies surged dramatically from under 1% to almost 8%, further highlighting the fragility of household finances.

The Regulatory Rollercoaster: Easing Oversight on BNPL

Adding another layer of complexity to the situation is the evolving regulatory landscape. The current administration has been actively scaling back efforts to tighten oversight of BNPL services, even as these services become a growing source of financial difficulty for consumers.

Earlier this month, the Consumer Financial Protection Bureau (CFPB) announced it would no longer enforce a previous rule that aimed to treat BNPL providers similarly to credit card lenders, which would have imposed stricter protections around disclosures, customer disputes, and refund processing.

This rollback is particularly noteworthy as the prior rule had been issued as “guidance” under former CFPB Director Rohit Chopra, who was reportedly fired in February.

Consumer finance experts suggest that the “guidance” format made it easier for the agency’s current leadership to reverse these policies. This shift raises concerns about consumer protection, as the less regulated environment could potentially exacerbate financial risks for vulnerable borrowers.

Klarna’s Strategic Expansion Amidst Uncertainty

Despite these headwinds, Klarna continues its aggressive expansion. The company recently secured a significant win by becoming Walmart’s exclusive BNPL provider, displacing rival Affirm.

In March, Klarna also partnered with food delivery service DoorDash, further integrating near-instant credit access into routine, small-dollar purchases. These strategic partnerships underscore the industry’s drive to embed BNPL services deeper into the fabric of the consumer economy, making credit more ubiquitous than ever before.

Consumer Spending Habits in Flux

The backdrop to these developments is a consumer base increasingly trimming spending due to persistent inflation. While household spending in April rose by 4.5% year-over-year, this was a slight deceleration from the 4.6% annual uptick observed in December, according to a New York Fed survey.

Researchers noted that much of this pullback was driven by households earning less than $100,000 annually, indicating a growing caution around larger purchases. However, it’s crucial to remember that average household spending growth still remains significantly higher than pre-pandemic levels.

The Future of Klarna and BNPL

The current environment presents a complex challenge for Klarna and the broader BNPL industry. While rapid user adoption and strategic partnerships fuel growth, rising credit losses and a strained consumer debt landscape demand careful attention. The easing of regulatory oversight, while potentially beneficial for BNPL providers in the short term, could also lead to increased consumer vulnerability and, ultimately, greater systemic risk if not managed responsibly.

For those considering BNPL services, it’s more crucial than ever to understand the terms, assess repayment capabilities, and consider the potential impact on overall financial health. The promise of “buy now, pay later” can be alluring, but the reality for many is becoming increasingly difficult to manage.

Key Considerations for Klarna and the BNPL Market:

Factor	Impact on Klarna & BNPL Market
Rising Consumer Debt	Increased risk of defaults and higher credit losses for BNPL providers like Klarna. Signals potential overextension of consumers.
Increased Late Payments	Direct indicator of financial distress among BNPL users. Can lead to higher operational costs for collections and potential reputational damage.
BNPL for Essentials	Suggests that BNPL is being used as a crutch for everyday expenses, rather than discretionary purchases. This demographic may be more susceptible to repayment difficulties.
Regulatory Rollback	Reduced consumer protections could lead to riskier lending practices and potentially more consumer harm. While it may offer short-term operational freedom for BNPL companies, it raises long-term ethical and financial stability concerns.
Klarna’s Expansion	Strategic partnerships with major retailers like Walmart and DoorDash demonstrate significant market penetration and a move towards ubiquitous credit. This could drive revenue and user growth but also exposes Klarna to a wider range of consumer risk if underwriting standards are not robust.
Klarna Stock (Potential IPO)	The current financial performance (doubled net losses, rising credit losses) and broader economic uncertainty have already led to a paused IPO. Future public market valuation for Klarna stock will be heavily influenced by its ability to manage credit risk and demonstrate a clear path to sustainable profitability amidst a challenging consumer debt environment.
Inflation & Spending Habits	Consumers are becoming more cautious with spending, especially on big-ticket items. While BNPL can alleviate immediate financial pressure, it could also contribute to a cycle of debt if consumers aren’t able to meet payment obligations as prices continue to rise.

FAQs about Klarna and Consumer Debt:

Q1: What does “rising consumer credit losses” mean for Klarna?

A1: Rising consumer credit losses for Klarna mean that a growing number of its users are failing to repay their installment loans.18 This directly impacts Klarna’s profitability, as seen in its doubled net losses, and indicates increased financial risk associated with its lending operations.

Q2: How does the increase in U.S. consumer debt affect Klarna and the BNPL industry?

A2: The surge in U.S. consumer debt, hitting a record $18.2 trillion, creates a challenging environment for Klarna and other BNPL providers. It suggests that many households are already stretched thin, making them more vulnerable to defaulting on new loans, including BNPL installments. This broad financial strain increases the risk of credit losses across the board.

Q3: Is Klarna stock a good investment given these recent developments?

A3: Klarna is currently a private company and has paused its plans to go public.19 Any potential Klarna stock offering would face scrutiny given its recent financial performance (doubled net losses, increased credit losses) and the broader economic climate. Investors would need to carefully evaluate Klarna’s ability to mitigate credit risk and achieve sustainable profitability before considering it a sound investment.

Q4: What should consumers consider before using Klarna or other BNPL services?

A4: Before using Klarna or any BNPL service, consumers should carefully assess their ability to make repayments on time, even for small purchases. Understand the payment schedule, potential late fees, and how late payments might impact your credit score. Given the trend of using BNPL for essentials like groceries, it’s crucial to distinguish between genuine convenience and relying on BNPL as a substitute for adequate budgeting or emergency funds.