What: Klarna reports doubled Q1 2025 losses to USD 99 million as credit defaults rise 17%, despite revenue growth to USD 701 million and an active customer base of 99 million.

Why it is important: The rising default rates signal a potential turning point in the BNPL sector, challenging the sustainability of current business models while raising concerns about consumer financial health in a weakening economy

Klarna's financial results for the first quarter of 2025 reveal significant challenges in the buy now, pay later sector, with net losses more than doubling to USD 99 million from USD 47 million year-on-year. Despite achieving 13% revenue growth to USD 701 million and maintaining a substantial active customer base of 99 million, the company faces mounting pressure from increasing credit defaults. Customer credit losses rose 17% to USD 136 million, reflecting broader concerns about US consumer financial health. The company's credit loss rate as a percentage of total payment volumes increased to 0.54% from 0.51% the previous year. This comes amid a challenging economic environment, with US consumer confidence reaching its second-lowest level on record. Klarna's strategic response includes significant cost-reduction measures, including a 39% headcount reduction over two years and a 12% decrease in customer service costs. The company emphasises its ability to adapt quickly through its short-duration loan book, with 83% of loans refreshing within three months.

IADS Notes: Klarna's increased losses in Q1 2025 reflect broader challenges in the BNPL sector, coming amid significant market evolution. The company's aggressive expansion, including its September 2024 move into physical retail through Adyen and its March 2025 exclusive partnership with Walmart, demonstrates its push for market dominance despite mounting pressures. Research from Imperial College Business School in November 2024 revealed that while BNPL services boost consumer spending by 10%, they also increase financial vulnerability, a concern evidenced by Klarna's 17% rise in credit losses. This tension between growth and risk management has prompted regulatory response, with the UK announcing stricter BNPL regulations in May 2025. The timing of these results is particularly significant as problem borrowing in the sector grows at twice the industry's rate, suggesting that Klarna's challenges may be symptomatic of broader industry issues rather than company-specific problems.

Klarna’s losses widen after more consumers fail to repay loans