Amid the spectacular fallout from the implosion of the crypto exchange FTX, the boss of buy-now-pay-later champion Klarna was quick to warn about the dangers of an over-reaction from regulators.
Sebastian Siemiatkowski said he was fearful that there could be a broader financial sector backlash at a time when “we need more competition in banking”.
It’s a fair point but the Swedish payments giant, which allows consumers to defer bills and pay in installments, is among a new class of fintech hopefuls that have been threatening to upend the staid world of high street banking since the financial crash – with limited success it has to be said.
Some 15 years later the same old names still have a vice-like grip on the market, and a generation of hopefuls that promised to shake-up traditional finance have failed to live up to the billing.
Increasingly, it looks as though Klarna, along with rivals such as Revolut and Wise, and a host of other tech-inflected finance firms, have actually had it easy. The free availability of venture funding and cheap debt of the last decade is evaporating, puncturing valuations, threatening heavy losses for investors, and bringing growth to a shuddering halt.
At Klarna, losses doubled to roughly $200m in the third financial quarter, from the same period last year. According to Siemiatkowski, this demonstrates “huge progress” towards profitability, although one suspects it will do little to restore the company’s shrinking valuation.
In the space of a year, Klarna has gone from being worth £38bn to just £6bn after its most recent funding round, a truly spectacular fall in value even by the racy standards of technology investing.
In Revolut’s last funding round in July 2021, it was valued at £28bn, but its shares were reportedly being offered for sale at half that value in the secondary market recently.
There were high hopes for Wise too when the money transfer service debuted on the London stock exchange last year. But its shares have tumbled by more than a third since its £8bn float 18 months ago.
It’s not that their ideas were bad. On the contrary, in most cases these disruptors, armed with the latest technology and fresh thinking, have been a welcome development. This is especially true of banking, where real innovation is scarce, some fees are too high and customer service is still too often poor.
One can even argue, for all the understandable concerns among charities about whether Klarna sucks people further into debt they cannot afford, that it provides a useful service for those able to afford repayments.
Tech entrepreneurs will protest that it is wrong to group everyone together when many of the top names are grappling with their own unique problems.
Klarna has faced growing competition from the likes of Apple, Shopify, PayPal and even once-fusty high-street lenders such as Lloyds.
Revolut has gained 25m customers but it is yet to get a UK banking license, and concerns have been raised about cultural and operational issues. Revolut says some are the natural result of rapid growth.
Senior figures are confident of riding out the storm, pointing out that rising interest rates means the billions of pounds it holds on deposit quickly become more profitable, as well as there being no need for additional funding.
Wise has meanwhile hit turbulence via the disorderly tax affairs of founder Kristo Kaarmann and governance issues including its dual-class share structure.
Nevertheless, a generation of tech businesses are grappling with the same question: having ridden the wave of cheap money, can they survive the next cycle? This doesn’t only apply to the fintech sector but the likes of Uber, Deliveroo and even Netflix too.
Spiraling interest rates changes the entire dynamics of the tech boom. When rates were at rock bottom, companies could get away with being heavily loss-making but investors won’t bankroll losses indefinitely.
Siemiatkowski has conceded that his backers have gone from telling him “growth is the only thing that matters,” to wanting to see profitability, a dramatic shift in sentiment.
The debt markets are seizing up too, and venture capital interest will quickly dry up as investors pull their money out of more speculative areas and seek out safer returns, with calamitous consequences for funding and valuations.
Meanwhile, customers and businesses are tightening the purse strings, dealing another blow to growth, and the earnings that backers are now demanding to see.
In Klarna’s case, there’s an argument that it may benefit from tougher times, on the theory that as consumers become more stretched they flock to less mainstream but still accessible forms of finance.
Equally, it may be that in times of great economic uncertainty, faith in more established, and properly regulated lending receives a boost.
The collapse of FTX is an extreme and early example of the same phenomenon. Although its founder Sam Bankman-Fried stands accused of fraud, it wasn’t until creditors realized that its balance sheet had been pumped up by speculative assets with fictional valuations that the crypto exchange began to unravel. In that sense it is unlikely to be a one-off but the first of a series of dominos to fall.
Much of the tech sector now faces an acid test of their true prospects. Some companies will of course survive. Some may even flourish, although it’s hard to think of an obvious candidate against the current backdrop. Others will get bought at knock down prices. But there will be those who go under too. A cull of puffed-up tech unicorns has only just begun.
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