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Klarna HQ in Stockholm. Source: Klarna.

The total implosion of the buy now, pay later (BNPL) industry is almost complete. Last week, Swedish giant and the OG of BNPL, Klarna, announced that it was finalising a capital round at a valuation of US$6.5 billion. If you think that’s a high valuation for Klarna, think again.

A mere 13 months ago the payments colossus raised US$639 million from everyone’s favourite cash incinerators at Softbank, at a valuation of US$45.6 billion, yep, that’s billion with a b. In recent weeks Klarna had tried speculating it would raise a down round at US$30 billion, then US$15 billion. It seems to have optimistically settled on US$6.5 billion.

The current round is understood to have been filled by existing shareholders, which essentially means no investor in the world was willing to back the world’s largest BNPL business even at a near 90% discount to its last raising. It’s likely that the real valuation is less than US$6.5 billion and the terms are also likely to be onerous. In reality, Klarna is probably worth zero, and existing investors are trying to give the business a little more runway to sell the business for parts.

Klarna’s 87% price cut is far from the only BNPL calamity. Zip, the second largest Australian BNPL business has seen its market value drop from almost $9 billion to only $350 million. Zip lost $154 million in the first half, which on an annualised basis is impressively, almost as much as the business is now worth.

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Affirm, the last remaining major publicly listed BNPL stock, which was founded by PayPal wunderkind Max Levchin, has too been taken to the cleaners. Its market value has slumped from US$47 billion to US$5.7 billion in less than a year.

Fortunately there was one good news story (for some investors at least). Australian giant, Afterpay, was smart enough to convince the world’s most overrated CEO, Jack Dorsey, into buying it. Block paid around US$17 billion in its own scrip based on Block’s share price when the deal was completed. The Afterpay business is now valued by many analysts at zero, while Block’s share price has helpfully crashed by 76%. This may have been because Dorsey gave up more than a third of his business for Afterpay, which promptly announced a record loss of $346 million in the first half of 2022.

Despite being briefly one of Australia’s most valuable businesses (it was worth more than Telstra at one point), Afterpay has never been genuinely profitable — in 2016 the business lost $1.3 million while generating total revenue of $220,000. In 2017 it lost $11 million. In 2018 it purported to make an EBITDA profit, however, that ignored items like staff equity grants, so the business recorded a net loss of $9 million. Dorsey’s dream of using Afterpay to connect its legacy merchant terminals with its Venmo-like cash app ignored the glaringly obvious fact that Afterpay appeared terminally incapable of making money.

This was Dorsey’s AOL-Time Warner moment. And created the only real winners from the entire BNPL debacle — Afterpay founders Anthony Eisen and Nick Molnar, who shrewdly cashed in their chips at the market’s peak and are believed to have escaped any escrow restrictions. This meant they could sell Block their shares earlier this year for more than $1 billion each (having already sold $200 million worth of Afterpay shares in recent years). Former Afterpay executive, David Hancock, was one of the few other winners, reaping more than $115 million from share sales in 2020.

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While BNPL essentially became an industry of meme stocks, its downfall was boringly predictable.

The great lure of BNPL to merchants, that it would massively increase average order value (to justify the lofty merchant fees), was an obvious furphy. The claim may have been justified in the early days of BNPL, but when almost every merchant had some sort of payment option for customers, what it largely did was drive millennials, who thought they weren’t using ‘credit’ into more debt. A higher average order to one merchant, simply meant that same customer would spend less in subsequent transactions (debt has to be repaid eventually). BNPL never created any real economic value, it simply brought forward demand.

But it gets worse.

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BNPL businesses were incubated during one the greatest ever everything bubbles. With interest rates in most western economies close to zero, the BNPL businesses were able to borrow cheaply on wholesale markets. Delinquency rates were also artificially compressed as pandemic related government stimulus payments lined the pockets of their low quality borrowers. Bear in mind even with these once-in-a-lifetime macro-economic conditions, almost none of the BNPL businesses were able to generate a dollar of real profit.

That meant not only were merchants paying a high fee for no economic value, the BNPL businesses were also getting crushed because they were essentially under-pricing unsecured lending. BNPL was a rare lose-lose-lose transaction: merchants lost because they needed to pay higher merchant fees for no long-term benefit, BNPL investors lost because the model was simply uneconomic and they failed to adequately price lending risk (and never chased delinquent users), while customers also lost because they drove themselves into further debt buying stuff they never needed.

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Alas, in five years, we will look back fondly on the BNPL sector much like we reminisce on the follies of the mid-2000s bubble like Babcock & Brown or Allco, or the dot com insanity of 1999 with the likes of and Webvan. But for now, we can sit back and watch the once highly-valued meme stocks unravel in slow motion.

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