This analysis was first published in SvD Näringsliv, in Swedish, on August 31st, 2022. This piece was translated from Swedish by Claude. Some phrasing may differ from a human translation.

Klarna will shrink its loan amounts to bring down credit losses. But while the company’s focus has been on the US, the Swedish business is now shrinking for the first time.

It is every CEO’s job to present and package reality as positively as possible. Sebastian Siemiatkowski, CEO and co-founder of Klarna, knows this very well. Which comes through clearly when you read the company’s interim report for the first half of the year, and his letter to shareholders in particular.

The more complex picture — the one Klarna does not communicate — is not quite so rosy. The company is losing around SEK 35 million a day. Cash flow is negative SEK 9.8 billion, of which just under a third is acquisition-related, compared with positive SEK 1.5 billion in the same period last year. And while the American market is growing fast — but expensively — revenue from Sweden is actually falling by 9.5 percent. That is the first time it has happened.

The fact that the Swedish market is shrinking is notable.

Klarna has been the clear market leader in Sweden for many years, but has faced increasing competition from similar products and offerings. That the company’s focus has been on the US has been obvious — revenue there is growing by more than 100 percent — but now, for the first time, there are signs that this may have come at the expense of more established markets. The fact that Swedish e-commerce has declined overall after a pandemic-fuelled boom probably plays a role as well. Finally, a change in the company’s product mix, where a sort of “perpetual credit” has been scrapped, also contributes.

Even Germany, Klarna’s single largest market, grew by just over 6 percent in the period. Klarna is the country’s second-largest payment system after PayPal, but a long line of challengers is appearing on the horizon there too. And this summer came the news that even the big bank Deutsche Bank is entering the hot “buy now, pay later” market in the country. Competition is intensifying.

Turning the business back to profitability requires both that established markets keep working, and that the US expansion stops bleeding money. Klarna writes in the report that they have changed their approach to credit losses and that they will lend smaller amounts to reduce that outflow. It remains to be seen what effects this will have, but between the lines you can at least sense some seriousness about the enormous losses the company continues to have.

Looking ahead, the challenge is exactly this balancing act between maintaining established, mature markets and growing into new ones at the same time. Siemiatkowski writes that the credit losses have been a “conscious consequence” of the company’s growth rate. It is true that growth has been rewarded by investors — almost at any cost — for many years. But it is, to put it mildly, optimistic to believe that changing their lending would not affect existing and future customers in ways beyond just credit losses.

The company has large and established competitors in the US as well, including Affirm and Afterpay (part of Block). Klarna’s success and growth rate there is tied to its competitiveness, something that can be diluted by changes of this kind.

The optimism from Klarna’s chief is familiar. In an interview with Dagens industri in May this year, Siemiatkowski said that “I am optimistic and I think there are good conditions” to defend the company valuation of around $45.6 billion that Klarna had previously received from investment company SoftBank. Less than two months later they raised new money at a valuation around 85 percent lower.

A positive outlook is a good starting point for a CEO. But that alone will not pull Klarna out of the tough market situation it finds itself in. Retooling a giant operation like Klarna can take longer than you think. Because the money is running through the company and the conditions for attracting new investors on favourable terms are harder than they have been in many years.