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So, Klarna, the Swedish-born and now United Kingdom-domiciled digital bank and Electronic Money Institution, found a window to price its US$1.37 billion New York Stock Exchange initial public offering ( IPO ) on September 9 – yet another European company listing in the United States.
The firm has shown positive business momentum, but the road ahead for the financial services sector is a little uncertain. The forward story depends on a lot of factors, not least ( for retail lenders, anyway ) consumer spending remaining intact. That’s potentially a big call with so many moving parts and an overlay of distinctly negative factors.
Klarna’s IPO was reported to have been 26x oversubscribed, allowing underwriters to price at US$40 per share, above the US$35-US$37 marketing range. No surprise that the shares popped in first-day trading, up 18% at one point before falling back, albeit closing at a reasonable premium to the IPO price. I won’t get into whether the stock was priced cheaply relative to demand. That’s a bit of a rabbit hole, and I’ll leave that to others.
Time will give a better indication of whether the apparently rapturous interest was driven by what investors believe is a compelling business case or whether it was a sign of frothy over-exuberance, driven by the optically sensible valuation of a tad over US$15 and fanned by upbeat syndicate messaging.
The IPO was priced off the valuation lows of below US$7 billion but a far cry from the US$45.6 billion post-money valuation of June 2021 when the firm closed a US$639 million funding round led by SoftBank’s Vision Fund 2. However, cratering valuations is what can happen to banks in adverse or uncertain growth and monetary scenarios, since they are so highly geared to the ups and downs.
Sector headwinds
European bank profitability, return on equity, stock prices, and valuations have all been on a tear since central banks started their rate-rising cycle, because it allowed net interest income to flourish. But the rate cycle has peaked. That’s not good for financial institutions. Also, the transmission effect of policy-rate changes on banks is immediate. The critical unknown for the sector, as I mentioned earlier, is what happens to consumer spending and delinquency rates.
At the same time as rates have peaked, the European economy finds itself in a tough spot, with strained public-debt sustainability, low growth forecasts, stubborn inflation, horrible geopolitics, and political volatility in certain countries knocking consumer and business confidence. That will cool demand for credit, hence arrest credit growth ( or send it into reverse ) and potentially push up default and delinquency rates.
For a bank like Klarna that is not yet sustainably profitable, that’s a risk. To be fair, Klarna’s Q2 numbers looked OK: a record number of transactions were paid on time or early, and provisions for credit losses remained low ( 0.56% of gross merchandise volume ) as realized losses fell from 0.48% in Q2 2024 to 0.45%. Delinquency rates dropped too: from 0.93% to 0.89% on Buy Now, Pay Later ( BNPL ) loans; and to 2.23% from 2.34% on its short-dated fixed-term loan product.
But that was then. The tide can turn very quickly, especially for lower-income customer segments that are attracted by products like BNPL, Klarna’s marquee offering. I don’t have a particular comment to make about BNPL, but it has been criticized as being predatory, inducing low-income users to overspend, with some being landed with late fees or paying so-called “snooze” fees ( which offer additional days to pay ) they can ill afford.
Interestingly, Klarna has taken precautions on its US growth: in August, it announced a multi-year forward-flow agreement with Nelnet, the US financial services firm, under which it can sell on a rolling basis up to US$26 billion in newly originated, short-term, interest-free “Pay in 4” US receivables over the life of the programme.
Regulatory scrutiny tightening
The other factor at play is the tightening global regulations around the BNPL market. The UK’s Financial Conduct Authority ( FCA ) will start regulating it from July 2026 to reduce the risk of harm to consumers and to ensure DPC ( deferred payment credit ) firms operate to high standards.
Under the proposed regulation, DPC agreements provided by third-party lenders will, under certain conditions, become regulated credit agreements. That means DPC lenders entering into such agreements will need to be authorized for the relevant consumer credit activities or have permissions under the DPC temporary permissions regime.
In the European Union, BNPL involving third-party lenders is now captured by the expanded Second Consumer Credit Directive, which was broadened to increase transparency and improve consumer protection.
In the US, the State of New York signed the NY BNPL Act into law earlier this year, which tightens licensing and general regulatory requirements, including around transparency, disclosure, and permissible terms. Other states are planning to increase regulatory oversight. In May 2024, the Federal Consumer Financial Protection Bureau issued an interpretive rule requiring BNPL lenders to treat consumers like credit card providers do under the Truth in Lending Act.
Watershed moment?
Notwithstanding the challenges, if Klarna can overcome them and its business model thrives, especially in the US, its IPO could be seen as a watershed moment. Listing events for European neobanks don’t happen that often.
In fact, venture capital, private equity, hedge funds, and other owners of fintechs, neobanks, digital banks, challenger banks – whatever you want to call them – haven’t found it easy in recent years to secure valuations that have gotten them excited enough to exit. It’s been a waiting game, as other options – like being acquired by incumbent banks or other fintechs – have stalled.
There’s an overhang of owner selling interest in the sector, certainly in the UK. The fact that Klarna’s IPO offered the dozen or so outside institutional shareholders that provided the bulk of the shares in the offering the chance for a partial exit will be viewed as a positive.
Klarna’s float will no doubt have stirred the blood of the owners of several UK digital banks eyeing exits. Starling Bank, Shawbrook Bank, and Monzo Bank are at the front of the queue; Atom Bank, Kroo Bank, Monument Bank, Zopa Bank, and others are all peddling hard to join it.
