Why the CEO of buy now, pay later giant Klarna has his sights set on Canada

Swedish fintech leader chooses Toronto for tech hub to grow its ‘buy now, pay later’ model in North America

Swedish fintech leader Klarna Bank is planning to establish a product development and tech hub in Toronto as it looks to grow its “buy now, pay later” model in the increasingly competitive North American market.

Klarna, which found fast success in Europe, grew from a business-school concept in 2005 to a multinational corporation challenging some of the continent’s established financial services giants, before expanding into the U.S. market in 2015.

Now, with more than 400,000 merchants on board and US$1.6 billion in net operating income, founder and chief executive officer Sebastian Siemiatkowski is looking to catch a ride on Toronto’s thriving tech scene and take advantage of the country’s shift into open banking.

Klarna initially set its sights on Canada in February, when it brought its “Pay in 4” service to the country, which, as the name suggests, allows consumers to split a purchase into four payments. The company partnered with retailers such as Harry Rosen, Mejuri and Frank And Oak as well as hundreds of others.

For the tech hub, which would be Klarna’s first such centre in North America, Siemiatkowski said the goal was to think small.

“We’ve had this strategy to … have multiple engineering hubs, which we don’t want to be too large,” Siemiatkowski told the Financial Post. “I always joke about the fact that when the company starts building the beautiful, big corporate headquarters, that’s … the beginning of the end, right?”

Siemiatkowski added that building a tech hub with up to 500 people would give the company a startup feel as well as a foothold in the North American market.

“We compared it with all of U.S. and Canada and so forth and concluded that Toronto had a fantastic amount of talent, fantastic positioning, (and) a very business-friendly government,” he said.

Being part of an ecosystem that helped startups such as Shopify Inc. thrive is another reason Klarna picked Toronto. Siemiatkowski anticipates the Toronto office to have a mix of remote and in-office work opportunities once it launches.

The buy now, pay later (BNPL) model is already starting to take off in Canada, fuelled by the shift to e-commerce during the pandemic. According to data analytics company Research and Markets, BNPL payments are projected to grow 63.5 per cent and reach $5.9 billion in 2022.

Klarna will be bumping elbows with other major BNPL players including Afterpay, Sezzle, Affirm, ZIP and PayPal as it expands in Canada. On top of that, it must contend with an established banking oligopoly and major credit card companies that are looking to include BNPL in their business models.

Bringing their suite of financial services products from BNPL to finance tracking may mean stepping on the toes of incumbent financial giants, but Siemiatkowski believes it’s a competition that’s overdue.

“We (compete with banks) in partnership with our retailers,” Siemiatkowski said. “Retailers are not happy with the banks either, so they’re quite keen on helping somebody create a little bit of competition because they’ve been paying a lot of fees and they haven’t been rewarded.”

BNPL, however, is not without its challenges.

After raising money at lofty valuations during the pandemic — Klarna was valued at US$45.6 billion in a June 2021 funding round, though Bloomberg reported the company could be valued at as much as US$50 billion to US$60 billion — the space has come under pressure amid the broader tech rout.

While Klarna is private, its publicly traded competitor Affirm has seen its stock price drop by more than 80 per cent year to date, slashing billions off its market capitalization.

Some personal finance experts have also taken issue with the BNPL business model, arguing it encourages consumers to overspend, potentially dragging them into a debt spiral. Siemiatkowski said he is aware of those concerns, but that they could apply to other lending services as well.

“Obviously, unfortunately, it does happen that people don’t pay (and are hit with interest) and again, that’s true for any credit product,” he said. “But with that said, if you look at our underwriting source, it’s very different.”

Siemiatkowski said that with traditional credit card companies, consumers are given a large credit limit and there are very few checks and balances to ensure that the customer is consistently able to pay their limit back. In Klarna’s case, the company checks to see if the client paid each purchase back on time. If they do, they provide more opportunities for consumers to purchase products.

“It’s a decision per every transaction,” Siemiatkowski said. “In addition to that, we never lend people money, we never let them transfer balances, we’re very cautious about the stakes. So, we use a lot of real-time data to kind of take those decisions.”

Canada’s shift to open banking is one reason Siemiatkowski is optimistic about the opportunity here. The regulatory framework, due to launch next year, would give consumers the ability to share their banking data with other financial institutions or move their information between institutions.

Siemiatkowski said that because banks are largely unchallenged by other companies, the banking industry has been more interested in lining their pockets than providing the best services to customers.

“The lack of competition comes from how hard it is for us to shift between banks and how difficult it is to be mobile,” he said. “A lot of that gets solved by open banking. So, I’m a big fan of it. I think it’s going to have a tremendous impact.”

Siemiatkowski acknowledged that it will take time for benefits of open banking to be fully realized, but he remains optimistic about its potential.

“Ultimately, I hope — I’m not saying we’re there yet — but I ultimately believe that one day it has to be that people who bank with us versus bank with other banks are more financially well off,” he said.

“Ultimately, that’s the goal.”

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