ANNOUNCEMENT: Expert Investor is now PA Europe. Read more.

How ethical is investing in buy-now-pay-later firms?

The likes of Klarna risk sending financially vulnerable people deeper into debt


Pete Carvill

Roughly 73% of my time is spent wading through press releases. A good chunk of the rest is parsing out useless statistics that cannot be proven nor otherwise.

But this week, a release popped into my inbox about payment provider company Klarna. The release itself was sent on behalf of an organisation called HelpCenter which, according to its website, “[…] is an intuitive, easy to set up, and use customer service software for e-commerce to make your interactions with customers more effective”.

According to HelpCenter, “Klarna holds over 50% share of global ‘buy now, pay later’ (BNPL) market.” The company, HelpCenter ominously warns, “[…] is taking the market by storm despite regulatory concerns and growing competition”.

The rest is just meaningless statistics. “Data presented by the HelpCenter app,” says the statement solemnly, “reveals that Klarna is currently the most popular Pay Later technology in the market, offered by 53% of websites on the entire internet, higher than its competitors Afterpay, Sezzle, ZipPay, and Affirm combined. Out of all websites offering Klarna as a payment method, 34% come from Germany and 31% from the US. Home market Sweden accounts for 12% while the UK comes fourth with 8% share. BNPL service as a whole is offered by 43% of US websites, with Germany second at 16% and a total of 12% from Australia.”

There is a lot of cloud here and not much mountain. Firstly, how do they measure this? Don’t the number of sites change continually? Are they measuring this by the number of sites, or the volume of transactions, or the overall size of those transactions?

The release eventually goes into talking about how regulators are looking at Klarna and other BNPL services, but names only two of the measures taken—a ban on retailers offering such services before other payment options in Sweden, and the Advertising Authority in the UK banning some Klarna ads.

That is not much. The only clear thing is that HelpCenter does not like Klarna.

Investor appeal

But here is the interesting thing about Klarna—lots of companies seem to like it. Particularly investment ones.

I have received at least 15 releases mentioning Klarna since the middle of August. Some, obviously, just namecheck Klarna. In fact, most do.

But one from 13 October references the company WestCap, which boasts, “WestCap has made notable investments in technology businesses such as Airbnb, StubHub, Klarna, iPreo, Skillz, Sonder, Addepar, Hopper, iCapital, and Bolt.”

Interesting. And this is from a release on Klarna’s own website, dated 10 June: “Klarna, the leading global payments provider, retail bank, and shopping service, today confirms a new equity funding of $639m. The round was led by SoftBank’s Vision Fund 2 ,with additional participation from existing investors Adit Ventures, Honeycomb Asset Management, and WestCap Group, to support international expansion and further capture global retail growth. Klarna’s other investors include Sequoia Capital, SilverLake, Dragoneer, Permira, Commonwealth Bank of Australia, Bestseller Group, Ant Group, Northzone, GIC – Singapore’s sovereign wealth fund – as well as funds and accounts managed by BlackRock and HMI.”

One day older and deeper in debt

But what is Klarna? Well, according to its UK website: “We partner with retailers all over the world, so that you can shop smooth [sic] directly from their sites. Don’t spot us at the checkout? No worries. You can use our app to enjoy flexible payment options everywhere and anywhere online.”

That sounds great until you realise that Klarna is, to say the least, controversial. Back in January, the BBC ran a story about the rise of companies such as Klarna, following concern from MPs that it was pushing people into unsustainable debt. This was followed a month later by the Financial Conduct Authority saying it would regulate the sector and, in April, Citizens Advice sounding the alarm (probably through a press release) that many users of such services were getting themselves into debt.

Following all this, Klarna told the BBC last month that it was going to offer a ‘Buy Now’ option that let people pay the balance at the end of a transaction rather than parse it out over a specific time period. This was ahead of an expected crackdown by the Treasury.

But back to the investment side…

Familiar company

That Klarna press release in June listed at least 15 investors that had put money into the service.

I went to the websites of some of those investors. Here is what I found.

  • SoftBank’s Vision Fund: “We envisage a future where the world’s most extraordinary companies are working together to help solve some of the biggest challenges facing humanity. The technologies we are investing in have the potential to profoundly benefit society through radical improvements in products and services, reduced costs, and improved efficiency.”
  • Permira: “The Permira funds are significant investors in a range of businesses around the world. We recognise the responsibility that this brings and are committed to active engagement with portfolio company management teams on environmental, social and governance (ESG) matters.”
  • Ant Group: “We are committed to philanthropy and creating equal opportunities through business practices and technology, so as to bring small and beautiful changes to the world.”
  • BlackRock: “Sustainable investing is about investing in progress, and recognising that companies solving the world’s biggest challenges can be best positioned to grow. It is about pioneering better ways of doing business, and creating the momentum to encourage more and more people to opt in to the future we’re working to create.”

It is hard to envisage how an ESG commitment can align perfectly with investing in a service that may be tipping financially vulnerable people into debt.

Canary in the coal mine

In March last year, the British retailer BrightHouse went into administration after it went out of business due to the downturn following the coronavirus pandemic. BrightHouse made money from selling furniture to customers that was paid in a series of payments.

Those payments often jacked up the price of products horrendously. In 2016, the BBC found that a £358 washing machine bought through BrightHouse had its price go up to over £1,000 once the payments and mandatory extras had been completed. And that was accomplished through an interest rate over three years of 69.9%.

Sasha Rhodes of Sheffield told the BBC in regard to BrightHouse: “I don’t think they ran enough checks to ensure I was able to make the payments – all they were interested in was my money. I did not realise how high interest payments were. I stopped payments after 16 months. I think I paid them around £800 in total for what must have been a £400 bed.”

Rhodes made the typical mistake of someone who does not understand finance. But investors do understand these things.

But who invested in BrightHouse? Well, Alteri Investors put money into the company in 2018, which their PR company confirmed. The PR company was also keen to point out that Alteri Investors was a minority shareholder in BrightHouse, and no longer had a financial interest since the company was now in administration.

Alteri Investors, on its own website, says that it is, “[…] backed by funds managed by affiliates of leading alternative investment management firm Apollo Global Management Inc.”

I reached out to Apollo, too. Strangely, the PR team for Alteri Investors neglected to mention when I first approached that they also did the PR for Apollo. When I reached their PR representative, they said in an email, “For context, the vast majority of Apollo’s total AUM – and therefore most of its investments – is steered towards credit opportunities. But, they do of course have a PE division, a hybrid strategy, and real assets too.”

That is nice, but Apollo has something else. Its own ESG policy, which states, “We take an integrated approach, incorporating ESG considerations into everything we do — from how we invest, to how we lend, to how our firm operates globally.”

There are also at least 12 volumes of its own ESG report, which it calls The Apollo ESG Effect. It runs to more than 120 pages.

So ESG is important to Apollo Group, as it reportedly is to SoftBank, Permira, Ant Group, and BlackRock. The question is how important it can be when they invest in companies with reported and well-documented histories of investing of offering potentially exploitative services to financially vulnerable people?