Power of Payments Ep. 8: Klarna and the future of BNPL, PayZen’s ‘Care Now, Pay Later’, and Mastercard’s ‘Smile to Pay’ system

Welcome back to Power of Payments. I’m your host Ismail Umar, and in today’s episode, we talk about Klarna and the future of BNPL, PayZen’s ‘Care Now, Pay Later’ solution, and Mastercard’s recently announced ‘Smile to Pay’ system.

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The following excerpts were edited for clarity.

Klarna (and maybe BNPL) in trouble?

Let’s start today’s discussion by talking about BNPL industry leader, Klarna. The Swedish fintech announced recently that it’s laying off 10% of its workforce. Citing the onset of war in Ukraine and the impending recession as primary reasons, the firm is letting go of around 700 members from its global workforce.

Klarna’s co-founder and CEO, Sebastian Siemiatkowski, said that when Klarna set out its business plan for 2022 in the autumn of last year, it was a very different world than the one we’re in today. Since then, we’ve seen a war unfold in Ukraine, a shift in consumer sentiment, a massive increase in inflation, a highly volatile stock market, and a likely recession. He said all of these factors have contributed to a very tumultuous year for the industry.

In February, when the initial news broke that Klarna was looking to raise more funds from new and existing investors, the firm was seeking a valuation between $50 billion and $60 billion. But a few weeks back, reports emerged that the firm was looking to raise $1 billion from investors at a much lower valuation, and the new round of funding could see the firm valued at $30 billion, down from $46 billion last June.

This means Klarna would lose its status as Europe’s highest-valued fintech, handing that over to Revolut, which is currently valued at $33 billion. In fact, just as Klarna announced its layoffs, Revolut announced that it’s actively hiring, with over 250 job postings up on its website.

Revolut, Monzo, and Curve have already been knocking on Klarna’s door, releasing their own BNPL-like offerings, as they come after its market share.

Klarna also faces competition from giants like PayPal and Mastercard, which are both interested in penetrating the BNPL business. PayPal acquired Japanese BNPL provider Paidy last year, and it’s already competing for the top spot in the BNPL space. Mastercard has also launched its version of BNPL called Mastercard Installments across its network.

And most recently, Apple has launched Apple Pay Later, which could turn it into a major BNPL player, and will further increase competition in the space, especially for the Gen Z market, because a lot of these young consumers already use Apple Pay, and they would be likely to start using Apple’s BNPL offering.

Last year, Klarna’s total losses doubled to reach $487 million. Other operators in the space have also been struggling to achieve profitability. Affirm reported net losses of around $430 million for the fiscal year ending in June 2021, and Afterpay’s annual losses shot up to $345 million last year. 

A fundamental question that’s been gaining attention lately is whether BNPL offers a sustainable business model for providers, and whether it’s even viable as a standalone business. Some experts are beginning to argue that it’s not, and the inability of BNPL leaders like Klarna to turn a profit seems to support this argument.

As it stands, the BNPL business relies on high volumes and really thin profit margins, with the bulk of the revenue coming from merchant fees, and some from late fees. And recently, charging late fees has gotten a lot of bad press for being exploitative, to the extent that last year, PayPal announced that it would drop late fees from its BNPL offerings worldwide.

Things don’t seem a lot better on the consumer side, either. A recent report found that 57% of consumers said they regretted buying an item using BNPL, and 56% found themselves falling behind on payments.

On average, bad debts make up 30% of a BNPL provider’s revenue, which is very high. With limited revenue streams and a disproportionate bad debt to revenue ratio, the business doesn’t seem very feasible, and profitability in a standalone BNPL business seems a bit far-fetched for now.

According to a report by UK-based research firm Redburn, if BNPL providers want to become profitable, they need to either get acquired by a bigger firm that uses BNPL to bring in new customers and sell them other financial products, or they need to start offering other financial services themselves.

The report adds that if BNPL operators want to move beyond just acquiring more customers and actually turn into sustainable businesses, they need to reduce their dependence on merchant discount rates and late fees, and figure out ways to move towards more reliable long-term revenue streams.

PayZen wants to combat rising medical debt with ‘Care Now, Pay Later’ solution

As I discussed earlier, the BNPL space is becoming increasingly overcrowded, with lots of new entrants across banking, payments, and tech over the last few years. This is making it increasingly challenging for BNPL providers to differentiate their offerings, and it’s pushing them to innovate towards newer categories like travel, education, housing, and healthcare.

And as US healthcare costs continue to mount, two major BNPL providers, Afterpay and Sezzle, recently signed healthcare-related deals that will allow consumers to pay some of their medical bills in four interest-free installments.

Healthcare could become an important sector for BNPL providers as consumers seek out flexible payments for high-value expenses. A recent survey by PYMNTS found that 43% of US adults (about 111 million consumers) want to use BNPL for ‘big ticket’ purchases – and among them, over 20% said they’d like to use it for medicine and prescription payments.

Afterpay and Sezzle are not the only firms to recognize the opportunity in using BNPL to tackle healthcare affordability and reach new customers. PayZen is a San Francisco-based startup that offers a ‘Care Now, Pay Later’ solution, which allows patients to pay their out-of-pocket medical bills over time in flexible installments.

The CNPL model uses AI and machine learning-based predictive modeling to generate personalized payment plans of up to 5 years, which are customized to each patient’s individual financial situation. This enables healthcare providers to offer affordable payment options to their patients by accurately determining each patient’s unique ability to pay.

I spoke with PayZen’s co-founder and CEO, Itzik Cohen, to hear more about how the CNPL model works. I was curious to hear what happens if a patient can’t afford an installment payment, or forgets to pay on time. Are there late payment charges? Could their medical debt worsen? And is their credit score negatively impacted?

Itzik told me his team believes that anyone who wants to pay their medical bills over time should be given that opportunity, so PayZen approves 100% of patients, regardless of their creditworthiness. Patients can set up auto-payment via ACH or debit card, so they don’t have to stress about remembering to make payments, and the firm sends them regular reminders, so that they’re always aware of the next automatic withdrawal.

If financial circumstances change, PayZen offers payment holidays, adjusts payment amounts or terms, and otherwise works with the consumer to make the repayment plan fit their new circumstances. But the firm doesn’t charge any interest or late payment fees. Patients never pay more than the cost of the service they received from their healthcare provider, so their debt doesn’t increase.

Itzik further added that enrolling in a payment plan has no impact on a patient’s credit, and PayZen doesn’t report their payment history to any credit bureaus.

I also asked Itzik whether he thinks healthcare could become the next major trend for BNPL, especially with major players like Afterpay and Sezzle recently signing healthcare-related deals. Here’s what he had to say on the topic.

“The model for BNPL providers doesn’t really benefit healthcare affordability in a meaningful way, and can actually make the medical debt problem worse. BNPL can involve large, even obscene hidden interest charges and fees. Afterpay’s healthcare offering, for example, can cost up to 30% APR to use. And Sezzle only offers a 4-payment plan, so it doesn’t address affordability for larger medical expenses.

The fact is that healthcare affordability problems are deep and complex, and BNPL isn’t a workable solution for them today. Out-of-pocket healthcare spend is a $1.2 trillion-dollar market in the US. Solving healthcare affordability requires deep credit underwriting expertise and the ability to absorb credit default risk – not to mention the difficulty of integrating with healthcare systems versus ecommerce platforms, and the intricacy of managing the backend and provider payment agreements. None of these are core competencies for BNPL providers, but they are part of our Care Now, Pay Later solution.

My hope is that new companies will enter the healthcare space that operate with a model and a mission like ours. There’s a huge market opportunity and a chance to make a real impact on Americans’ physical, financial, and emotional health. I’m really excited for the future.”

What does Mastercard’s ‘Smile to Pay’ tell us about the future of privacy in payments?

A few weeks back, Mastercard announced that it’s launching a biometric payment system called 'Smile to Pay', which will allow customers to make payments by waving their hand over a reader or smiling at a camera at checkout, without having to take out a separate card or their smartphone.

The new payment system has already been launched at selected supermarkets in Brazil, and future pilots are currently being planned for roll-out all over the world, including Latin America, Africa and Asia, followed by North America and Europe later this year.

The new technology will offer facial recognition-based payments by linking the biometric authentication systems of a number of third-party companies with Mastercard’s own payment systems.

Similar authentication technologies are used on smartphones – in the form of face ID – and also at many airports around the world.

In order to make use of the service, customers will have to install an app that will scan their face and take their payment information, which will be stored on a third-party provider's servers.

At checkout, the customer's face will be matched with the stored data, and once their identity is verified, the funds will be deducted from their account automatically.

Mastercard claims the technology would enable much quicker transactions, shorter queues at checkout, better security than a standard credit or debit card, and would also be more hygienic, helping to ease Covid-related health concerns.

The new payment system is part of Mastercard’s efforts to break into the contactless biometric technology market, which is expected to surpass $18 billion in total value within the next five years, according to KBV Research.

China started using biometrics-based checkout technology back in 2017. But Mastercard is one of the first to launch this kind of system in Western markets, competing with the likes of Amazon One, which lets users make contactless payments with their palm, and Visa, which is reportedly also working on similar biometric payments technology.

A Mastercard representative also told CNBC recently that the firm’s biometric tools could one day be used in the development of payments infrastructure for the metaverse. In April, the company filed 15 NFT and metaverse-related trademark filings, which included trademarks for virtual cards and payments in the metaverse.

When it comes to the acceptability of biometric payments among consumers, Mastercard cites research suggesting that 74% of global consumers have a “positive attitude” towards biometric technology.

But other research conducted on the topic shows very different results. One study finds that 69% of customers are not comfortable with face recognition tech being used in retail settings, and another study shows that only 16% of consumers trust this kind of technology.

Facial recognition systems have raised concerns in recent times over data storage, privacy, and safety, especially when there are many third-party providers involved.

Despite Mastercard’s efforts to ensure a high level of security, there’s no guarantee that third-party providers’ databases – with potentially millions of people’s biometric data – would be impossible to hack. In the wrong hands, this data could lead to identity theft, which is one of the fastest-growing types of financial fraud.

Another challenge is around racial bias. Recent studies indicate that facial recognition algorithms are less accurate on people from racial and ethnic minorities. It’s not clear whether Mastercard’s technology has been able to overcome this challenge, and if so, to what extent.

If the software fails to recognize a customer at checkout, that would of course cause them inconvenience, but if the technology misidentifies a person, that could lead to more serious issues.

So, there are still many privacy and security-related concerns around biometric payment technology, and it will be interesting to see how the leading firms in the space go about addressing these issues.