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BNPL platforms like Klarna introduce behavioral market failures by encouraging present bias—where consumers prioritize short-term gratification over long-term financial well-being. This leads to unintended consequences like overspending on non-essentials and accumulating debt. These issues challenge the predictions of the standard equilibrium model, which assumes rational actors with perfect information. In reality, information asymmetries and psychological distortions distort consumer decision-making. The CFPB now regulates BNPL under credit card-like rules to address these imperfections.

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Introduction of Buy Now, Pay Later Services

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Introduction of Buy Now, Pay Later Services

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Consumers make purchases and pay for them in installments over a short period, typically with no upfront interest but potential fees for late or missed payments.

These services often feature easy sign-up and may appeal to consumers seeking alternatives to traditional credit, but can encourage overspending and potential debt if not managed carefully.

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‘Buy now, pay later’ is more popular than ever. It can cost more than you think

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More shoppers are using ‘buy now, pay later’ plans heading into Black Friday and the holiday season, as the ability to spread out payments looks attractive at a time when Americans still feel the lingering effect of inflation and already have record-high credit card debt.

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3 Main Stakeholders:

Consumers

BNPL Suppliers

Retailers

No Clear Winner or Losers

Depends on how one uses the service

Wins:

Consumers

Consumer that utilize time value of money

low credit consumers

BNPL Providers

Increased usage with credit averse consumers

Increased revenues from merchant fees, interest, and commissions associated with retail purchases

Retailers

Increased retail activity among consumers

20% more-NBER

Increased revenues from activity.

Losses:

Consumers

Financially irresponsible individuals expirience overspending

Late payments may result in loss of service availability

BNPL Providers

Take on financial risks of consumers defaulting

May not be profitable, due to U-shaped consumer usage.

May violate Anti-trust laws, and may be seen as predatory

Retailers:

May rely too much on BNPL services

Long run-economic short comings

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Do you think Buy Now, Pay Later (BNPL) services need more regulation to protect consumers?

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Article Summary of BNPL Government Regulation

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Article Summary of BNPL Government Regulation

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Consumer Financial Protection Bureau (CFPB) have initiated stricter oversight of BNPL companies, requiring them to follow to similar consumer protection standards as traditional credit card companies.

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Fintech IPOs had stalled after 2021

BNPL market expected to hit $160 billion by 2032

Klarna can reportedly raise over $1 billion in US IPO

March 14 (Reuters) - Swedish fintech company Klarna on Friday reported a 24% surge in 2024 revenue, as the buy now, pay later pioneer made public its paperwork for a long-awaited stock market debut in the U.S.

Fintech listings soared in 2021 but lost momentum due to rising interest rates and steep valuations. But with risk appetite in equity markets slowly picking up, several companies that had shelved their listing plan are eyeing a comeback.

Sign up here.

Klarna, which reshaped online shopping by pioneering the short-term financing model, did not disclose the size of its proposed offering.

Media reports suggest it could aim to raise more than $1 billion at a valuation exceeding $15 billion.

The BNPL market is projected to surpass $160 billion by 2032, with retailers such as Walmart, Target and Amazon joining fintech firms such as Klarna, Affirm and Block to attract younger, credit-averse shoppers.

Klarna's revenue grew to $2.81 billion in the year ended Dec. 31 compared with $2.28 billion a year ago. It earned $21 million, compared with a loss of $244 million, a year ago.

The company's latest step comes as stock market volatility, driven by renewed recession fears and uncertainty over President Donald Trump's tariffs, threatens to stall a recovery in the IPO market.

"The latest spike in volatility has dimmed the IPO prospects for a number of companies, but that has not completely shut down the market for new listings," said Matt Kennedy, senior strategist at Renaissance Capital, a provider of IPO-focused research and ETFs.

Klarna had 93 million active customers on its platform and operations in 26 countries as of 2024 end, according to the IPO filing. It's rival Affirm (AFRM.O), opens new tab currently commands a valuation of roughly $15 billion.

U.S. fintech rivals Stripe and Chime were last valued at $91.5 billion and $25 billion, respectively, in a tender offer and private funding round. Both companies are reportedly preparing for IPOs.

Klarna said in its IPO filing it was working to fix a material weakness in its systems that are used to prepare their financial statements. It also said the Swedish Consumer Agency is investigating the company's compliance with marketing laws.

END TO IPO WAIT

For years, Klarna's likely stock market debut has been the subject of intense speculation, with previous plans fizzling out amid volatile market conditions and shifting investor sentiment.

Its decision to go public now comes as a key test for fintech IPO appetite, following a period of weak listings and tighter funding for private firms.

A successful offering could signal renewed investor confidence in high-growth financial technology companies, while a lukewarm reception may underscore concerns over lofty valuations and regulation in the sector, analysts have said.

Klarna drew investor attention as its valuation soared from $5.5 billion to $46.5 billion in just two years, fueled by three funding rounds between mid-2020 and 2021.

CEO Sebastian Siemiatkowski had considered a direct listing - a route that avoids selling new shares and the costs of a traditional IPO - in 2021.

But, the Sequoia Capital-backed company shelved the plan and instead raised funds at a sharply reduced $6.7 billion valuation.

Besides Sequoia, Klarna's major shareholders include its co-founder Victor Jacobsson and Danish fashion magnate Anders Holch Povlsen's Heartland A/S.

The company has partnered with major global brands, including cosmetics retailer Sephora, sporting goods giant Nike (NKE.N), opens new tab , and rental booking platform Airbnb (ABNB.O), opens new tab .

Klarna, which has tapped 15 banks for the IPO, expects to trade on the New York Stock Exchange under the symbol "KLAR."

Goldman Sachs, J.P. Morgan and Morgan Stanley are the lead underwriters.

Reporting by Arasu Kannagi Basil and Manya Saini in Bengaluru; Editing by Sriraj Kalluvila and Arun Koyyur

Our Standards: The Thomson Reuters Trust Principles., opens new tab

Manya reports on prominent publicly listed U.S. financial firms, including Wall Street's biggest banks, card companies, asset managers, and fintechs. She also covers late-stage venture capital funding, initial public offerings on U.S. exchanges, and regulatory developments in the cryptocurrency industry. Her work appears in the finance, markets, business, and future of money sections of the Reuters website. A passionate reader, she loves books across genres, from classics to contemporary fiction. She holds an undergraduate degree in Political Science from the University of Delhi and a master's in journalism from the Symbiosis Institute of Media and Communication.

Basil writes stories across the U.S. finance file including banks, asset managers, payment firms, insurers, and exchange operators. He also covers initial public offerings on U.S. exchanges and venture capital funding.

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Sweden's Klarna discloses 24% revenue surge in much-awaited U.S. IPO filing

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Swedish fintech company Klarna on Friday reported a 24% surge in 2024 revenue, as the buy now, pay later pioneer made public its paperwork for a long-awaited stock market debut in the U.S.

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BNPL is growing fast, but without clear rules, consumer may face debt, hidden fees, and unclear terms. Thoughtful regulation can reduce harm while supporting responsible use

Clear Disclosures

Policymakers should require BNPL providers to clearly state fees, interest rates, and repayment terms upfront and in simple language. This transparency helps consumers make informed decisions

Standardized Protections

BNPL users deserve the same protection as credit card holders. This includes standardized late fees, credit checks, and refund/dispute processes to prevent abuse and confusion

Regulation Z Update

The Consumer Financial Protection Bureau (CFPB) recently rules that BNPL providers using digital user accounts now count as “card issuers” under Regulation Z. This brings them under the same rules as credit card companies (Federal register, 2024)

Business & Consumer Uncertainty

As regulations evolve, firms must adapt quickly to remain compliant. At the same time, consumers may struggle with repayment decisions, especially if their income is unstable or inconsistent

Balance

Regulations should strike a balance, protecting vulnerable users while still encouraging innovation and access. Clear rules, consumer education, and flexibility are key to making BNPL safer for everyone

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Per a CFPB survey, 70% of BNPL users spend more via BNPL than they would otherwise.

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Would you use BNPL for a food delivery service?

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Improves market efficiency by giving consumers the necessary information for rational decision-making.

Enhances equity by offering greater protection to vulnerable consumers and potentially decreasing the risk of debt accumulation. Consumers are more cautious before utilizing BNPL services.

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Financial innovation that disrupts traditional credit markets and alters consumer spending patterns. Its rapid growth signifies a shift in how transactions are financed.

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Consumers may overspend, leading to inefficient resource allocation. Resources should be directed towards uses that provide the greatest societal benefit.

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Economic Concepts

Information Asymmetry

BNPL creates a gap where lenders know more about the financial risk than consumers do. This can lead to poor financial decisions

Market Impact

Boosts Retail, Masking Risk

Retails benefit from higher conversion rates and sales, but consumers may accumulate unmanageable debt without realizing it.

Regulation Z

Regulation Z & Consumer Protection

The Truth in Lending Act (Regulation Z) may soon apply to BNPL, requiring clear disclosures to protect users from hidden fees and misleading terms

Economic Principle Connection

Externalities and Market Failures

BNPL’s unchecked growth can lead to negative externalities like consumer debt crises. regulation aims to correct market failures and protect public interest

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A PYMNTS survey found nearly 60% of consumers prefer BNPL over credit cards due to easy approvals, fixed payments, and no interest

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Thee Federal Reserve Bank of New York reports consumers spend 20% more when BNPL is available.

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Is BNPL predatory towards younger, and unexperienced buyers?

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Lack of standardized disclosures

Limited consumer protections

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Global trends towards regulation

Emphasizing consumer education