Klarna Group is making an ambitious push to expand its consumer lending and banking services. But longer-term loans by the buy now, pay later pioneer also come with larger potential losses – and investors have noticed.

Klarna, founded 21 years ago in Sweden, is working to move its business from one that offers short-term BNPL loans at online checkout to a far larger group of engaged consumers that swipe its debit card in physical stores and take longer-term loans that bear interest. 

“The consumer momentum is there, the merchant-expansion momentum is there and the engagement levels are there with the application of more opportunities for consumers to spend with us in more places,” Klarna Chief Financial Officer Niclas Neglén said last week at an investor conference.

The company has about 118 million active users.

Gross merchandise volume in the company’s consumer lending, which it calls “fair financing,” increased 165% to $4.5 billion in the fourth quarter from the same period a year earlier, Klarna said last month in its fourth-quarter income report.

The Klarna loans are taking market share from traditional banking, said the company’s co-founder and CEO, Sebastian Siemiatkowski. He mocked more established bank rivals as monetizing “misery through revolving debt,” in a quarterly investor letter last month.

Klarna’s lending is also boosting its need to make provisions for credit losses, which rose 59% in the fourth quarter, compared to the same period of 2024, according to the income results, released Feb. 19. That’s what investors are worried about, driving the company’s stock price down by a third over the past year.

Klarna posted a 13-minute “illustrative” video on its investor site last month of results from a hypothetical $1 billion in interest-bearing loan portfolio to demonstrate how it accounts for expected losses.

At 10% interest, the portfolio would be expected to generate $100 million, minus an expected loss rate of 4% ($40 million), leaving the company with a $60 million profit on the bundled loans.

However, while a loan’s full loss provision is booked in the same quarter Klarna makes the loan, future revenue from the loan is accounted for over subsequent quarters, the narrator explains. That’s due to International Financial Reporting Standard 9, an accounting revision that took effect in 2018.

“While this is a timing issue rather than something structural, quarterly execution against guidance needs to improve,” Wells Fargo analyst Jason Kupferberg wrote in a Feb. 19 client note.

On Tuesday, London-based Klarna said it had doubled a lending agreement with Elliott Investment Management, to $2 billion, and extended its term from two years to three. Under the arrangement, initially announced in November, Elliott purchases Klarna receivables to enable additional lending. The new agreement will enable as much as $17 billion in loans over the three years, Klarna said.

Last week, in separate announcements Klarna said that it had topped one million merchants that accept its payment methods and that its Klarna card had reached five million users across the 16 countries where it’s available. The card, which lets users pick whether to pay upfront, later or in installments, became available in the U.S. last July. 

Klarna shares are down about 68% from their $40 IPO price last September, including a 27% plunge Feb. 19 driven by the quarterly results. 

Much of the market’s concern reflects “heightened investor caution regarding the company’s ability to balance rising loss provisions with durable growth,” Wedbush Securities analyst Scott Devitt wrote in a Feb. 19 note, adding that the loans’ “underlying profitability is not impaired, but deferred.”

“Although fair financing loans require a greater provisioning up-front, the benefit of these loans compound as interest revenues are recognized over the life of the loan,” Devitt wrote.

A Klarna spokesperson Wednesday declined to comment on the topic.

Klarna has been public for two quarters, Kupferberg, the Wells Fargo analyst, noted last week at an investor conference the bank convened in Boston, asking Neglén, the CFO, to “remind the audience around the accounting mechanics of fair financing.” 

“Since you’re still relatively new to the public markets, it’s important for people to understand the impact on the (profit and loss statement) over the short term,” Kupferberg said.

“You provision for your expected credit losses upfront while you earn, prudently, your revenues over the life of the loan,” Neglén said. “That's simply what we’re doing.”