When lenders become advertisers
- martinkleinbard
- Apr 3
- 9 min read
Updated: Apr 11
Editor's note: I published this post hours before Klarna announced it was pausing its IPO in the wake of the tariff news.
Let’s play a little game. I’m going to give you some quotes from a recent SEC filing, and you tell me who the mystery company is.
We accelerate commerce by connecting consumers and merchants with comprehensive payment and tailored advertising solutions, both online and offline.
We have built a highly differentiated advertising solution based on the close relationship we maintain with our consumers and merchants and the vast amounts of data they entrust to us.
We offer brand, search and affiliate solutions to advertisers such that they can connect with consumers across the commerce journey.
Sponsored search allows merchants to reach consumers with intent. Sponsored search allows merchants to pay for premium placement of their products in consumers’ search results.
[W]e offer a dedicated shelf, which is a full carousel in a consumer’s home feed for a merchant to promote various products.
We allow our consumers to discover and engage with merchants pre-purchase with AI-powered, personalized recommendations.
Pencils down. Who ya got?
Meta? Google? Walmart? Pinterest?
The correct answer is E: none of the above and not even close. It’s not a social media network or a search engine. It’s not a big box retailer with storefronts or warehouse inventory. It has no peer-to-peer marketplace capabilities. Its core product is a short-term, small-dollar consumer loan.
On March 14, the Swedish-based Buy Now, Pay Later lender Klarna filed its S1 in preparation for a long-awaited US initial public offering. It’s hardly the fly-by-night operation that we came to expect in the SPAC boom of a few years ago. Founded in 2005, it spent many years in the black before shifting to a more aggressive growth focus in the late 2010s. It returned to profitability in 2024 on $2.8 billion in revenue, and is expected to earn a market cap north of $10 billion.[1]
How did this super-unicorn get all that glitter? If you take co-founder and CEO Sebastian Siemiatkowski at his word, it all comes down to disruption of a broken legacy consumer finance industry.
“Banking is about trust,” Siemiatkowski wrote in his letter to investors that accompanied the S1. “At its core, trust is rooted in the profound yet daring belief that someone else will place your needs above their own...Yet, somewhere along the way, traditional banks traded this principle for profit, losing sight of what truly matters. Instead came financial engineering, raking in profits through late fees, overdraft penalties, revolving debt traps, and countless other tricks designed to exploit their customers.”
As expected, Siemiatkowski offered his short-term credit products as the healthy solution to the “debt traps” and “tricks” offered by legacy credit card issuers. “Klarna,” he continued, “lets you decide on a purchase-by-purchase basis whether to pay now with debit or use credit with clear, fixed terms. It’s a difference that keeps the average Klarna balance at $87, compared to the $6,730 average credit card balance in the United States.” It was an echo of the same drum that he'd been beating for years. Back in 2021, he proclaimed that “our BNPL products offer a sustainable and no cost healthy form of credit - and a much needed alternative to high cost credit cards.” [2]
I know these arguments well because I’ve made and evaluated them for much of the past decade. I was an early-stage employee at a company (Bread Finance) that competed against Klarna and Affirm for merchant partnerships back when we called our products “purchase finance” or “point of sale loans.”[3] A year after we got acquired by Alliance Data Systems (who very flatteringly then changed its company name to Bread Financial), I joined the Office of Markets at the Consumer Financial Protection Bureau. One of my primary responsibilities was to monitor trends in the BNPL market, which culminated in a 2022 report[4] (co-authored with two other Bureau staffers) that evaluated the industry in the context of data collected from five large BNPL lenders.
As a risk manager by trade, I naturally began the research for that report thinking that BNPL's most significant innovations pertained to its underwriting and product construct. Those factors played supporting roles in the report, but they weren’t the protagonist. That honor belonged to a rather unusual notion that started popping up everywhere I looked: the BNPL lender as advertiser. Or, to put it more accurately: the BNPL lender as publisher connecting advertisers (e-retailers) with end consumers who may want to purchase products and services from said advertisers. It was the industry’s worst kept secret.
“We are fundamentally a marketing device for merchants,” Affirm founder and CEO Max Levchin declared back in 2021.[5] Like other illuminating quotes that stand the test of time, its veracity has held but its exact meaning has changed.
At first, the “marketing device” referred to BNPL’s ability to help merchants derive more revenue from their existing customers—hence Affirm’s boasts like “76% of customers would’ve delayed or not purchased without Affirm,” “60% lift in average order values,” and “28% fewer abandoned carts than any other BNPL.”[6] Of course, BNPL was hardly the first credit product to figure out how to generate general incremental spend. Credit card issuers figured that out long ago—hence the mountain of research we've all seen backing up the commonsense notion that we spend more when plastic is available versus a cash-only baseline.
Over time, however, Levchin's “marketing device” expanded to sophisticated ad networks that would generate retailers leads to brand new customers—i.e., those who were not already browsing the retailer's website. At the center of this lead gen value chain were BNPL lenders' apps, which created “discovery engines” where consumers would go not just to finance a pre-planned purchase but also to learn about new potential purchases. In 2022, reflecting on why he bought Australian BNPL lender Afterpay for $26 billion, Square/Block CEO Jack Dorsey lauded the “discovery aspect” as “one of the critical reasons we made this acquisition.”[7]
“[T]hat lead generation is really important,” Dorsey added, “and we think it's something that can grow fairly massively.”
The timing of this strategic shift was impeccable. Between 2021 and 2022, Apple started cracking down on third-party cookie tracking between apps, but any data gathered within a given app was fair game for selling to the highest bidders. The race was on to maximize affiliate fees earned from clicks generated off a user’s BNPL app homepage.
Over the ensuing years, Klarna made significant investments in what Siemiatkowski at the time called “an end to end shopping service that caters to many needs - from inspiration and discovery to seamless post-purchase experiences.” [8] It bought several small and medium-sized marketing tech companies to improve its UX and back-end advertising capabilities, partnered with third parties like Sovrn to optimize the bidding in its first-party ad networks, and signed A-list celebrity endorsers to grow its brand. The investments paid impressive dividends. In its recent S1, Klarna disclosed that its advertising revenue had grown from $13 million in 2020 to $180 million in 2024.
I can't overstate how novel this concept is. Klarna and its BNPL competitors have gone where no consumer lending business has ever gone before: to the realm of large-scale, retail lead generator. It’s not that legacy lenders haven’t tried to enter the e-commerce lead gen business; it’s just that they’re miserable at it. To succeed at matching advertisers with buyers, you have to have to find buyers at moments when they’re primed to spend. You have to deliver the advertisers “high-intent consumers”—a phrase that Klarna repeated six times in its S1. The only time that most of us interact with legacy lenders is when we’re going to make or dispute a payment—not exactly “high-intent” moments for spending more money.
This level of marketing power is only accessible via the confines of walled-off proprietary apps, where the lender controls every piece of the user interface and the virtual real estate. As Klarna noted in its S1, “[w]e also allow merchants to reach consumers in a commerce-centric environment, which we believe is the most effective place to reach consumers.” Translation: it’s a lot easier to advertise new retail products when users come to you to casually browse brands than when they are looking to secure financing.
From the perspective of the BNPL lender, ad networks confer two massive advantages in the capital markets on top of the direct dollar and cent contributions. First, as Klarna noted in its S1, the networks make the company more “balanced compared to many of our competitors in the payments and the banking industries [] who tend to depend more heavily than us on either merchant revenue or interest income.” Second, they open the door for tech-level revenue multiples, which tend to be significantly higher than lending or payment processing multiples.
With that much strategic and monetary value at stake, it's only natural that BNPL lenders will focus their app UXs on maximizing their discovery and lead gen capabilities. I can’t be the only one who’s noticed that the Klarna app’s closely resembles that of a pair of consumer-facing tech giants from other industries: Robinhood and DraftKings. Green up arrows. Trending “top picks.” Personalized offers. And why not? Even in a market downturn and facing no shortage of negative press, they're both eleven-figure companies.
I'm genuinely curious if Klarna would prefer to one day ditch the lending apparatus altogether. Its roots were in a 30-day risk-free "try before you buy" product, which certainly straddles the line between loan and marketing tactic. Imagine how much faster it could grow without the legal and financial requirements associated with being a lending institution (and, in Europe, a depository one). Imagine the boost to its share price if investors weren't concerned about loss rates and credit cycles. If the discovery engine and lead gen capabilities are that good, then won't consumers continue to flock to it even without a built-in pay-in-four option?
The most practical counterargument is that, even with its 13x growth in four years, advertising still only comprises 10 percent of Klarna's revenue. The strategic and consumer welfare counterargument is that stripping away the pay-in-four capability doesn't restore a cash-only baseline for online shoppers. It restores a debit-or-credit-card baseline, the latter of which presents all of the legacy "debt trap" concerns that Siemiatkowski and others have been making for years. If BNPL really is a "much needed alternative to high cost credit cards," then what justification is there for getting rid of it?
The best way to resolve these questions is to remind ourselves that two things can be true at once. Installment loans in general and pay-in-four BNPL loans in specific confer several substantial benefits to consumers over credit card borrowing...AND...The practice of lenders moonlighting as advertisers presents a new set of marketplace and consumer risks.
It would behoove the long-term interests of the big BNPL players to agree on an industry code of conduct around its lead gen practices, including (but not limited to):
Making the use of individual shopping and borrowing data for personalized lead gen/marketing purposes opt-in rather than opt-out. There should be a presumption of privacy whenever a company is dealing in consumer lending.
Using words like "borrow," "finance," and "loan" whenever referring to the use of credit products. It's commonplace, for example, for BNPLs to quote a consumer's credit limit as their "purchase power" or "available to spend," which can further blur the lines between buying and borrowing.
Having separate app tabs for borrowing and shopping. It's nice that most big BNPLs give consumers visibility into the timing and progress of shipping and returns, but that should occupy a clearly separate space from information on outstanding debts, payment due dates, and year-to-date borrowing.
Delineating credit performance by acquisition channel in their public financials. Investors and the general public deserve to know whether loans issued via clicks from sponsored posts are going bad at higher rates than those originating on a merchant's website.
Investing in ongoing third-party unbiased research into the overall financial health of high-use BNPL borrowers, especially heavy discovery engine users. Repaying one's BNPL loans is a necessary but not sufficient condition for financial health. It's important that the public knows what the effects of heavy BNPL usage are on bank balances, non-BNPL credit performance, and subjective feelings of financial wellness.
The last point sounds like a lot, but it's really just asking BNPL companies to put their money where their mouths are. If their product really is the "much needed alternative" that they claim it to be, then this research will prove that out.
“Investing in trust, investing in your customers,” Siemiatkowski wrote at the conclusion of his recent investor letter, “is the quintessential strategy that has delivered the most outstanding returns for shareholders.” It's only fair that we hold him and his competitors to that standard.
[1] https://www.sec.gov/Archives/edgar/data/2003292/000162828025012824/klarnagroupplcf-1.htm?hashed_user=f099f51bad3958e37895132952a0a051&utm_source=Sailthru&utm_medium=email&utm_campaign=03.17.25%20Fintech&utm_term=Fintech%20Takes
[2] https://www.klarna.com/international/press/klarna-expands-and-strengthens-uk-offering-including-launch-of-pay-now-immediate-payments/
[3] It's worth noting that there are important product differences between the longer term installment loans that were most prevalent in the early years of the point of sale marketplace and the small dollar "pay-in-four" loans that have become synonymous with the term "BNPL." While at the CFPB, we maintained the nomenclature distinctions of "point of sale" for the longer term loans and "BNPL" for the pay-in-four product, though I realize that many folks use "BNPL" to describe any loan issued to finance a particular retail purchase.
[4] https://files.consumerfinance.gov/f/documents/cfpb_buy-now-pay-later-market-trends-consumer-impacts_report_2022-09.pdf
[5] https://www.fool.com/earnings/call-transcripts/2021/05/11/affirm-holdings-inc-afrm-q3-2021-earnings-call-tra/
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