Prediction: Klarna Could Turn BNPL Users Into Bank Customers

Sure. I mean at the essence of it, some of you may remember that when we were kids, like at least when I was working in Burger King when I was 15 years old, and you would swipe your card, you would press one for debit and two for credit, and you had that optionality which meant that all of your spending you could decide whether you want to use debit or credit. Now the banks, they didn't like that because the problem with that was too much was put on debit, too little on credit. That meant that you wouldn't revolve at the end of the month. You wouldn't build your balance enough. There wasn't enough bill to, you know, so you would pay it all off. And so they removed that. But the truth is that there's a massive audience of customers in the US. The McKinsey study show that they call this the self-aware avoider. It's about 20% of the US market which are people that simply are, you know, dead and they're tired of the dirty tricks of the banks as Netflix credit cards explains, I think summarizes it up fairly well, and they just didn't like the credit card product because they felt they found themselves in debt faster than they realized how did they get there and they pay themselves off but they're longing of that debit card with the optionality to use credit occasionally and that is buy now pay later. So it's a very simple offering. You go online, you make a purchase. You can pay it in full with Klarna as well. Actually, just like a PayPal wallet, you can pay the full amount. But you can also pay it in four interest-free installments. Could be a $100 purchase. You split it up in $25 every second week. And so it gives you that zero-cost fixed installment credit line to make some of these purchases just slightly more affordable on that single occasion. And then you pay it off. And I would argue it's a much more responsible credit product than, you know, credit cards and so forth which is very visible in the fact that our average outstanding balance are much smaller than on credit cards, that our losses are much smaller than credit cards and so forth but it's an alternative to that product and it's been growing tremendously both in US and Europe in the last decades as a consequence.

Well, look, it feels like you're asking me to sum up 20 years of my existence because the truth is that when we launched, I mean, we launched this in the small country of Sweden. And I mean, the first comment I had is like already then it was like, PayPal is going to kill you. PayPal is going to get you out of the market. And then I was like, we managed to grow successfully here, become very very prevalent. I mean, PayPal is actually almost non-existent in Sweden as an example. And then we started growing into Germany and then everyone said in Germany you're never going to succeed and you know we did that pretty well and then the UK and the US. I think like over those 20 years we have shown that we just bring a lot of value. I think it's customer obsession. We're super obsessed about how we evolve the products and how we stay close to customer service and the feedback that we're getting and just being very very focused on that. Secondly, you know, operational efficiency has been very important over the years. We become better and better at that at being, you know, very efficient. Now AI has allowed us to accelerate that even further which I'm sure we can come back a little bit later on but and I think brand has been a big thing. If you look at Klarna, if you look at our website, if you look at how we communicate we're just very very different. All the other ones are blue, boring. You know, they think that trust is still communicated through a lot of, you know, middle-aged men in suits and ties in marble offices. And unfortunately, after Occupy Wall Street and all that stuff, people don't necessarily, you know, relate that to trust. And banking is all about trust. So, we try to speak a different language. We try to be, you know, approachable, simple, easy to deal with. I mean to some degree you could argue it's the same trend we've seen in carriers where, you know, we used to have the old phone carriers and then came these like new entrants like Mint and all these others that are like simple to use, straightforward and so forth and we have shown over and over again that we can be competitive. Now today the fact that we are international compared to the ones that you mentioned, I mean maybe with the exceptions of PayPal, is also a huge asset because if we work with big merchants like whether it be an H&M or Sephora or, you know, any of those international brands they do prefer working with a company that can also offer these services in 26 markets. You know, we have a full banking license in Europe. We have most of the license in the US. So, it's a pretty big business by now, you know. So, it's also one that merchants trust and like working with as a consequence.

I mean the truth is unfortunately that for very very rich people credit cards have been proven in the US to be the most efficient redistribution of wealth mechanics probably ever created. So I think the stats are something like they move about $30 from every low-income household and transform that into $700 into high-income households. And the way that works in the US is due to the very high credit card fees that the merchants pay. And since they're not allowed to discount credit cards versus debit cards and cash, they need to raise prices across the board. So everyone is paying slightly more at the merchant. But the people who are benefiting from that is primarily the people that have access to the biggest reward cards, the most expensive cards, the highest loyalty cards and so forth. And it's true that mechanics that it has functioned as such. So the honest answer to your question is basically if you're super rich and you never revolve and you never use the credit facility at all and you only collect the points, it's probably is a superior product still in that regards. But for the rest, for all the rest of people, like it is actually not that great. I mean especially people who revolve end up, you know, usually carrying a balance of like $5,000 in the US and paying 30% on that. It's not uncommon, right? So that is not a great product for that audience.

No, exactly. And I think that like people tend to forget about this. They, you know, and to some degree it's also like, I mean I even I have to laugh a little bit when, you know, people do like oh they're now going with DoorDash and, you know, pizza on installments and some memes or tacos on installments or burritos on financing, you know, stuff like that. But the truth is what is the other dominant form of payment on DoorDash? Credit cards, right? So people when you have a credit card you're putting all of your spending of that month on credit and then you decide whether you revolve or not. What we argue is that it's better that you use debit and then occasionally credit. And when we go to things like DoorDash or Uber, which are two great partners of ours in the US, the reason we do that is not because primarily they're interested in the credit aspect of our product. What they're interested in is they're saying, hey, you guys are huge in Europe and you're operating at lower costs than both debit and credit because we're coming from a market called Europe where interchange is regulated. So debit cost merchants 20 bips and credit cost merchants 40 bips and Klarna has had to be competitive with those prices in order to grow as a network and grow acceptance and preference among consumers and merchants. Now we're coming into this US market and we're seeing like wow, you know, officially debit is regulated but most merchants tell us they pay 140 bips and they pay for credit cards 250 bips and so you know we are experimenting with these large merchants like how can we offer you payment solutions that are simply cheaper, more affordable for the merchant and the consumer and there's just this massive opportunity to disrupt in this industry because it's just been not competitive enough. There hasn't been enough competition and there's this massive profit pool to go after. So to your point, right, and so these kind of announcements of DoorDash and so forth what people don't realize a lot of that is debit. We have a debit product that's almost 30% of our volume where people pay the full amount a little bit like your PayPal wallet where you pay the full amount with it and that's a growing and important product for us as well. So we just want to make sure that we kind of cater to all different type of situation because if you're only doing financing, if you're only doing like high ticket financing furniture, you do have a limitation in the size of your market. We've learned that from Europe. It's an interesting market. You can make a lot of money there. It's a great market, but it is limiting you. We want to be an everyday thing. We want to be used every day. And you just don't buy a piece of sofa every day. You don't do it right. You buy a lot of other stuff.

Very much so. And it comes back to the core insight. This strategy of Klarna was really set in 2015. That's when we kind of pivoted in this direction. And the insight that we had is that we have learned how to onboard and acquire a customer directly at the most important time which is when you're about to pay something. I mean historically if you look at these credit card companies, be Capital One who I know well, a lot of their success came from direct mailing. Amex used to stand in the airport and bug you when you were there and try to get you to sign up. These are not as successful sales channels. When it's really relevant, you're going down to Macy's and you're saying, can I buy this thing? And they say, yeah, would you like to use Klarna? And you say, yes, now you do. Like that's how easy it is to sign up and start using it. Is as easy as using your existing card. That's a fantastic customer acquisition channel. We have 800,000 merchants who promote Klarna, show this as an option. So that gives you like this steady flow of incoming customers. You have to remember that Capital One and these banks, they pay $150 to acquire a credit card customer. Amex may pay up to $400. We're not paying anything. We have merchants who are advertising our payment solution to our consumers and that's bringing a healthy growth. However, obviously those customers may just use us for a single transaction. And what we've seen now in markets where we're very mature, take Sweden as an example, Germany, where basically the whole population is using Klarna. We obviously want to go from just being a single payment method to actually being, to your point, the full card, the full banking solution. And what's interesting is when we are accomplishing doing that, we're taking the average revenue per customer from somewhere between $25 to $30, which is the kind of standard for our 110 million that we have. But when we bring them a card and a bank account, that rises fivefold, right? So we're at $150, $140 in average revenue. So, and when we looked at that, we were like, okay, how are we going to do that to your point in a difficult market like the US where there's so much competition where first of all we solve the first thing which is customer acquisition which is usually the biggest and most expensive thing because you have to acquire all these customers and so forth right so solve that 30 million consumers in the US they're coming in Macy's Sephora Walmart they're all advertising the availability of Klarna so that's already bringing us these customers in. Next step is basically then to upsell them and upgrade them from just a single transaction to the card and there we're super happy now to see that this month, this quarter has really taken off. So we're almost like 1.3 million active card holders out of zero a quarter ago in the US. And those are I would say comes from two things. Sorry for a very lengthy answer but it's an important question that comes from two things. One is that first relaunch a card that's debit and credit not just credit where you put everything but it's a debit card where you occasionally can choose that credit. There's huge demand for that in the market. But everyone that I present that to, Matthew, does exactly what you said now, which is, yeah, but what about my rewards? Like, okay, that product sounds nice. I like the debit, you know, flexibility with credit and not overextending myself on credit, but what about my rewards? And so, what we're now doing is we're getting a debit card with credit card rewards. And that I think is super cool that we can launch that into the market that we can actually offer rewards and benefits and cash back and loyalty points that are on par with what some of these credit card providers do. So that I'm very excited about and I think that's going to just take off. Like I had, you know, as a funny anecdote I put on X that like there was some guy that wrote me like, look, I'll actually abandon my Amex card if you, Sebastian, you know, cut the card yourself, you know, personally. And I said, I'm all in. Anyone that wants to do that, you're invited to come over. And we've had almost a thousand people have signed up. So, we have to do a pretty big event now. And I'm going to probably have a lot of ache in my hand as I'm going to cut a thousand credit cards apart. And because people just tired of these fees, they notice these credit card companies have been raising their fees recently. A lot of people are frustrated about that. Just up and up. They're not seeing the value for it. And you know, so there's options now. There's other options.

So the idea was early on is that like look, obviously offering people an interest-free installment offering that to your customers is going to drive sales success. It's going to drive increase in average order value. It's going to drive higher conversion, more customers actually completing their purchase. So instead of what's happened in the US is you have both high cost to merchant plus high cost to consumer through revolving and so forth, right? We're just squeezing that and saying look merchants would pay basically the same that they pay currently for credit cards and other payment methods in the US. But the difference is they're making something much more affordable and attractive to consumer because it's 0% interest. It's fixed installments and so forth. And that's paying off in average order values and in conversion. So they're seeing lift in sales as a consequence of that. And that is the primary reason for merchants adopting it. It cost them kind of the same as the other payment methods, but it actually drives real sales, right? And so, that's been it. Now, what's been interesting for us, which maybe kind of separates us a little bit from competition, is that because we've been doing this for 20 years, at some point of time, we were like, okay, it's a heavy effort to sign every merchant in the world and get sales guys out there everywhere. So, we started asking ourselves like, we have to probably rethink this. We have to think differently if we're going to scale to the same size as Visa, Mastercard in number of merchants. And what we decided is that the holy grail for us was we work with partners today, Stripe, Adyen, Worldpay, all these big PSPs and acquirers. And we realized that like if we're going to hit really Visa Mastercard numbers, we have to work through these distributors primarily. Even though we can occasionally sign a big merchant ourselves, but we have to primarily work with these distributors. I mean, it's very typical. You've seen that in a lot of other industries. Microsoft used to do sales themselves, Salesforce and then eventually have this whole ecosystem of people doing sales on your behalf. And I think that like the same happened to us. So for the last one or two years, we've been investing in what we called global Klarna default. And the idea there was the holy grail for us was it shouldn't be that you go to Stripe, you get Visa, Mastercard, and then you add on Klarna or you add on. We shouldn't be an alternative. We should be default. We should be part of the standard package. You go to Stripe, you get Visa, Mastercard and Klarna standard package and that we've now signed with a number of the largest PSPs in the world that process over a trillion dollars of volume each one of them and that's starting to pay off in number of merchants. So I think what was really exciting in this quarterly earnings call is that, you know, our merchant growth was about 13% a year ago and now it paced up to 38%. So we're now at 851,000 merchants versus 600,000 merchants just a year ago. And this is due to this very very focused strategy that like these partners we have to rethink how we work with these distributors and partners to really make them our primary sales vehicle versus merchants and that is starting now to pay off. That's a long strategy taking a lot of time to establish this relationship to make it, you know, valuable for them and then they sell to the merchants and then the merchants see the lift. I think it was super exciting. We saw with one of these PSPs, they just took Klarna live on a lot of their merchants and those merchants automatically just started growing faster. The PSPs saw higher fees and revenue as a consequence because basically more payments volume is obviously good for them and it was good for us. Everyone wins and that has been like how we can try to reach the network size. I mean I don't think it's that different. If you think about Amex 20 years ago, you can only use it in a few places and today you can basically use it everywhere. So, it's a very similar strategy and that's made Amex into the huge company it is today and we're kind of pursuing the same strategy, but we have to do that with partners for that to be realistic.

I am very inspired by companies like Walmart, IKEA. These are very rare companies who apply the strategy to me which is very long-term which is that when you grow bigger and you make more profit you share that with your customer not all of it but part of it and if you do that decade by decade you start creating these positions and these companies that are just like almost untouchable right. And I think that that has never happened in banking [laughter] like I don't know last time I heard a retail bank was like we made an amazing profit this quarter as a consequence of that all the interest rates are coming down and all the customers are going to, you know, enjoy better services at lower cost for whatever reason and I think it is associated with the high switching costs that exist in banking like it's just so hard to switch, the fees are intransparent, it's hard to understand what you're paying for, you know, the banker was supposed to help you with your retirement plan but instead was driven more by his commission and which retirement plan was making him more money or her and so there's all these inefficiencies in the banking industry and I have already and we believed this already 10 years ago technology AI will eventually put all of that away like all of that is going to go away I mean to some extreme right but still it's going to make these markets like both tech and fintech, you know, both retail banking and the classic technology companies will have to be like the rest of us companies who wake up every day and have to worry about how do I get somebody into my retail? How do I get somebody into my restaurant? How do I make that customer happy? How do I how am I operationally efficient so I don't run out of money compared to my competitors? I mean, those companies have been virtual monopolies and they've been making so much money. I mean, the profit pool of retail banking is like over $500 billion. The one in tech in ads is over $500 billion. That's a trillion dollars. That's not because those companies are customer obsessed or because we feel that they wake up every day and care that much about us. It's switching cost. It's all these inefficiencies. And so to answer your question then what I feel is that like we have to lead, right? We have to lead and dare to be a bank and a tech company that is actually willing to give some of that money back to our customers to continue being customer obsessed to continue being efficient, drive operational efficiencies because that's going to happen anyway due to AI. I'm 100% convinced about it. Then how much people can argue like how much is it going to be this and that whatever but direction...

Exactly and there's tons of examples of that, you know, you can have there's some low-cost airlines in Europe for example that took on that disruptive force and been, you know, the highest profitable making low-cost airline in the world for many years like so there's tons of examples of where if you're willing to come in with both value and low cost you create very very interesting moats over time but you have to be more long-term, you have to be willing to make the commitment and go there. And that's what we're doing.

Well, I do think that like we are a bank, we're fully licensed. We now offer bank accounts, cards, and again, it comes back to the thing I just mentioned about AI. I think that our this strategy that Klarna is on right now was set 10 years ago. At that point of time, we sat down. We said, okay, what's the future of financial services? And we said, well, look, the future of financial services is basically you wake up in the morning and you have your digital financial assistant that says, you know what, I analyzed your mortgage last night. I realized I could save you 20 bucks and, you know, the only thing you need to do to get the low rate is just say yes because I'll do all the paperwork for you. I'll do all the switching cost for you. And so, to us, that was like, wow, that's going to happen. That is as real as self-driving cars. I don't know when, but I know they will happen eventually, you know, and that was true for us 10 years ago. And now, you know, I was with the kids in San Francisco last year and we went to do Waymo and we're like, wow, it's actually happening, you know. So, this is our guiding star. And I think what does that mean for Klarna? It doesn't mean that there will still be a lot of fantastic retail banks that will make fantastic profits. They will make less than they do today, but again, we're in a trillion dollar addressable market. So for Klarna being a $3 billion revenue company today, there's tons of opportunity to grow and be one of the ones that pushes that envelope that drives that transformation. But the conclusion was that in the longer term that means that you may look at having fewer large retail banks and they probably need to be global. They need to be very AI savvy and technology savvy. They need to wake up every morning and care about getting the customers through the door because those customers will be able to move much faster than they do today. And they need to be operational efficient and can't allow themselves the excesses, the grown-up kindergartens and all the other stuff that we've seen in both tech and banking that just won't be around. You won't be able to do that. And so I think that the opportunity is to be one of those global retail banks. And that means that I hope that we are many more users than the 111 million that we already are. But also obviously even more importantly that those users use the full product suite of Klarna. Not just a single buy now pay later transaction whatever but actually use the card, use the banking facilities and other additional financial services that we're bringing to that audience.