Klarna’s Sebastian Siemiatkowski on Agentic Commerce, Credit Cards, & Financing Everything

Thanks for having me.

Oh, good question. I mean, I can't answer obviously for the others, but I can answer for us. Many people told us that it's so difficult to become a bank. It's so hard being regulated and all these things. So, for a while, we were cautious about it as well. But we got our first banking-like license after about 5 years of existing back in 2010. And to us we only saw advantages. It created clarity on how to operate and run our product in a compliant ways. It gave us access to things like deposits that allows us to fund the business more and kind of removed some of the structural competitive barriers versus the banks themselves. So to me, it's just been advantageous rather than the opposite.

I haven't seen that. I mean, I've seen obviously that there are potentially there's more compliance work, there's more second line work, there's some more process and some more legal requirements that needs to be met. All of these things that are required of one are actually good stuff if implemented well. What I hear when I talk to my incumbent CEO is that in many organizations seems that those are treated as side things that are bureaucracy and only there to tick the boxes and then they don't necessarily serve their purpose. But if you go and read the law carefully and you understand the prerequisites and the ideas that the regulators had with these, you generally see a lot of them are actually quite smart. Like take as an example, we have something called a new product approval process. So you need every new major product approval needs to be combined with risk assessments, financial implications of those changes, product and consumer implications and so forth. That's a pretty good thing to do and I would argue most good tech companies would apply that anyways. But what ends up happening many times is things gets implemented poorly and then instead it just becomes bureaucracy.

We have not publicly commented on that. We haven't given any answer to that. I think it's like what I try to say at least is directionally speaking it would make sense for us to do so over time in the US as well because we have seen in Europe a lot of advantages of it but there's no like official timeline or decision made that we would have shared publicly today.

I'm very happy to hear that and see that because it was actually a big surprise to me coming from what is usually treated as less competitive and less capitalistic Europe versus the US where when it comes to getting a bank license what you had to do in Europe was just go and apply and historically in the US it was like it is not clear whether you will get one and nobody can really tell you what is required to get one because right now we don't want more or the regulators don't want more banks. That was kind of the message we used to get back in the days. So I think it's a great improvement.

I've given that a lot of thought over the years. I used to have Nigel Morris on my board, co-founder of Capital One. I remember back in the days we were talking about, you know, country expansion and how to establish in one. And at that point of time, one of the most coolest popular things were, oh, we're going to use Facebook data to do social underwriting and people were going to use that to improve, you know, that was like one of the big things in fintech back then. Not something Klarna pursued, but others were. And I remember speaking to Nigel about it and he said, well, look, you know, for Capital One, even if that would turn out to be the thing, it would be like improving their margins a few bits. You know, it's not going to disrupt banking. It's not what's necessary if you truly want to go after the incumbents. And what we arrived at Klarna is that the key is customer acquisition cost. The fact that in the US it may cost $100, $200 to acquire a customer in the more subprime Capital One category and $400, $500 if you're Amex. So to me, the key was that a great app is nice. There used to be Simple.com, some of may remember it back in the US. All of these things are nice, but you have to find a way to acquire customers at a lower cost. In Klarna's case, the fact that we have this huge merchant network of over a million merchants offering Klarna where consumers can come and say, 'Hey, I can either use my traditional bank card or I can just with a single almost click experience try this new thing called Klarna' has become a very efficient customer acquisition channel that has allowed us to achieve 130 million users at basically zero CAC. So that is our entry point but other neobanks seem have found others and we are happy to see even in the US we're close to 30 million right through that mechanics.

What I find attractive is the position that Amex has and I think there is something unique about Amex and we are very deeply inspired by what they're doing. We call it spend-centric rather than lend-centric which is the similar terminology that Amex uses because different than your kind of lending there are a couple of players in lending there's Affirm there's Synchrony etc they turn around their books maybe two times a year so they are predominantly a balance sheet lender while Klarna is predominantly spend-centric. We turn around our balance sheet more than 10 times a year and that changes the characteristics of the business but most importantly it grows a different type of relationship with the consumer something that you use very frequently, you have a different relationship with than something you just took a loan with at some point of time when you did a big ticket purchase. So for us, we think that's the position to be in. Now, what people tend to forget is, you know, Amex is the 10th largest bank in the US. And but people still don't talk about them as a bank. And I think that's the route that Klarna is at. We're trying to create a differentiated service, a different brand, a different value for our customers and some of the services we provide are bank-like just like Amex does. But the key of our is the lifestyle, the brand, the customer service of what we do.

It's fun obviously when people love the product to that extent where they use your name as a description for what they're doing. But I think the key for us is that we want to be relevant for every type of purchase that the customer do. Both the big ticket spend which is a category we just entered into the US more recently or have scaled more recently the mid-tier kind of charge card equivalent type which is the $100 type of purchase fashion etc. and the everyday spend the groceries and so forth. So we need one that is relevant for all of these, but obviously we're mostly associated with this 0% interest paying for product which has been extremely popular and well-received in the US.

First and foremost, we do not offer revolving. We think revolving is a bad concept. It's confusing. It's difficult for people to understand how long will it take and people tend to pay off for a much longer period of time. So, we only do fixed-term installments. The other one is we try to make sure that our interest is fair and that it's well priced compared to any other alternatives that consumers may have for financing that particular purchase. And many times we try to work with merchants to make sure that they are funding the interest. So it's a 0% offering which also is more attractive than using your credit card and borrowing at a higher rate. Then there's also a third thing. We're trying to be mindful of not pushing your limit into your face. We're trying to find a good balance there because we know that sometimes the limit can be misunderstood as I have more money than I believe I have. And then obviously that the primary product that we are promoting is the charge card equivalent of buy now pay later which is 0% and paying four installments. That is basically a charge card product an equivalent of a charge card product. And that one is also I would argue much healthier just like Amex has been pushing charge cards more than revolving for many many decades. So I think it's all of these things where we've tried to make a difference. But obviously as anyone issuing credit, you will still have some consumers that you know unfortunately overextend themselves or use the product in a way it's not intended to be used and so forth. It doesn't matter if it's DoorDash or you know groceries or everything is on your credit card and then you are more likely to revolve and this is why the average outstanding balance on a credit card is like $5,000, $6,000 while the average outstanding balance with Klarna is a hundred.

Ironically, I saw the same when we launched with Deliveroo in the UK a few years earlier because Klarna is so strongly associated with buy now pay later. That always becomes like a gimmick or an interesting point as you highlighted but you have to remember we're competing with PayPal and we offer debit pay in installments like small or medium-sized tickets and big tickets. What we're trying to do is make sure that we're relevant in every checkout for every purchase. So going into things like Uber, DoorDash, and so forth is part of that PayPal strategy. Nobody is talking about the fact that PayPal is available in these apps such as DoorDash. Nobody talks about the fact that you can use your credit card and revolve on your DoorDash purchase. So one has to separate with Klarna as a merchant network wants to be relevant for everyday spend groceries, gas stations with our debit product predominantly and in the mid-tier segment with our buy now pay later and in the big ticket segment with financing. Now, occasionally, may that mean that a customer goes to DoorDash and puts a purchase, a fairly small purchase on for interest-free installment? Yes, it can happen. Just like people will go there with a credit card and revolve on a purchase they did at DoorDash or a balance that was partially DoorDash, right? So, the same thing may happen, but that's not the intent. The intent is to give Klarna or the availability to use Klarna at any merchant for all the three different payment products that we offer. And it's interesting that in a lot of countries in Europe where Klarna is widely known to be used for different type of payment methods, this is not really a debate. You won't see this in these countries because to them it's just like yeah, of course they're there just like Visa and Mastercard are there. But in some markets where we strongly still only associated with buy now pay later, then this becomes a bigger thing.

No, I wouldn't say that. You said that. But I would just say that like again I understand why because we're so strongly associated with this super successful paying for product and so everyone just inherently assumes that's what we're doing, right? We have a lot of other interesting products. One that really excites me is that another which is like you can take for example for somebody like Uber or these kinds you can aggregate all of their purchases and give you a kind of a charge card equivalent product where all of that gets paid at the end of the month which for a lot of merchants that see a lot of low value transactions where Visa and Mastercard charges a fixed fee in addition to the percentage fee per every transaction that's an amazing opportunity to drive down payments cost and it's not different I mean you go back you'll find a lot funny clips from the 80s where people are like arguing like why are credit cards used at Burger King? Like people think it's insane in the 80s and today's it's standard, right? Like we don't think about it as a problem that you can use your credit card at Burger King. So I just think it's the novelty of this and the difference of it.

Well, it's interesting because I've been in this for 20 years, I remember that after '07, everyone told me that like the idea of packaging and selling off loan portfolios is dead and is never going to come back. And here we are almost 20 years later and it's becoming a de facto standard. I was one of the ones who always believed that that model was superior like in the long-term perspective. If you think about it like x amount of years in the future, I find it very likely that providers like ourselves will basically to some degree be market makers. Meaning we recognize the consumer. We can underwrite them. We understand the risk profile of that consumer based on our internal data as well as combine it with some external data. And we are then going to allow people in the market to bet on providing financing at the most affordable rates to that particular cohort of consumers. I think that model makes a lot of sense that you have a separation between the kind of underwriting decision and the origination from who provides the balance sheet and who's willing to invest in that. Now what we also do know however is that over economical cycles we have seen sometimes the problem that such markets may dry up on very short notice and that's why from our perspective we decided to become a bank and fund by our own sourced deposit base which is still like 90% of what we're doing today because it just gives us a higher level of stability and predictability in the funding and companies that don't do that may you know we've seen that I've been here in fintech for 20 years I've seen some of that happen.

Yeah. There was a number of companies that ended up in that situation where suddenly these things dry up right and that just becomes a problem. So for us it's been important to establish that as only one form of financing but longer term does it make sense that that is a very popular and dominant form of financing? I would say yes. Makes sense.

You have to think about two aspects, right? Like in the mortgage world almost the whole thing is like can this person afford to service this loan over a longer period of time and what's the risks that unemployment hits them or something else happens under that time right and that is an important factor for us as well but in our case also an important factor is just behavioral because you know our outstanding loans are about $100 they usually the durations are very short as I said we turn around our balance sheet more than 10 times a year so what ends up happening many times is like if we see a macroeconomical shift or something happens in the economy, we just change our underwriting in real time and it takes only about 60 days for more than 50% of our balance sheet to be underwritten by the new standards. That's a level of agility and flexibility that the big banks don't have. That's also a downside. If you're pushing people into revolving and building large balances like the big credit card companies are when economical changes happen, you just can't shift out of it as fast because you have all these customers with all this depth. But with that said, also to your point, there's also like a preference. Why would consumers pay you versus somebody else? These things play in. And I think like that's why being a beloved brand, having preference, being a service that consumers appreciate and pay actually does matter for repayment rates as well. Especially in US actually a little bit less in Europe where the market works differently.

I know their origination will change and their underwriting will change. They can change that pretty quickly. But the problem is they're stuck with whatever they originated for the last years, right? I mean a general bank in general has about I think 80% of their balance sheet has been originated two, three years previously so they just don't have that agility to changes even if they change their policies today it takes a lot of time before the majority of their balance sheet is underwritten by the new policies.

I'm not worried about that at all. Well, I've done this for 20 years and as I said already, I think I've answered it with the duration so forth. I think for anyone that's watched Big Short also have to remember why did the mortgage crisis really happen was because the underwriting was really poor and there was a number of big companies that went and guaranteed that that underwriting was not poor but it was actually great which was wrong right and so I think in our case because we're not securitizing we're putting this on our own balance sheet we have all the incentives in the world to be very mindful and thoughtful about what we underwrite and what the repayments rates. Most people can pay back a hundred bucks. Like it's very different. The mortgage, you know, if you're underwater, like you're underwater, most people can pay back $100. So, if you're thoughtful and you keep your loans small, you fare well even when...

Economical environment changes, and that I've seen with Klarna over the 20 years that we have operated the business.

I am, as I believe a lot of others as well, very much in favor of free capitalism, of having as few rules as possible. But I also think most people would agree with me that anarchy isn't great. That in all business, there's value to having some rules of how we interact. And I think that what was wise about that suggestion is it recognizes that in some markets, sometimes some rules may be helpful. I think about this primarily first and foremost from a US consumer perspective, where we are seeing a continuous growth of revolving credit card debt, and that it might make sense to add one or two rules to help counteract that. The implications for Klarna, in my opinion, is that it makes us stronger because it makes the offering more similar to what we've been offering. We have had paying for 0% interest, and if the rules make the other products more similar to ours, I think it just validates what we have built and the benefits that we provide. So I think in general it would be a good thing.

You could say that, but on the other hand, what I've seen in Europe is that when such caps were introduced, the whole loyalty model with all the loyalty points and so forth became less attractive because it was more difficult to execute that, and it just levels the playing field as well. The whole idea is that we educate and our consumers see the value that we're offering and are not lured away by offers that initially may sound very attractive, but in the end are all about you maxing out on revolving $6,000 at a 30% interest rate. Right now, we're seeing a big benefit from the fact that people learn themselves that those models are not healthy. We call them the self-aware avoiders. They've tried credit cards. They don't like it. They found themselves in too much debt. They pay it down and they start using Klarna instead. So, you know, there are pros and cons, but generally speaking, I'm always going to speak up for what I think is right for the consumer.

That is actually incorrect.

Yeah. And this is one of the kind of myth-busting that I think, independent of what our PR department tries to do, we will probably not be able to get the facts right here because it's just been repeated and reshared so many times that it's beyond us by this point in time. So let me give you quickly the facts. What we did, we launched an AI customer service bot. It took about the equivalent of 700 agents' jobs, but since we're outsourcing those, nobody lost their job. They just went and did other jobs for other companies. But it reduced and had a significant impact on our cost base, and it helped resolve the most simplistic errands at a higher quality that consumers appreciated. Since then, we have increased that, and it's now about doing the jobs of about 850. So it's slightly more than it was back then. What we also tried to communicate and failed in media was that we said, look, we have a very interesting learning from being one of the early deployers of this, and that is that in a world where AI can do the most simplistic customer service, we believe that human customer service will almost be seen as a VIP thing. It will be one of those things that you're like, oh wow, I talk to a human, and we want to offer the best customer service in the world. But in order to do so, we would also have to change because historically, Klarna was not necessarily thinking about customer service primarily from a quality perspective, but primarily from a cost perspective. So, it had to change. We had to recruit a different type of customer service agent. We had to be willing to pay thereafter, and we have to give them the tools and the prerequisites to be successful in serving customers in a better way. Now this then got misunderstood as like we were saying that the quality of AI was bad, and there's been tons of misquotations, but that's what's actually happened. And then in addition to that, we have also worked using AI internally and allowed us to become more efficient. And through natural attrition, not any layoffs, but through natural attrition, we have shrunk. We used to be about 6,000 people, I would say, and then we have become fewer, partially through efficiency and partially through the application of AI. We're now below 3,000, about 2,700. So those are the actual facts of what's been going on in there. And we think it's an amazing tool that accelerates the business and it has, you know, tons of opportunity to improve quality of service for our customers.

No, I mean the AI sometimes isn't correctly hooked up, and mostly it's about you not providing it the right context. I think most people today would argue if you give AI the right context, it's actually very capable in a lot of situations. But if your source system is not providing it the right context, it may miss. But there's also other aspects, like for example if a customer is unhappy or feels that a decision is unfair, most people will say I'm not accepting a robot telling me that. Give me a human. And I think that's a very natural and fair request of a customer to be willing to say I don't accept this robot telling me no, give me a human to speak to. And we want to offer that service to our customers. We think they should be entitled to have that service. So there will be situations and there are situations in which humans are the right answer to helping customers in a more thoughtful and empathetic and qualitative way. Obviously all technologies that you launch, you will always find single instances where that technology hasn't functioned as intended. That was true for our app before AI came along. That was true for our services. You will always find instances where that's not the case. And I think the same applies here. I'm a big believer that AI will be helpful to humans and businesses going forward. But I also wanted to send the message that I think there is a real place for humans in the future state of banking services as well because I do think that empathy and the availability and speaking to a human is something that people will appreciate. As my wife wisely says, two things can be true at the same point in time. But in media, it's sometimes difficult to communicate two things at the same point in time, which was our learning in the end. Klarna's objective is to drive a fantastic product to its customers, to help give consumers an alternative to credit cards and the traditional banks, and that's what we're going to focus on. Whether we apply AI as a technology to do so or not, we will do so when the quality and the reception is positive and it helps us bring better services at higher quality with lower cost.

So I'm not going to go into the details of the SaaS story anymore, but what I can say is that there was an important thing that we believed, which is that for Klarna as a company, we came back to whether it's AI or just software in general, you want to make sure that you have the right context for whatever decision you're going to make. If you're going to help a customer, you want to understand all the different data points that are important in helping that customer with whatever errand that may be. And one of the conclusions we did back then was that the problem is if you have your data spread out over too many systems, it just becomes harder to integrate and extract all of that information that is necessary to support the customer in the best way. And that was the primary objective of why we decided to reduce the number of software vendors, because we saw that it didn't help us in that regard.

Vibe coding is a term that I would argue doesn't exist anymore. Vibe coding was a term that was created when AI was producing code that was subpar to traditional engineering code. And I think most people that are in the industry and close to AI and coding would argue that since November last year, the code that AI today produces is on par with what human engineers do. Now that doesn't mean you don't need to code review it or verify it, and it may make mistakes just like humans do. But today, anyone can code. Not everyone can verify that the code is of quality, but the code that AI generates is of high quality today.

Well, I think again it comes back to what we talked earlier about Amex, right? Like would you argue that the situation you described is a threat to Amex and the traditional credit card companies? I use my American Express when I'm doing big ticket items because sometimes they give me paying for promos, but also because there's purchase protection. I know that if there's a defect with my phone or something else that I buy, that Amex will, if the merchant won't cover it, cover it for me. And that's a huge appeal for me.

I think it comes back to what I said, brand preference. And I think at some point in time you need some funds somewhere that you need to settle somehow, and you need to have some relationship with that company, right? But if you look at it very long term, and I've spoken about this on some opportunities, you can basically argue that financial services are a combination of a digital assistant that helps you in those every day and the balance sheet, right? Those are the two parts that customers offer. So we just have to be the preferred way in which people fund those transactions, see value in doing that with us, both from a cost perspective and quality perspective.

I mean we actually do offer lounge access. I mean we have multiple tiers on our card. Here's my very nice metallic Klarna card, and it does give me airport lounge access. I don't have a Klarna lounge just yet, but we do have access to other lounges. I do think that like, yeah, that could be the case. I think it's consistently changing, like why do people prefer an airline loyalty program versus a non-airline loyalty program? Like all these things continuously as the industry evolves, things change and you just have to stay at the forefront. I think what's interesting and what to us was a strong belief is that we believe that over time you need to have a very low-cost customer acquisition channel, which we have established. We bring in consumers at a very low cost. We have a big consumer base of almost 130 million users now globally. And then it's about offering those attractive and relevant payment options and financial services that are interesting for them. And that was always the key objective. I think it's interesting to see today that among our competitors, we're the largest network in number of users and geographical span, and we cover the broadest set of payment methods, both everyday spend, kind of mid-size ticket spend, and big ticket spend. And that, we believe, puts us very well equipped for the future, whatever the future is going to bring.

I think that generally speaking, sometimes we end up having an exclusive relationship, which is great. But if you would listen to internal conversations at Klarna, you would hear many times I told my sales guys like, don't worry that much about exclusivity, because the DNA of Klarna is preference, not exclusivity. So what I look at mostly is merchants that offer us and multiple options, and then I look at what's the share of checkout that Klarna gains, because that to me is like the true, it really truly reflects what is the true preference of us versus some of our competitors. But then sometimes occasionally it's also nice to be able to work together with a fantastic partner like Walmart, because if you're in exclusivity, it also gives you some opportunity to kind of launch new services, test new concepts, drive additional value for both parties.

Thank you guys. I appreciate it.