We are going to get started with the next session. Up next, I am very pleased to have Sebastian Siemiatkowski here, Co-founder and CEO of Klarna. Sebastian, thank you for coming out all the way to the West Coast. I know it's very far from where you live, and we're very pleased to have you. Thank you for having me. It's great to be here. We're about at the one-year mark from the IPO. It's been a very eventful year. A number of different moving pieces in the business between the ramp in Fair Financing, the launch of card products around the world, the PSP default rollouts, and a lot of education for the new investor base along the way. As you look back on the first year as a public company, what has played out as you expected? Where has reality been different from the plan, and where are you focused on executing over the next year? Sure. Well, look, I think first, if we take the bigger perspective, long-term perspective, we have three segments of payments or spending that we offer services towards the consumer. It's everyday spend, low average tickets. It is the mid-ticket segment, which would be fashion, cosmetics, beauty, et cetera. There's been high ticket, which is financing. Just as it's been before the IPO, it has continued to be after the IPO, which was that in every market we enter, the mid-ticket is our entry strategy because it grows frequency, brand awareness, brand preference. We can train our credit underwriting models based on issuing small amounts of $100 on average, which lets us understand the customer and their payments behavior over time before we start extending the big-ticket items, so what we call Fair Financing, which is basically point-of-sale installments. About two years ago, we started focusing in the U.S. and also in the big ticket segment, where we have been quite small before. We have seen great success in our opinion. We have signed Walmart, we signed Apple, and as a lot of, to your point, have followed, Fair Financing has grown a lot as a share and general in the market. That is very much according to our strategy as we always do, and obviously it comes with more revenue and transaction margin dollars. All of that very much according to plan. We are excited to see that Fair Financing took off so much since it is a competitive market, but we see that the offering is in demand both from the merchant side and the consumer side. I think in general, also, if I look at the fact that revenue was up in Q2, 27%, transaction margin dollars 42%, ARPU 24% year-on-year, all of that, great. Where we fell short, Germany. In May, we assumed Germany second half would be firm. What we started seeing is, and I think this is important to remember, we do 3.8 million transactions a day. We actually see these things before the statistical office see it. In August 18, we adjusted on what we saw, which was about three percent of volume guide, even though we adjusted up our transaction margin dollars for the year. We got the confirmation on the 1st of September when the official Federal Statistical Office of Germany, Destatis, published that online sales in Germany was down against expectations 5.6% in July. Again, if you think about it, we built this company for the 10-year ambition, and that is what we still run that way. You rightly hold us to the number we said in May, and a miss against that number costs credibility against that 10-year plan. Going forward, the rule is guide us to what we can see and change the guide when we can see changes at all our quarterly reports. Got it. When you talk to investors in the days after the print, what do you think is being misunderstood or underappreciated about the quarter or the underlying trajectory of the business or execution along that 10-year plan? Look, the market is the market. I understand why people anchor to volume, but volume fluctuates. You will have a seasonality effect. There are currency effects. There is also the lapsing of big partnerships that may impact numbers and so forth. I think we still believe that the right focus is the transaction margin SEK and how that develops, and we are very pleased to see that development in the last- In earnings, it is Klarna's largest market. I think it would be helpful if investors maybe understand the complexion of that business for Klarna. My understanding is that the German volume is relatively low take rate, very high margin. Maybe we could do a little bit of an education on what that market looks like. I assume it is heavily pay now and pay later. What does the volume look like, and then how do transaction costs differ in that market versus other markets? Yep. I think it comes back to the fact that Germany, just like many other European markets, the primary reason people use Klarna is not for lending. It is for what we call actually the ability to touch and see the package before you pay for it. In e-commerce, that is the big thing. You are using credit as a way to increase your safety when shopping online as opposed to a lending factor. That is a big difference that applies to these European markets. Then what we see is high frequency. The people shop a lot with Klarna. It is a very well-known renowned brand in the German market. What is different also is that if you look at Klarna in general, actually, not everyone, I think, notices this, but the biggest cost of Klarna is actually payment fees are higher than what we provision for credit. But that is not true in Germany. Right. Because in Germany, we primarily fund through very cheap ACH-based type of funding mechanism, that allows the gross margins being more in the 50s, 60s on those transactions. The other thing is, again, that it is very much what we refer to as spend centric, not lend centric. Germany is not the market where financing is at large. There is still potential to grow it. There is more opportunity. Generally speaking, a lot of it is just paying back within the 30, 60 days that allows us to turn the books 10 times a year because you have that velocity of spending, but short duration credit. Got it. Okay, that makes sense. Maybe switching over to the U.S. business. The U.S. has been growing rapidly. What should we expect for the U.S. in the coming years? Well, we saw 27% growth of the volume last quarter, and we are very pleased with that. It is our largest market now by revenue, by number of users. It is 30 million users. What we see is that if you look at Klarna in that mid-ticket segment, as we talked about, if you go to any merchants that you would find in that retail clothing, if you look at beauty, cosmetics, and so forth, you will see Klarna very prominently across those. We recently, for example, announced Ulta Beauty as an example and so forth. There we have that presence which is very critical in how we execute the strategy on each market. Then we are adding more segments. You could see potentially some of you noticed we announced Southwest Airlines. We announced which also generally tends to be in that ticket segment, actually, because those are cheaper airfares. Then obviously the big opportunity has been to grow into the financing and high ticket spend, where we see a lot of opportunity and recently announced both Walmart and Apple this last year. That is still a big opportunity. I think that especially when you compare us, not necessarily to other peers that we often get compared to, but if you look just at the incumbents of that space, point-of-sale installments and lending in the U.S. still has large room for growth in additional verticals in offline and so forth. I guess with that as context, where do you feel— what inning are we in? I do not know if inning is too American sports, but where are we in that build-out of the growth in Fair Financing and the maturation of that part of the business? Yeah, I think that one thing that we try to highlight is that if you look at— because over the years, we found that that high velocity spend centric product is the core and foundation of the business, and Fair Financing is this additional opportunity to grow into to earn more revenue and so forth, right? To us, it was always critical to win in that mid-ticket segment. If I look at it for the U.S. market, even though there has been discussions and highlights, as you said initially, that Fair Financing has grown a lot, and it is true, it has grown a lot in the U.S. If you look at it historically, in the 20 years Klarna has existed, the share of Fair Financing compared to the more buy now, pay later or the mid-ticket segment is still actually lower than in the most extreme years, right? We think the balance is getting healthier between those two products in the U.S., and we still see a lot of opportunity in the Fair Financing segment where there is a lot of money to be done. But the balance between that is very healthy. Yeah. It is important for us because you have to remember that our outstanding balance on a customer in general at Klarna is a few hundred SEK, which still compared to a credit card, the average outstanding balance is $5,000. We like it like that. We like it that it is high velocity, it is spend centric, we see the direct, and we can make adjustments in our underwriting, and we can refresh our balance sheet in less than half of our balance sheet in just 60 days. Yeah. It gives us a lot of agility in how we manage our risk. Maybe sticking with some of the more recent partnerships. You recently announced a partnership with Apple, and I think there is a lot of interest in hearing more about your expectations there. I understand you are probably limited in terms of what you can say, but maybe we could try it this way. Can you talk about how the deal came together? What made Klarna a good choice for the partnership? Then second, can you talk about the broader context on Apple financing in the market? There historically have been other providers of credit. How is Klarna going to be positioned relative to other options to finance Apple products going forward? Well, to tell a funny anecdote, I was here 11 years ago pitching for the Apple deal back then when the company that we currently replaced won the deal. I am very happy to see that we, this time around, managed to come through. At that point in time, we were basically absent in the U.S. It was probably a bit early to win that deal at that point in time. We have had a long partnership with Apple already, on Apple Pay, on other offerings together. We were very pleased and happy that when they approached us about the opportunity to think and kind of rethink the upgrade program, they found us to be a partner to sit down and think through how can we do this in an even more attractive way for the consumers? How can it relate to. I think what I am also very proud of is, in my opinion, Apple is a company that has product quality at the very, very top, the experience and all that, which is what I aspire for with Klarna as well, because that drives, again, the preference and the conversion rate and so forth with our services. We were very pleased that we got the opportunity to pitch and then finally also win this deal. Today is a big day as they are announcing new devices, and so we keep a close eye on it. It is fascinating. Hopefully track the performance. Another big topic that I mentioned at the top of the conversation is around Card. You crossed 5 million active after the global launch across multiple countries, multiple continents. Can you talk about how the card is impacting the near-term numbers? I know there's issuance costs, there's scoring costs up front. Longer term, what impact do you expect it to have on the mix of volumes between the three main products? Maybe talk about if it's leading more towards everyday spend, like the core business, or if it's driving a higher mix of financing like we've seen at some of the competitors. Well, it's actually 6.5 million active now. So it's had a good quarter. Look, to us, the key strategy there is that, again, if we zoom out a little bit and look macro, we saw that in general in financing, retail banking, take Amex as an example, other companies, the point is that the biggest barrier of entry is customer acquisition cost. That's what's most expensive. So when we thought about our strategy long term, we said that we have this amazing merchant network. We have these merchants that find value in offering Klarna to their consumers, and that becomes a very attractive and efficient customer acquisition channel that is very low in cost compared to, I don't know, stand in the airport and try to sell you a credit card. That has really been the first phase of this, which is how we scaled to 130 million users. Now we're in that second phase where it's all about, okay, how do we take this relationship? Somebody saw us online at one of the big retailers, tried it, liked Klarna. How can we then increase the frequency of purchase, get them to use the app, explore the app and its features, and then eventually turn that into a card experience? We launched that about a year ago. We're very pleased with what we've accomplished so far and the adoption rate of it, and we see it in the ARPU. Because what happens, obviously, is the customers that goes from shopping with us occasionally online, when they transform into the card, it has very significant impact, as I mentioned, the growth in ARPU that we've seen. For our long-term strategy, this is exactly what we were planning for and now are executing on, and we will continue to focus on this, and the membership and subscription as well, which is part of how this all ties together. Any commentary on how customer behavior differs on the card between different markets? Are there any notable callouts in customer behavior? Well, I can add to what you asked me earlier, and I actually forgot to answer, which is the payment mix. I think that in general, we think about the card as a vehicle. It is basically people who like using us online, whether they used us for, which is most common, obviously, the kind of buy now, pay later mid-ticket segment. We then have a fairly large group that uses us for everyday spend, uses our debit products as well. They are still a significant part of our volume. Then we have the Fair Financing. The card for us is just basically enabling people that optionality in store. I think that some of you may remember, at least when I used to work at Burger King back in the days, when people swiped their card, they used to press one for debit and two for credit. The credit card companies removed that because people would not revolve and build as much of a balance and would not put themselves in as much of debt. But we see that there is true consumer demand for that control experience that that gave you. Customers want that optionality every time they pay. Not obviously if you are in Metro, you just want the debit. But for a lot of purchases, they like that optionality of themselves being in control of debit and credit. I think that is what, when we talk to consumers in the U.S., that is why our NPS is high. That is why we are getting a new audience, because these are customers that are looking for that. They are responsible people that want to be in control, and they find the traditional products of the banks and the credit cards to not give them that level of control. That is really the thing that we, with the card, are bringing to the physical world as well, which is highly appreciated. That is reflected. The mix of how they pay depends, obviously, on what they are purchasing. Yeah. Makes sense. Okay. Maybe let's talk distribution. PSP partnerships was one of the major changes to how Klarna distributes the product around the world, moving from a merchant-by-merchant integration to default placements through PSPs like Stripe and Worldpay and JP Morgan. It's a two-part question. First, can you just talk about the strategic benefits of being default rather than an add-on alternative payment method at these processors? Second, at a high level, can you walk through what the economics look like? I think there are some investor questions around whether this channel has an impact on pricing or economics or whether the volume like for like is the same. Maybe you could talk through those two pieces. Yeah. I think that it's all about what we call Visa, Mastercard parity. You want to be accepted. You want to have as many acceptance points as possible. That is additionally important when your primary customer acquisition channel is to be present at the checkout. Because the more acceptance points you have also means that you're growing the number of user base and the number of people that use the product. What we concluded is that people have chosen different strategies. Some companies in our sector tend to offer both PSP acquiring products and buy now, pay later products. We saw that we did not want to compete with our distributors. We have chosen the path of being pure in what we do, and that has strengthened our relationships. There's a few other things that were important. The other thing is if you work with these large PSPs like a Stripe or a JP Morgan and so forth, for you to truly be able to be default. What does default mean? It means a merchant comes to them and says, "Hey, I want to sign up for payments." Either they get Visa, Mastercard, and then they have to take the additional choice of adding Klarna or some buy now, pay later provider, or it's part of the default standard package. Our Holy Grail was always to be default, be part of that standard package that you get when you sign up, because we knew that if we're going to reach millions and millions of acceptance points, that's what's going to be necessary to work closely with these distributing partners. That was important. But for that to be relevant, you have to have a few things. You have to have international presence because a lot of the retailers will not sell to a single market. The problem for the PSP will be, well, we can have so many markets that we have so broad coverage because that allows them to really make it default. Right? Right. Second, you need to have payment methods that are relevant for low ticket everyday spend, mid-ticket that I already spoke about, and a high ticket. So that if you're on a subscription merchant or some other, you still have a relevant offering, because otherwise, again, it's not viable to say you're default because you will have to select which of your merchants this is actually a relevant product for. So those were very key for us to have all types of payment methods, debit, credit, high ticket, medium ticket, and international presence, and that has unlocked this ability to then go default with these large partners that do trillions and trillions of SEK of volume. And that now grows, as you saw, we have a significant growth this year in number of acceptance points and merchants as a consequence of that. We continue to believe this is going to be an important part of the strategy and a foundation for continuous growth for the coming years. Yeah. Just on economics, how do the PSPs price Klarna when they distribute it? It depends, obviously, because these partners, depending on whether they're SME focused or enterprise focused, will price differently. But for us, it's very effective and great distribution channel. I would also say, in addition to that, you have to remember that it actually means less sales cost. Because we don't need to do the sales ourselves. We don't have to have salespeople calling all these merchants. We don't have to do the same level of marketing. We get more through the distribution channel. So we find it a very cost-effective distribution channel. Got it. All right. I want to talk through the topic of AI and operating leverage. Klarna's talked a lot about being an early adopter of AI internally. Margins have improved but are still relatively close to breakeven at the moment. How do you think about the ability to bend the cost curve over time? How do you think about the incremental margin profile of the company from here? Yep. What we've already publicly shared is that we were early to launch one of the first AI customer service agents. It, at that point of time, did the equivalent of about 700 people's jobs. Since then, I think six months ago or something, we shared a new updated metric that was 850. So it's actually growing that share, and it's very cost efficient. We, at the same point of time, tried to communicate effectively that in the world of AI, we think AI is going to be the cost efficient, fast customer service. I can see, for example, the most important metric was actually that customer resolution time when chatting from a human was 12 minutes and an AI was two minutes. So it really made it much faster. But we wanted to offer a human support as kind of the VIP experience with higher quality. At the same point of time, if you look inside a company, we used to have a revenue per employee of about $400,000. It's now $1.4 million. We've doubled revenue the last few years, and we have recruited less than the natural attrition of the company. We have not done any major layoffs. We have simply made sure that the recruitment rate is lower than the natural attrition rate that usually for a tech company like us, runs in the 15%-20%. Then we have proactively seeked out efficiency opportunities in the company where I would argue that AI has contributed. It's not always. Obviously, some of it is just efficiency gains that we've had by the focus of it. But that then has grown revenue per employee to about $1.4 million as it is now with the combination of those two. We continue to be very optimistic that AI allows us to continue on that path of productivity, revenue, and cost optimization throughout the company. I think what I hear when I talk to others, I get the impression that we are fairly far in the adoption and learning of how to utilize this internally, and there's a good understanding of it, which is helping us- Yeah in that regard. Efficiency is important, but maybe switching gears to more revenue opportunities around AI. Can you talk about how Klarna is positioned for agentic commerce and how you think about the pace of scaling of broader agentic commerce volumes? Yeah. I think, again, the most important to me is that you have preference. If you have preference with your consumer, it doesn't really matter if it's agentic commerce, other commerce. You will have preference and you will have volume and growth. That's the key one. But taking that aside, I think it's very exciting for us. We have announced some partnership with OpenAI. One of the reasons they were interested in working with us is because for every transaction we do, different than the traditional networks, we carry SKU level data. What that means is we understand not only that you spent for SEK 200 at that merchant, we often know exactly the items and products that you bought. As you think in the world of agentic commerce and personalization, that kind of information becomes extremely valuable. The more the agent knows about you and your purchase habits, the more likely it is to be able to recommend you and help you. There's been great demand in partnerships because of that unique aspect of Klarna, and also the fact that we actually operate one of the largest product catalogs across Europe and the U.S. in the world. I think Google Shopping is a large one, but then after that, this is one of the largest. This is due to an acquisition we did in the Nordics a few years back. That's also helpful because for agent e-commerce to function, it's important to know not only what products exist, but know what exact price they're being sold at right now and what exact inventory exists right now. This is what that brings to the mix. That has also been in great demand. I think there's a lot of strengths in Klarna that allows us to be very relevant in the agentic commerce space. Yeah. Okay. I'm going to jump around a little bit, but I wanted to talk a little bit about the broader thesis on Klarna from an investor perspective. I think that thesis since the IPO has been that as Klarna expands into higher margin products, higher margin geographies, Fair Financing and U.S. playing a role there, you could see gradual expansion in the transaction margin after a period of depression kind of late last year as a lot of these products were scaling. So margins are on pace to exit this year, still a bit below 2024 levels. Is that the right thesis to think about the trajectory of margins over the long term? And how do you think about the timelines in which we could see stronger unit economics play out in the form of higher margins? I think we have focused very much on the transaction margin dollars because we think that going forward is the right metric to talk about and focus. We hope that people have noticed. I think that is the key thing that I focus on every day into the business is like, how do we grow that transaction margin dollars? What are the activities that we can take? If you look at it generally, if you come back and focus on the buy now, pay later, the mid-ticket segment, I'm very pleased to see that the transaction margin in the U.S. has improved significantly from a year ago. It's now in the 23% transaction margin kind of level. If you look at our established markets, it's in the 60s. That's what some of the established markets are. So I think that is obviously a continuous focus for us. Got it. Okay, that makes sense. Another question that we got post the quarter was just on the cadence of volumes in the back half of the year. You mentioned a couple of large partnerships, Apple in particular, Southwest, that are going to be ramping. The question that we've gotten is, you're lapping a period of really impressive implementations last year, Walmart, Airbnb, eBay, Expedia, all the names that we talked about at the time of the IPO. Can you talk about how pipelines look today versus a year ago, and how you feel about the cadence of new merchants coming on board in the back half of the year? I think you mentioned already the ones that you mentioned. Apple just went live about a month ago, and obviously today with the announcements. Southwest Airlines, I am not sure is live. I think it is only announced that we are partners. Is it live as well, Niclas? It is live. It is announced. It is announced, but not live. Exactly. The point is that that is obviously an interesting new experience for us because as a private company, these things would not matter as much. It would be like, yeah, they are going to come live eventually. Now we are obviously much more focused on the exact timing, the lapsing, and so forth. Generally, if I look at the pipeline, we are still a tiny fraction of the total payments volume in the U.S. If you look at any report, it will tell you that buy now, pay later is taking market share, that it is growing as a phenomenon. There is adoption among the consumers, and there is still a tremendous amount of merchants, specifically new verticals and segments that still do not offer it compared to what we are used to in Europe. Because you have to remember, in some of our markets, if you look at the very old markets that we have been for a long period of time, be it in the Nordics or in the German-speaking countries, you will see Klarna across every vertical, every type of merchant and so forth. That is definitely not the case in the U.S. yet, and not in some of our newer European markets like Spain, France and Italy. They are also showing great growth, but not true in the U.K. either. I think that that vertical expansion is one of the big opportunities going forward. Obviously we try to make sure now that every time we lapse a big launch, we try to make sure there is a new one coming in. That is part of the focus. Yeah. Okay. So obviously a lot of growth in the business, a lot of new volume coming through the pipes. One of the questions that we've got post-quarter has been around the funding strategy and the philosophy around how Klarna is managing the balance sheet for some of the exceptional growth the company is putting up. As you think about that, as you think about the move to some of these loan sale agreements over the past year, how do you view the funding strategy longer term? Is this a permanent shift, or is this a change in the funding strategy to accommodate the outsized growth in some of these partnerships that you're seeing? The core advantage and an important aspect has been that over the economical cycles that I have been with Klarna, I mean, I was with Klarna in 2007, I've seen it in 2013 and so forth. The best form of funding is deposits. Deposits is the best stickiest. In addition to that, what's really attractive about our deposits is that they are fixed term, long durations, 12 months. It means that they are very sticky and very long-term durations compared to, as I said, our balance sheet that we turn around so often. Right. That's the key, and it's also a very cost-efficient way. Now, what we have increased in the last year is that we have, thanks to the amazing work of Niclas, we have increased the amount of different forward contracts, different ways to offload the balance sheet and so forth. That comes at some expense at the margin, but it also unlocks even more capacity. I think that what you see is that if you think about it in decades, what you're going to see is in, because we always focus on the return on equity and you think about how you manage your balance sheet and the volume growth, you're going to see in heavy expansion areas that it's smart to use these forward contracts and these additional levers to allow yourself to really keep the growth pace that you want. Then in other parts and phases where you are seeing slightly lower growth, you may bring some of that volume back in order to increase your return equity and the profitability of those deals. That's just a smart way to build a bank and to grow a bank over a very extended period of time. I see that with some of our peers, when they slow down in growth, they start bringing more volume back that increases their profitability and returns, because that's the natural thing to do when you're in that phase. It's just a question of where you are. We have been in a very expensive phase. We have expanded a lot in the last year, and it's been natural as a consequence to also for diversification reasons and so forth, to use more of these contracts. I think right now it's the right thing to do so. Might be over time, in a few years, we start bringing some of that back again. Got it. It's just a question of where you are in that cycle. Okay. Maybe you could just talk about investment spending. I know this is one of the comments you made on the earnings call that Klarna's investing in growth in the back half of the year. Can you talk through the complexion of those investments and how you think about the return on that spend? Yeah. I think we are very much a retail business more than maybe sometimes people recognize. It means that we have a lot of volume in the fourth quarter, a lot of seasonality due to e-commerce and Christmas sales and all of that, and Black Friday and all of these things. This obviously also ties to where we tend to do a lot of our marketing and activation strategies with our merchants. One of the things I find very interesting is that if we take any merchants, what will tend to happen is when we do marketing activities, and if we do them at the right time of the year, and if we do it in the right way with our partners, what happens is you will see us be, let's say, at this share of checkout. During the marketing activation, it will grow dramatically at a higher level than it was before. This is what's very fascinating. We try to do that at the end, especially during. We take these opportunities during Christmas sales and so forth to make that investment because it helps us next year. We grow that share of checkout through these. That's part of the focus for Q3 and Q4, and that's what you're also seeing in the numbers, that there will be more of that spend. That's one thing we have done historically always, because it really pays off in the longer run. Got it. All right. We've got about a minute left. I want to just hand it over to you for this last point. Klarna has been an innovative company, been around the block for many, many years, still growing very rapidly. What can we expect in the coming years from a product and a business perspective? Well, look, as some of you may have noticed, I decided myself to purchase shares recently. I'm a big fan and supporter of the company, and I believe in its future. Right now, the focus is on the transaction margin dollars and eventually to turn that into EPS when that materializes. That's the focus. I think that the services we have, the market coverage we have today, the products we offer, there is not much more to wish for, to be honest. What it is more about is how do we get the adoption rates up? How do we get more users? Some of you may not even be familiar. We actually have Klarna Mobile in the U.S. A few thousand subscribers are using us for phoning with them. There's a lot of features live, but the question now is: how do we grow the adoption rate of these products? That's the phase that we're in right now. That all translate then into the growth of the transaction margin dollars, whether it's products that have balance sheet implications or products like subscriptions, marketing revenue, and other products that doesn't have any balance sheet implications or any risk associated with it. Right now it's just like it's not doing more things, it's doubling down on things that work and really focusing how that comes through into the transaction margin dollars and then eventually longer term on the EPS as well. Great, understood. Well, that's a great place to leave it, Sebastian. Thanks for joining us today. Really appreciate the conversation. Thank you.