Building a Disruptive Payments Company (with Klarna CEO Sebastian Siemiatkowski) 01:19:23

Hello, Acquired listeners. Today, we are doing a deeper dive into the payments landscape after our Visa episode late last year. And to do that and learn more about his company, Klarna, we are joined by Sebastian Shamiakovsky, the co-founder and CEO of Klarna. Now, that is a name that many of you probably recognize. They are best known as a buy-now-pay-later company with ambition to play a broader role in the payments landscape.

They were founded 19 years ago in Stockholm, not too different than our friends of the show at Spotify.

by now have 150 million consumers globally using the service and powering 2 million payments a day. But we will get into Klarna specifically later on. First, welcome, Sebastian. Thank you for having me. It's great to be here. So I want to ask you, in some ways, a crazy softball question, in other ways, an impossible question to answer. And that is, starting at the 30,000-foot view, if someone asks you, hey, can I have a high-level overview of how payments works and who are the major players in the value chain? I

you know, in five minutes or so, how would you respond to that? Yeah, well, considering that I hope there's a lot of geeks on this call or on this listening to this podcast, I would probably in this case start a little bit differently. Well, I would say usually, look, I think the easiest way to think about it is the issuing and acquiring side and the networks, right? So the issuing side would be the bank giving you your credit card

that provides you and that card has an access to a credit line or a positive balance. Then you have the networks in between Visa and Mastercard that kind of sets the standards and boasts the brand recognition to us that you know that this card will be accepted in these places, but also the standards for how that exchange of financial information and payments and the settling of that transaction actually happens. And then finally, obviously, you have the acquirer and the PSPs.

which basically are the ones partnering up with the merchants and helping them enable the acceptance of payments, providing the terminals if it's a physical store or providing the checkouts and the cashier experience if it's online.

And then you have a number of companies that kind of circulate in this industry, whether it's people helping with recognizing fraud or helping with underwriting or, you know, different, for example, e-commerce platforms that may also offer. We know Shopify is a fintech company to a large degree as an example. So there will be a lot of people that are a little bit of both. But in general, I think that acquiring network issuing side explains a lot of it. And.

You founded Klarna 19 years ago. Wind all the way back, what was the insight that you had where you said, I should attack and start in this very particular corner of payments?

Yeah, so not to make that too lengthy, but for whatever reason, I've always had this like dream of starting a company. I was inspired by the founder of IKEA, that Swedish Ingvar Kamprad. And I read Richard Branson's book about Virgin when I was like 14 years old, and I thought it was a fantastic story and stuff. So I've had a lot of different business ideas that I obviously myself thought were awesome, each one of them. But most of them stayed as a draft on a piece of paper.

I happened to spend two years in Stockholm School of Economics, which is a business school. And I did a sabbatical year, which took me around the world without flying, which was an exciting adventure. Coming back, I was out of jobs and I was just desperately looking for a job. And this was a low economy because the IT.com bubble had just burst.

So I tried to kind of go to PwC or these kind of places that somebody with an economical background should work at, but I didn't get a job. I found myself getting a job at a account receivables factoring slash debt collection company, which was kind of the last place in the world I ever imagined myself working as a sales guy. And I had a lot of experience from me being

kind of a younger 17, 18 years old, I used to work extra as a, as a telemarketing guy who would, you know, call you and bother you in the evenings, trying to sell a subscription to a magazine or something like that. And so I got this job. And my job was basically to open the at that point, there was still telephone catalogs, right, like these catalogs of businesses. And I would call them and say, Hey, when somebody doesn't pay your invoices, or when you

need factoring so you want to borrow against your account receivables who are you using currently and would you consider using the company that i work for and the funny thing is the company i was working for was called acme a c m e and it was a really stupid idea why they use that name but they said like that's the dummy company that microsoft uses in all of their presentations right so they said this is free advertising for us every time they use this dummy company it's like advertising for us

It didn't sound like a great idea. But I mean, basically, I was just picking up the phone call and I was calling all these businesses. And this happened to be 03 when it was difficult, right? You would call this lady in accounting in some mid-sized Swedish company. And she would say, look, I've used this other company for 20 years and I don't really care. And maybe you can save me $1,000 in fees, but I don't care. Like I've been using them and I trust them and so forth, right? So it was difficult. However, I happened to call

a few e-commerce companies because at that point in time, Amazon didn't exist in Sweden. So there was these early entrepreneurs that had found that you could buy Google AdWords really cheaply for like cat food and you could start shipping a lot of cat food, right? Like it was actually quite easy back then, right? You just buy an AdWord that nobody else was buying and suddenly you'd had all these customers flocking at your website. And they were in need of some payments methodology, right? And what happened there was

The prevalent form of payment online then was just like it is today, was Visa and MasterCard. There was card payments. However, traditionally in mail order, catalog mail order businesses had provided a bill me later option, which is true in the US as well, right? And so the catalog companies had already figured out that if you would provide credit when you sold something at a distance,

Meaning, you know, it's different when you go into the store, you see the product, you touch and feel it. And it's like, this is what I'm buying. And then you pay for it. But in a distance selling, when you would order something from a catalog, the experience of being able to say, please ship this product to me first, allow me to touch and feel it before I pay for it.

So buy now, pay later made a lot of sense. It's not about credit for borrowing money. It was to provide safety and trust to the consumer that like I can touch and feel this thing before I part with my money. You have to remember this is in a country called Sweden where most people had debit cards and not credit cards, right? So in the US-

So actually, a lot of people had credit cards, but they didn't like using them because they thought they were dangerous and they would get in debt and stuff. So people really used them as a lost...

Smart. Yeah, exactly. That's pretty smart. So they mostly were using the debit money. So to them go online and buy something in these early days was a risky undertaking. Like I'm punching in my credit card number or my debit card number, which gives somebody else access to my positive balance on my salary count. And then I'm shipping money to this small e-commerce business I've never heard the name of to get my cat food at potentially cheap price.

So the ability to be able to say, hey, could I first order that stuff, get the cat food, inspect it and say, yeah, it's healthy cat food is what it's advertised to be and then pay for it made a lot of sense, right? So.

That just made me thinking like, wow, why aren't these e-commerce companies doing what the mail order companies used to do? And we're still doing because they were quite successful mail order companies that were just migrating to the internet. And they were actually doing it. And they're offering what we refer to as an open invoice payment method back then, which then merged into buy now, pay later. But it was basically that ability. So I had this idea. The company I was working for, considering the name of it, as you heard, Acme, is a

was not the most serious company in the world. So I kind of figured out this was not going to be the place where I was going to be able to develop these ideas. And then

It happened to be so that I went back to school, to university, and they had an incubator. And I came with the idea there like, hey, maybe this is something that I should start a company doing actually. So that was kind of the background. It really was the initial founding insight that is the core product today of people for individual purchases will want to pay later even after they transact. Correct. A lot of companies do a lot of winding around in the woods before figuring out the core product.

I'm sure it took some time to get traction, but like the initial idea was the thing with market fit. Well, actually, I don't want to sound like that, but it didn't take that much time to find traction. So what was interesting here, and again, you have to remember this is in a small country of Sweden with 10 million inhabitants, but we had this idea. We went to the incubator. I found my two friends that, you know, I knew one of them from high school, Nicholas, and the other one I met in university.

We decided to go down this route around October, November. We found a business angel investor that invested in December and she brought some engineers. The engineers built the first MVP of our system to process these transactions and underwrite the transactions and all of these things. From about January to April, it took them about four months and they did it in their spare time because they still had full-time jobs. We asked our business angel to give us $40,000.

She gave us $60,000 for 10% of the company. And we said at that point in time, look, we only need $40,000 to come to profitability. And she's like, no, no, you're going to need $60,000. Different era. Different era. How much money have you raised to date just to get that out there? A lot. A lot. A little bit more. I think it's $4 billion or something. But the point is what's interesting is

is we spent $30,000 before we became profitable. So we were about six months into it and the transaction started running and we very quickly became profitable actually. And it was only in many years later that we started raising bigger rounds of investments. And we were profitable for the first few years of the business because the business model was very effective.

The merchants loved it because they saw an increase in sales. You're enabling transactions, yeah. Yeah, exactly. So, you know, and consumers loved it because they felt much more secure of using this over using their debit card. So it really kicked off. Now, it was in a small market, right? Which is why...

We didn't become PayPal at that point in time. It would have been very different if you would have like stricken gold like that in the US with something, right? But here in Sweden, it became extremely successful very quickly. To the consumer trust element, were you holding the payment information yourself? Was that part of the value proposition of like, oh, you don't have to give the cat food company your payment information. This is a

centralized place where you can trust us and we're the secure platform? Yeah, I mean, it has become that more and more, but the merchants always wanted to understand who is their customer and what are they buying and so forth. So we made sure to build a system in such a way that the merchant had full access to it as well with the consent of the consumer. And how in those early days, I'm sure it sort of evolved over time, but obviously if the benefit is pay later, there's a sort of a concept of float. You said you quickly got to profitability.

Who was sort of floating the money in the meantime? Yeah, and this is the funny part, right? Which is, and I think only truly nerds like yourself will be able to appreciate this fully. But the funny thing is that what we're basically describing here is a factoring idea, right? Because basically, we are underwriting an account receivables and then we're acquiring those accounting receivables from the merchant. We figured out, because everyone was asking the same question, how are you going to fund this? Because you need a lot of cash, right? You need to buy these invoices and then wait...

or these account receivables and you need to wait for them to be paid by the consumer. But we figured out, which is a typical to me like entrepreneur conclusion, is that like, yes, if you worked in the finance industry, you would be like, of course, that's necessary.

But if you're an entrepreneur and you talk to these online merchants back then, they were like, you know what? I'm not interested in a cash flow solution. They themselves were actually, sorry to say so, but many times fairly poor at understanding the importance of cash flow. So what ended up happening is we went to these smaller e-commerce businesses and said, look,

The thing you want to avoid is the risk. We'll take on the risk of the customer not paying because that was one thing that they were very worried about. The second thing that the merchant was very worried about was the administration. If I do this myself, because some of them could have done it themselves. They could say like, hey, I'm just going to

print an invoice and then ask the customer to, I mean, like an electrician would come to your house, right? It will give you a bill and say, pay me for my work, right? They could do that. But they were also worried about the administration. What if I need to collect this money and get a collecting agency and like, oh my God, and customer service and all these things. Those were the two primary concerns, not the cashflow. So we ended up constructing a business model where we say, we'll buy these account receivables from you. We'll take the risk and

We'll do all the admin, but we won't pay you until three weeks later. So we ended up actually creating a funny factoring model, business model that actually had a positive cash flow. Amazing. Our merchants were basically funding us for the first few years. Some merchants obviously recognized and said, look, I need the money instantly. I need it faster. And then we would say, well, then we need to charge you a higher fee.

And we had enough merchants that accepted to get delayed on their payments.

And in combination with the fact that a lot of consumers paid not at due date, but much earlier, right? They would just pay instantaneously. So those two cash flows we managed to balance. So it was actually quite some time before we started having cash flow issues. You sort of had the golden goose of being able to scale with customer funds without actually going out and raising additional capital, which most people would think is impossible for a factoring business who's

theoretically, entire value proposition is fronting money, what you need to get from some facility or maybe you dip into your equity capital to do that. But you're right. It's a very entrepreneurial insight of actually the customers are not obsessed with cash flow. They confront the money effectively and will handle the risk in the administration. Yes. And that's exactly it, right? So that was what's funny about it. And

And it worked. Over the years, as we became more, I don't know, like hopefully trustable, we started having banks fund this and we found different ways of solving this. But initially, that's actually how we solved it. It's almost sort of Visa-like in a way. I guess you were taking the risk in a way that Visa wasn't. But you're a network. You're not actually the financial provider in those early days. Exactly. Exactly. Yeah.

When was the first time you heard the phrase buy now, pay later? Because I will say, I think I heard it in probably 2015 or something. And if you had started the company over a decade before that, it had to be one of these scenarios where you thought you were operating in one space, then your space got named by somebody else and you had a choice whether to adopt the generalized name or not. Great question. So for a long period of time, I was very

angry with the fact that, in my opinion, what was a clone of Klana in Australia called Afterpay had also then created the buy now, pay later term. But then fortunately for me, I found that Financial Times had written an article about Klana back in like 15, 13 or 15, before Afterpay was launched, where they actually titled it buy now, pay later. So

That kind of made me at ease that I think it was Financial Times that coined the term. So now I feel a bit more happy from it.

from a pure prestige perspective. Bringing up Afterpay brings up this sort of interesting point that this space lends itself well to companies that serve geographies and their specific needs. So you sort of could have, before everyone was at global scale, an Australian provider, a Swedish provider, a US provider. And then I imagine the race was just sort of on to figure out, well, how do we serve the needs of those other markets in addition to our own?

You're totally right. So what happened in our case was we launched this in Sweden. It worked. Then as being Swedish, funny enough now when I look back at it, but the first next market was Norway and Finland, which are like 4 million people, whatever. But that's partially driven by merchants' demand because a lot of Swedish e-commerce merchants were active in Norway and Finnish market and so the Scandinavian countries were.

The next big market for us was Germany and Netherlands. And the reason we chose those markets was because there was a strong tradition of what in Germany is referred to as Rechnung, which is basically invoice or buy now, pay later in those markets. And for a long period of time, we were like, how are we going to break into this US and UK market? Because in our opinion, we looked at it and we said credit card are so prevalent that

There's no need. There's no need for our product in those markets. And that was my conclusion. And it made us continuously like think about like, okay, but how are we actually going to do it? The funny thing was that we eventually decided to kind of dip our toes into the UK market. That was basically I think around maybe it was pretty late, like 15, 14, 15.

We used most of like between 2010 and 15. We used for two things. I can come back. One, we tried to compete with Stripe and Adyen on the acquiring and PSP side, and we can come back to that later. But the other part was a payment service provider, right? So as one of those. And then the other part, what we spent 10 to 15 on a lot was to get Germany to work because...

We had at that point in time four or five markets, and it was really difficult for us to kind of rebuild our systems and rebuild everything that we were doing so it would actually be able to operate in multiple jurisdictions with different regulatory requirements, et cetera, et cetera. But in 2015, when we had a small team, we put them in the UK and we said, hey, let's go and try to get something going in the UK. And then the team came back and said, you know what? We think there's a huge opportunity for this product, which gives you an opportunity to buy now, pay later.

And I said, no, that's a terrible idea. The only option we have is to go into high ticket financing. So more the approach that a firm has had. I mean, basically going at like the mattresses and the home electronics and kind of do that.

and not go for like small ticket items or fashion or whatever. And I said to the team, so you're not allowed to do that. And secondly, the team had an idea that we're going to go to like one of the biggest fashion retailers and try to nail a big whale from day one. And I was like, we've never done it like that. We always go to the small merchants and then the medium sized merchants, etc. And I was actually quite tough on the team. I was like, that's a really bad idea. You're not allowed to do it.

And they fully ignored me, right? They just ignored me entirely, right? So six, 12 months later, I had another business review meeting with them. And they were like, okay, so we're trying to do this buy now pay later to large fashion retail. I was like, I told you, you're not allowed to do that. That's a horrible idea. And they're like, please don't do it.

And then three months later, it came, we've signed ASOS and we're going live with Buy Now Pay Later. And it's been a smashing success, right? So it's kind of funny. You always want to attribute, you know, but in that case, actually, I was very fortunate. We had a very independent thinking team in the UK who recognized something that I had not recognized. And that then also Afterpay had recognized in Australia, which was that credit cards had been growing 2x between, you know, 7, 8 and 18.

But debit cards have been growing 10x and that there was this new generation of card users that simply did not have access to credit cards or didn't like to use credit cards. And to them, the traditional business model of Klana, the very basic idea that we had when we started in Sweden. So the funny thing, it wasn't Klana that figured the U.S. out. It was the U.S. market that became the Swedish market.

And that was what's opened up for the US for Klarna, right? Which is kind of opposite to what you would usually expect to happen. It wasn't us. It just happened to be that the demographic and the 2007 financial crisis, the changes to credit cards, promotions in campuses, and tougher restrictions on underwriting and all these things created this massive boom in debit. And then that meant that there was suddenly a new online shopper.

that had a need for our products that didn't exist when we started Klar9 Sweden in 2005.

It's fascinating. So it's not that like credit card users switched to become debit card users. It's that the market for unpenetrated digital payments ended up mostly accruing to debit card users, which changed your characterization of, oh, the U.S. market has mostly credit cards too. Well, all these new people that in what was previously sort of a latent unexplored market are now primed to be the type of customer that we have here in Sweden.

Exactly. The thing is that what I really found interesting in all of this is that like we have occasionally work with McKinsey. They do some things that is very high level and I find of less value and they sometimes do really great things. So I have both fantastic things to say about McKinsey and sometimes I'm somewhat of a criticism. But with that said.

McKinsey published a report and this was a fantastic report. It was actually published in May 2014, so long before the buy now pay later thing. And it's called New Frontiers in Credit Card Segmentation, Tapping Unmet Consumer Needs, right? Remember, this is a few years before buy now pay later, like about five years before buy now pay later became a thing in the US. And in that report, McKinsey says,

There is a group that credit cards are not catering to, and they call them self-aware avoiders.

This is a group of people in the U.S. who have had poor experience with credit cards. They don't like the practices of credit cards, the way the credit cards promote over-indeptness by giving you a credit limit that's very, very big and you think you have that money and can spend it, the way they always ask you every month to pay a smaller amount and pay the lowest possible amount so that you revolve and build up a balance. All these tactics and practices that credit cards have applied that a proportion of the population in the U.S. have simply ignored

you know, not liked or they seen their parents get in financial debt in 2007 and couldn't get out of it. All these things. That was a group and the interesting thing is a group of fairly high median annual household incomes. They are spending quite a lot but they were, McKinsey estimated that group to be about 20% of the US population. They're called self-aware avoiders and

And when you look at the features that they promote, like what are the features that are most important? Is it like the whole credit card industry has been over obsessed with the idea that everyone is a reward seeker. There are reward seekers out there and it matters a lot to them, but it's not the whole population, right? So instead of talking about rewards as the most important benefits, the self-aware avoiders want simple and transparent fees, rates and terms, right? They want rewards.

Avoidance of mishaps that trigger fees. Pay off horizon for each major purchase. And swipe to installment loan. McKinsey is basically describing Binopulator five years ahead of its time, right? McKinsey were an entrepreneurial organization. They could have, you know, started Klarna in the US. Yes. And even I read this report and I didn't fully grasp the potential of it.

back then. But the point is that there were these indications that the markets were changing, the needs of consumers were changing, opening up for a different form of credit that would be more attractive. Not to necessarily everyone. Yeah, I mean, I guess this is one of the

downsides of the Visa MasterCard system in that it was explored on that episode. Visa MasterCard's business model is in many ways very, very similar to yours, but their partners are the banks and the bank's business model is banking. They lend money. They make money on lending money. And so that's underlying that whole system. For sure. And that's the point.

If you look at how much money a credit card issuer is making, as much as they may look in the papers and say, oh, there's a new generation of users that won't buy now, pay later. Is it attractive if I'm doing revolving at like 30% interest rate?

and I'm running my credit card portfolio at this bank, is it attractive to offer pay in for interest-free installments? Like, you know, that doesn't sound attractive. Like, I'm not going to make more money doing that, right? So it is a model that actually makes less money of its users, which means that it's better for consumers. And it's a model that means that people borrow less. So it has that advantage for the consumer, but that's not necessarily an advantage for

the bank itself or the credit card provider today, right? Now, my point is only to say that you still make money with this model. It's just that you make less money. And it's easier for a company like Klana that's never, or actually we have done some revolving as well. But like if you take even Afterpay as an example who never had revolving, it's easier because you only have upside, you don't have the downside, right? If you have this massive portfolio of people that are paying you tremendous amount of revolving fees and stuff like that,

then it's very hard to take a decision that you're going to change into a business model that's simply... There's a major innovator's dilemma aspect to this. Yes, yes, yes. Is this sort of the Christensen idea of low-end disruption? There's a new market that wants a different product. That product is not as financially interesting to incumbents, and therefore there's this opportunity created to create a lower margin, sort of quote-unquote worse in many ways product to this new set of consumers? Yeah.

Yeah, I think that's a big piece of it. I think that like if you look at the also the criticism and the challenge that a company like Klana gets, I think part of it is as we provide credit, there's always the discussion of credit and the issues associated with it. But there is definitely a part of that criticism that is pushed by banks, right?

and other incumbents that are seeing a major threat to their existing revenue lines. Like if this model becomes more prevalent and if consumers, I feel very confident that in the coming years, we're going to see that people that use these models are actually better off. They get less in debt, they pay less in fees than people using credit cards. And eventually when that becomes more and more confirmed as the truth,

that will create a tremendous pressure on these incumbents models, right? So is it fair to say that using Klarna or a BMPL system, you're essentially...

Signing up to a more structured credit or payment plan versus a credit card, all of the financial responsibility is on the cardholder. The financial responsibility is still on the payer here, but it's like, hey, I know the terms up front. It's structured. I can't get myself into a situation like we've been talking about where my revolver just gets out of control.

So yes, I want to make it clear here as well that like when we started Klana to come back to the early days, the first model that we offered was just a buy now pay later. So you would buy something now and you would pay within 15 to 30 days. Now, after about two years, we did see the opportunity to move into revolving and also financing of higher ticket items such as, you know, a home electronics device or something like that.

When we did that, we looked at the competing banks in Sweden and we looked at their business model and we said, like, how are they actually doing this? Like, how does it work? What fees do they charge? What are the revenue lines? You know, how do they underwrite and all these things?

And we concluded that there were all these great tricks that made a consumer pay much more. So like a classical trick would be, hey, sign up for 12 months interest-free. And then what you would do is you would send the customer a bill for your monthly payments on that 12 months interest-free loan, where you would either pay a higher amount, which would keep the 0% interest plan, or you would pay a lower amount that actually meant that you move into a 36 months revolving account with 20% interest.

Now, obviously, consumers are going to say, oh, this month was tough. And they're not necessarily going to understand fully the consequences. So someone even by mistake paid a lower amount and would be moved to a higher interest bearing plan. And we were like, oh, okay, that's how you make business in the banking world. Awesome. Let's do it. Let's copy these things. And we did it. And you make a lot of money from doing those things.

Now, it took us some years to also start reflecting like, but hey, did all of these consumers really understand what they did? Did they want to pay that high interest rates? Is it healthy? It took us some time to start reflecting on this. And then as we started reflecting these, we started changing our business model and removing some of these

tactics that banks have applied to maximize this. And I think that there's a great episode on Netflix called Credit Cards Explained, where there's basically 30 minutes where you just move through all of these tactics that banks have applied in the last decades. It's a different generation. I think in in 2090s, there wasn't this corporate social responsibility thinking. There wasn't that thing. It was just like, how do I maximize profit? Right. Like that was the driving force. And if somebody came up with a tactic that was legal,

and made people pay more interest, then you would do it. Like there wasn't that consideration. Is this healthy? Does this make sense? Et cetera, to the same degree, right? And I think what we've been doing is we've been challenging these things. And I think a great example of that to answer your question was when I used to work at Burger King when I was 15, when you swiped your card, right? The terminal in Burger King would say, press one for debit, press two for credit. Now that made a lot of sense because,

When you make your everyday purchases, only a few transactions are relevant to put on credit. Maybe it's a bigger purchase and I want to put it on credit for that purpose or, you know, something. But like your everyday spend at Burger King probably is a debit transaction, hopefully, right? But maybe, you know, I'm out of salary. I'm getting my salary, my paycheck tomorrow, and I'm okay to take it on credit for 24 hours. These situations may vary in people's lives. But the point is there was an option between one debit and two credit. And everyone's like above average.

40, 30, you know, remembers these things. Now, the banks removed that. They removed it. And today you swipe a credit card and you get everything on your monthly statement. Everything, your Burger King purchase, you know, your Walmart food, everything is on that. Why? Because obviously, as you had that ability to click per transaction, your monthly statement was before when you had one for debit and two for credit, the monthly statement would only be

for the full amount of what you put on credit. And if you had the option to put on debit, you would have a lower amount. So let's say if you had that option with one for debit and two for credit, maybe your monthly credit card statement would be $500. How likely are you to revolve then? Well, you're much less likely to revolve because you can actually afford $500. But if you put your full consumption of a month

You had maybe $1,000. And now suddenly you're going to revolve. So the banks remove these things, press one for debit and two for credit, because they simply saw that it drove less revolving. And less revolving means less money. And then means less ability to offer cashback and rewards that then is the main feature to drive in new credit card customers. So you got this loop where everything is incentivized.

to basically get consumers to pay maximum interest and maximum revolving rate. And now what we're doing with our solutions is reintroducing press one for debit, press two for credit. So we have both pay now and pay later. So we're trying to kind of bring back a lot of these ideas that used to exist that were simply just more healthy solutions.

from a spending perspective and a credit perspective. Oh yeah, how does that manifest in the Klarna product today? What does pay now look like? I think people are quite familiar with the Klarna button to buy now, pay later. Yeah, so where we're going towards is that we're not there entirely yet, but within one or two years, we hope that every time you see Klarna on a merchant website, it will mean that you know that you have those two options. And already today, debit for Klarna is about 35%.

of our volume right so almost not half but it's a third of our volume is debit not in the u.s obviously where we're predominantly only credit still but in a lot of european countries the debit side is quite meaningful and our ambition is for it to be 50 50 online and in store probably be 80 debit and 20 credit or something which we think is kind of the long-term healthy proportion so the

The mall that I usually go to that's just kind of closest to my house in San Francisco is Stonestown Mall. The entire mall, and it's huge, is basically covered in chlorino banners. And for the last year or so that I've been going there, I've been like...

This is so weird. Klarna, I think, buy now, pay later. I think online. I think e-commerce. Like, what is Klarna doing here? Tell us about in-store. You know, we've been trying to approach in-store in many different ways. So I think to come back to that original thing, like we started definitely with the buy now, pay later model. I'll actually put it in a different context. In 9-10...

We had this widely successful buy and buy later. And we had this idea that we were going to, what you refer to in the industry, close the loop, meaning that we would be both the merchant acquirer

PSP and the issuer. This was the compete with Stripe and add, yeah. Exactly. So we had this idea. I always laugh about the fact that we had this presentation. I had this presentation for my board back then. I said, look, we're going to launch a new product called Klana Checkout. And the idea is that Checkout will allow online merchants to offer all the local payment methods, Visa, MasterCard, local payment methods, buy now, pay later methods, et cetera. And we will do all the acquisition and all the processing and everything for these merchants.

And then I said, look, I think we have a few competitors that look scary. There's these Collison brothers in Ireland who figured out the importance of great APIs and that actually most of the people integrating payments are engineers. So let's build a great product for engineers. And then there's these guys who've done it before, the Dutch guys, who really know this industry. And the funny thing with Peter at Adyen is

was that at that point in time klana was a bigger company than adian you know in all aspects organization revenue and so forth so i went down to peter and i said look peter you have to sell your business to me because i'm going to run you over and peter just looked at me he was like who's this brat kid coming in you know that was like probably you know whatever 30 and he was like 40 and he's like who is this guy coming in and like you know threatening me so it took me a few years to fix my relationship with peter after that now we're good friends at least so that's good

So we had an idea that we were going to compete in this. I always laughed that if my investors were listening to me in that board call, they would have said, oh, I need to go and make an investment in Stripe and Adyen, which actually Sequoia did. Many of them did, right? Yeah, exactly. So I was like, I was very right. The only problem was the Klana did not deliver on our thing, right? So we got Checkout out. It became actually a very successful product in the Nordics, where for a period of time, we had more than 50% of all online transactions.

in Sweden were processed over Klana Checkout, right? So it's hugely successful, but we struggled to bring it international and do it as well as Stripe and Adyen did. After about five years, and I remember like in 2013, there was an announcement Adyen did like, oh, we added 50 payment methods in Asia or something. I sent it to my engineers and I was like, guys, we haven't added a single payment method in two years. I can just look at the pace here of execution and I can see where this is going.

But in 2015, it was the final blow was when Adyen signed Spotify.

And so obviously Spotify being a neighbor of ours is like your backyard. Exactly right. You're like, okay, here comes your worst competitor in science with your best friend. And you're like, okay. So it became a very critical point of time for the company because we said, okay, look, it's clear that we're not executing on this strategy as well as they are. And we have two options, right? Either we pretend to be almost Adyen and Stripe, and then we exit the company because somebody wants to buy an almost Adyen or an almost Stripe.

which, for example, happened. There was a Bambora, was a company in Sweden that got acquired by Ingenico because they were an almost-Adian. So you can do that, or we pivot, right? And this was when we pivoted in the direction that we're on right now. So in 15, we kind of changed the ambition, and we said, look, if we can't win on the merchant side,

let's instead pivot and try to win on the consumer side, right? And let's become... And to be clear, you were still doing well on the merchant side for the buy now, pay later platform, just not the full umbrella checkout platform. Exactly, right? The checkout really worked in the Nordics where we had good support and good for it. And the biggest challenge was actually in the US market was Shopify's dominance, right? Because basically the only opportunity we saw for checkout was to start with smaller merchants and then kind of grow into larger merchants.

But Shopify decided they wanted to do their own checkout and be their own fintech company. And at that point in time, it basically blocked kind of the only entry point that we had into the market. And so that kind of was also like a revelation, like it's going to be very difficult, right? And since then, you've seen a few companies have been trying to do checkout. There's been that company in the US, I forgot the name, and I got quite a lot of attention trying to do checkout. So there's been a few people that's been fast as an example, and a few others have been trying to do something like that. But

So it became clear to us that we needed to move away. And today, you know, Adyen and Stripe are our biggest distributors. It's really changed a lot. We actually mostly are integrated over acquirers and PSPs like them who are promoting and offering the Klana product to merchants. It's actually...

not that common today that a merchant has direct integration with us anymore. Really? Yes. Well, that'll help not require a gigantic sales force. Yeah, exactly. That's like classically the problem with merchant acquiring is you need to have boots on the ground in every geography. Which is why you needed banks to do it.

Exactly. Now, so it became problematic for us, obviously, with checkout because we were partially competing with Stripe and Allianz. So in order to get those relationships and partnerships going, we've made commitments that we are, you know, moving away from that part of our product line, right, and move into the consumer space.

product line, which has kind of been the direction of the company ever since 15. Yes, we haven't talked really about the consumer products at all. And that seems to be the more recent evolution in the company. So what does that look like? Funny enough, in 15, so we were like, okay, the Binopulator thing worked really well. We didn't at that point in time yet recognize there was an opportunity in the UK and US. So we were a little bit concerned. We did a last attempt in 15 to launch checkout in the US with very limited success.

So we're a little bit like, what do we do? It happened to be that my second co-founder was leaving at the same point in time. So I had an entirely new management team come in, which at that point in time, I also learned that I don't want to hire executives from the outside. I'd rather promote from the within. And the company had been around for 10 years. So I took some of our best junior managers and promoted them into my management team. And we basically sat down with a white paper and we said, okay, where do we go from here? Like, we need to find a different direction.

And actually, the conclusion was the following. What's going to happen with financial services? That was the big question. We said, okay, well, we can say that we don't know. It's a bit like self-driving cars. We don't know when it will happen. But eventually, what will happen is you will wake up in the morning and your digital financial assistant will...

Basically say, hey, Ben, you know, I looked through your mortgages this night and I realized that you're overpaying and I have negotiated a new rate on your behalf with a separate bank. And the only thing you need to do in order to save 10 bucks on your mortgage every month is for you to say yes, because I'll do all the switching for you and I'll just move you to a different bank. Right.

And eventually that's going to happen. I don't know how fast it's going to go. I don't know when these things will become a reality, but it's very clear that directionally speaking with the way software is developing. And obviously in the last year now with AI coming along, you're like, okay, that's much closer than I thought it was going to be. The point is like, it's like self-driving cars. I don't know when it will happen, but I know it will eventually happen. So the conclusion was like, okay, so the future we're looking at in financial services is that

At some point in time, there will be this digital financial system that just does this on your behalf, right? Okay.

So then the next question then is, okay, but where does that leave us? What do we do in that world? Like what is Klana in that world? Well, obviously you said like, well, the best position to be in is I want to be your digital financial assistant because maybe if I did that for you, Ben, you give me a dollar a tip for like, hey, thank you for fixing that mortgage thing. I give you a dollar and tip, right? If you can get me a cheaper mortgage, I'll give you a lot more than a dollar. Yeah, I'm happy to hear that. I'm happy to hear that.

So the point is that like- Can we talk after this episode? Exactly. What this all means is that eventually you'll have to be that digital financial advisor, right? Which in a way is kind of what

you would think of as like, what was the purpose of a traditional bank man? It was your financial advisor that would like, hey, I'm going to take over. I'm going to take care of your finances, of your savings. I'm going to make sure that they grow. I'm going to take care of all this stuff that you don't understand and don't have an interest in. And I'll just make sure that you're good off. The only problem is that

Once bank got that trust from us as customers, they took it to their advantage and they started finding all these ways to not necessarily serve our best interests as customers. But at some point of time, we just realized that's directionally where financial services are going. And it is going to be a very, very disruptive force because, for example, one of the things it means, it means the end of the excess profits that we have seen in banking industry.

So in banking industry, we've always had excess profits because people are not very easily moving between banks because they find it hard and difficult to change and they're not sure they're getting any value. A lot of these things will go away and it's just going to look like a very different industry than it does today. And so we said, well, OK, we want to be that digital financial advisor. Well, then the next question is, how do you win that? How do we make sure that Klana is the best digital financial advisor?

And we concluded, we don't know everything, but we know a few things. We know that it is beneficial to be global over being local, because this will be a question of scale. The more markets you serve, the more consumers you serve, the more likely you are to be able to operate such a thing. It's going to be about volume and size. It's going to be important, right? So global distribution was very critical. So that's when we said, we have to really expand our network of a number of countries. That was like one, right?

The second thing is data. The more I understand, the more you, Ben, or you, David, have, the more you have trusted me of data about yourselves, about your transactions, about, you know, your financial life, the more likely and capable I will be to be able to provide you advice and services of value, right? Because the better I understand you as customers, the more likely I'm able to actually save you time, save you money, you know, do something that's of value for you, right? Right.

So we then realized that Klana had one very unique thing that really sets us apart, that to me is much, much, much more critical and has been much more at the core of what Klana is than buy now, pay later. And that is SKU level data. So whenever we started a business, because we started as an open invoice business, we needed to produce an invoice at the very beginning of our life as a company. That meant we needed...

skew level details on every purchase. So as you know, when you process a transaction on Visa, you don't get that, right? You just get the amount and the merchant name. In our case, we know exactly at H&M, you bought this sweater of this color of this size.

etc. Right. And today we even show you images of the items that you bought. There's two really interesting things here that are simultaneously happening. One is the strategy thing that you're talking about. When you started with SKU level data, you know, it just lends itself better to, well, great, now we're going to have more data. The other thing is literally just technology advancing. We're 50 years past the origin of credit card networks. You just couldn't

couldn't actually run that much data over the networks. And now the networks are what the networks are. It's, I don't want to say impossible for credit card networks to retrofit and get skew level data, but like it's a hard task to roll that out to the entire network simultaneously. It is. It very much is. And I know that... I'll let you keep going, but I'm still like, how do you get that data with the Clarnac card now that like... Yeah,

you don't actually but I get back so no but you're right but the point is that like Visa and Moscow tried this in the 90s called level 3 right so they had level 3 data they tried to convince immersions of it but it was very difficult and this is again where a four party network will

because a third-party network like American Express or Klana or PayPal has the ability to be close. Like if we get Scooby-Doo level data from merchants, we can instantaneously make sure that it's visible to the consumer and the consumer can see the value of it. The problem with Visa and MasterCard is that even if merchants would share that data with them, they need the banks to

to change all of the banking apps to start visualizing and showing that data. So you really get this catch-22 where it's so difficult to drive innovation when you have so many parties involved, each one with their own self-interest, their slowness in adaptation, et cetera, et cetera. It's one of the reasons I think it's never worked. The other reason is trust, right? So the amount of time I had to spend

with the top CEOs of US retailers to say, hey, trust me with this information, right? Trust me with that. If it's Macy's or Sephora or H&M or, you know, whatever it is, I've spent so many hours like, why should you be comfortable with sharing SKU level with Klana, right? And how is that going to benefit you as a merchant? So there's a lot of aspects to this, but we realized that this is something that when utilized in the right way with the consent of the consumer, right?

it can actually create tremendous value. That's helpful, right? So I think that was one. And then the other thing is, you know, we said, well, look, other people will figure out. We already said back then, if we're going to go down this consumer path and we need to build a brand as well, so the whole smooth and the pink and all that became very important for us. But it's also like we just said, look, there's going to be three parties that we're going to compete with. It's going to be big tech, like Apple is going to try, Amazon is going to try, Google is going to try to be in this space.

Secondly, there's going to be FinTech, Revolut, Chime, NewBank, whatever.

And then there's going to be the traditional banks, Goldman Sachs doing Marcus or whatever, right? So it's very clear to us that it will be these three categories of companies that will try to aspire to do similar things that we're doing. The only thing that we can try to do is be faster, better, smarter, move faster, innovate faster, and try to do this differently than the others. But eventually, and I'm still very committed to this, I think in a few years, you will see out of all of this emerge companies.

you know, three or four really large global players in the space who are basically being that digital financial assistant of customers. And that will be a very valuable position to have. So that is basically, you know, what we're trying to do. So how does this work with in-store at Stonestown? I'm not a big fan of management literature. I think a lot of it is very general and high level and of low value. But

I read Good to Great, and there was one thing that I liked in Good to Great. One of their conclusions was, don't bet on a single technology. And I really liked that. And how we tried to introduce that at Klana, we said, look, it's fantastic if we can grow this third-party payments network that has SKU-level data, but it's also a problem for our consumers that they're limited to using Klana only where Klana has been integrated at point-of-sale levels.

or at the merchant. So can't we try an even more difficult approach, but also an interesting approach, which is that why don't we enable it through multiple different technological solutions? Like

A card is one way to allow you to use Klana everywhere. Now, you have the disadvantage of not getting SKU level on those particular transactions. And then you're faced with the complexity of explaining in the Klana consumer app, why do I see images of my purchases on this one, but not on that one, and so forth. So you have other complexity that arise from that. But there's a benefit to explore the concept of using Klana everywhere.

This was also, funny enough, one of the most critical aspects of the U.S. because what ended up happening is we missed out on the U.S. opportunity. And suddenly, out of nowhere, Nick and his team from Australia came and signed Urban Outfitters in the U.S. and started gathering very significant momentum there.

Was that the start, Urban Outfitters? It was, yeah. I think Urban Outfitters was like the big first. We were part of that RFP and we just, you know, we didn't have the right people in that call and we just missed the opportunity. We could have won that RFP, but. That was the first one of like, you know, I think of like Affirm and the boosted boards, you know, I'm buying a thousand dollar skateboard. The Urban Outfitters Afterpay, that was the first, like, I'm buying a $10 t-shirt. Yes, exactly. And I think Affirm at that point of time

had had a lot of years. I mean, Affirm was started a long time ago already, right? But Affirm was so focused on the high ticket purchase items. I think they were very late to the game on the paying for stuff. And so they didn't really see that. And it took some time for them to kind of also try to go after this opportunity. And I remember very clearly, we came to the US in summer 19 and we started seeing this traction of off to pay and buy and not pay later. And we were like, no. That's pretty much it.

We're like, no, we're going to miss out. Like, finally, there's an opportunity for us to actually establish ourselves. Because again, coming back to that AI vision, we realized that like, we have to make it in the US. There's no scale if you don't make it in the largest market in the world, right? So there's just, you're not going to reach scale. So it was super frustrating to us. And then the other part was, so we picked up and was like, okay, we got to do this. We got to do the paying for. And we basically got it live very quickly. So it took us two, three months.

To get it to market in the US. But then we had a big problem. Which was that we started talking to all these merchants. And we showed them like... Because we've been doing this much longer than Afterpay. We had a much richer product. Much richer features. We had so many great things. And our brand and everything. But we had a very difficult dilemma. Which was... You don't get fired for choosing IBM. Right? So at that point of time, Afterpay was already gaining momentum. And...

It was clear that like, you know, if I was whatever, let's say I'm a, you know, chief officer of e-commerce at some big brand in the US. And like, okay, Klana had a nice presentation, seems to have an awesome product, but the others have already picked off the pace. So I don't want to get fired for choosing the wrong product.

you know, provider, I'm going to go with a market leader, in their opinion, right. So that was a very difficult situation for us, like, and I thought it was like, it's probably one of the most difficult things I've ever done as a founder and CEO is like, it's one thing to come into a market and only compete with incumbents, and kind of traditional players. It's a very fascinating and interesting thing to come in and compete with somebody like Nick and his team, who are themselves founders, entrepreneurs, super fast moving, super aggressive, super smart,

It was just like the most awesome challenge I've ever had in this job. Like it was just so much fun. And then the block acquisition happens, right? Yeah, exactly. But that was a few years. Actually, we realized that nobody wants to go with the second one. Everyone wants to work with a winner, right? And so we asked ourselves, how could we create a perception of winning

without actually winning. That was the challenge. So that is the ultimate entrepreneur's task. Yeah, if you figure that out, like, please let me know. Exactly.

So what we realized is that, okay, they were ahead on the merchant side, meaning that every meeting they would bring a slide with more brands and logos on that we could bring for the U.S. market. Now, we could fake it a little bit and bring some of our European brands that were international to make it look better. But, you know, the off-the-pail sales guys quickly shut that down by training the merchants to ask, like, how many of those are actually live in the U.S., right? And so that worked only very shortly, right?

So we were looking for like, how do we solve this? And we concluded that we had had this idea for quite some time. And the idea was our app, you know, the Klana app, it could function not only as a transaction history, just like your banking app where you can see, okay, here are my purchases. And we had a nice images of what you purchased. But we had this idea of creating a browser and using virtual cards as a way for you to shop with Klana where Klana was not available, right?

So we launched our browser and the browser is part of our app still. And it basically allows you to go to any website. Let's say you go to Amazon as an example, right? Now, Klona doesn't work with Amazon in the US. But what you can do in the app is you can, as a Klona user, you can generate a one-time Visa card. And then the app will basically enter the card numbers into the Amazon checkout system.

As a consumer, it feels like thanks to using Klana browser, you can now shop with Klana on Amazon. And you can pay in four with Klana and you have the payment methods. And also because we control the browser experience, we can actually collect SKU level data out of that transaction. So-

It gave us this idea that, you know what, maybe we can't win with Afterpay on the merchant side, but we can win on the consumer side. So basically the pitch ended up being, we had one slide, which was app any downloads. And we made sure to always have more downloads of our app than Afterpay. That was like, look, we have more downloads than them of our app.

And the reason for that is, you know, you go to Urban Outfitters, you use Off2Pay, but then you can only use Off2Pay at the merchants that are integrated. And even if they've had some success and they have some merchants, it's still limited. Klana, you go to H&M, you try Klana out on the H&M website, and then you can use Klana everywhere on every online retailer in the US. Who do you think the consumer will choose? And we just said the consumer is choosing us, right? And we had all the data to support this claim.

And so then the merchants were like, maybe I should go with this winner instead of that winner, right? Interesting. And by doing this sort of browser hack, did you then capture the SKU data? Yes. Because it was happening in your browser? Cool. Yes. And the funny thing is, like, it grew immensely, right? I mean... Yeah, you go to Klarna.com still today and it's like, oh, you can shop on Klarna.com, right? I mean, we do over $10 billion worth of volume on that browser, right? So it's a huge business. So it actually became very popular with the consumers as well.

You know, it was just interesting. So that kind of managed us to then we signed Sephora, you know, we got eventually Macy's and so forth. Right. So so that started turning the tide towards Klana in the US away from Afterpay and not entirely. I mean, they've been successful as well. But but the point is that like at least it made a huge difference for us. Yeah.

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So we've got a lot of founders that listen to this show, and you've had an epic journey. I mean, you're still a private company. It's been 19 years. You've had multiple business models, multiple management teams. You raised a lot of money in the headiest of times the world has ever seen from the headiest of players who were investing at the time. You had quite the valuation. Now you have a different valuation. You were in the news quite a bit.

geez, what, a couple months ago for board level corporate governance stuff. We internally refer to the succession drama, yeah. The succession drama that played out, yes. I mean, and truly like new reporting,

twice a day with here's the latest on the situation. You were in Sauron's eye for what a week there. What advice do you have for founders? Maybe let's start there with the succession drama and kind of work backwards of in company building, you have these crazy moments along the way. You've seen a lot of chapters. Yeah. I mean, I don't know if there's any good general advice that can be had from that. I think at least one thing that

has changed me. I'm not trying to say, look, I always try to be very humble about the fact that like, I've gone through a roller coaster with this company, there's been tremendous success and tremendous challenges that we faced, some of which is well known, some of which is less well known. But I think over the years, at least something that has developed within me is the fact that whatever challenge I'm faced with today, as much as I can be very

and I really want to say this from the bottom of my heart, I can be desperate, I can feel, I can cry, I can feel, oh my god, this is, you know, so difficult or so hard or I can feel it's unfair or, you know, whatever the emotions that you get into and I can feel desperate and I can feel confused and how the hell am I going to solve this situation or what am I going to do about this? I obviously get all of those emotions still and I've always gotten and I think everyone else that is sane does in such a situation.

I've also over the years started breeding a different emotional state. And that is a little bit of this is what I trained for. So I often think about like Zlatan Ibrahimovic, the best soccer player in the world, who happened to have come from Sweden and be born on the same day as Ida was. If you are playing football at that level, your dream is to play the Champions League final, right? Like that's the dream.

That's not an easy game. That's a freaking difficult game. The pressure, the psychological pressure, you know, the audience cheering against you if you're on the wrong arena, you know, like the pressure, this may be the peak of your career, you know, all of these things going on. But at the same time, like,

Would you rather not play that final? This is what I was trained for. And so to me, what I've started to think more commonly in these situations is like whenever I feel under massive pressure, I take Queen and I put on Under Pressure in the car and I put it on Maximum.

And I just enjoyed the moment. I enjoyed the feeling of like, you know what? This is what I've trained for. This is my 20 years of work has come to me now trying to see if I can figure this situation out. And I may very well fail. And that unfortunately is the way it works, right? Like there was an amazing Netflix documentary about

you know everyone is participating in the tour de france and all these different teams and how hard they you know train for that and so forth but there was also this thing that like at some point of time the race is over and you know the world keeps spinning and there's a new day and you know things work out i mean i think people in sports have much more recognition of the fact that like you know there is that huge final game and then the next day the world keeps spinning right and

The same applies here. And I'm not saying that it makes it easy because it's not. It's really difficult. And I, again, as I said, all the other things are true, but I've also come to some degree to say like,

This is it. You know, this is what I trained for. I wanted to be in these difficult situations. I want to see if I can master this situation, if I can solve it, if I can resolve it in a good way. So I, to some degree, also started to cherish the fact that I have the privilege of being challenged to a level where it's sweaty. You know, and I laugh about that a little bit because at the peak of Klana's valuation, when there was like, you know, we were officially Europe's most valuable fintech and the company was worth $50 billion, even though, you know,

At some point of time, you're like, hey, when valuations are growing faster than revenue and profit, then you have to realize that at some point of time, there may be a correction in the market. But when I was there and I was invited to Downing Street to have dinner with Boris Johnson, and then I flew the next day to go and see a conference where Elon Musk was there and Kim Kardashian and whatever, a very small private conference, I was thinking to myself, is this what life is going to be like now?

And then three months later, the company valuation is 6.5 billion. We can't raise money. The newspapers are writing about how we're a failure and we're the next WeWork. And it's obviously horrible to some degree, but it's also like, wow, I'm living again. This is not just like, you know, like it's for real. Like, you know, so there's something about that that just, I'm not saying I wanted it. I don't say I planned for it. And obviously, maybe if I would have been smart, I could have avoided it.

Once you're in this situation, you just have to make the best of it. Do you think that's actually the case? Let's take the big valuation haircut in order to raise the money you needed at the time, or let's take the board strife recently. Weren't you always just doing the very best, most forward-looking thing you could at the time? How could it have played out differently? No, I think that's true to some degree.

To some degree, it's true because one of the things, for example, that people tend to forget, right? It's like the company was profitable up until 2019. We actually made a profit every year. Now, we still raised some money.

because we were growing a balance sheet and we need equity support that balance sheet. You were profitable in those years when you were raising like hundreds of millions of dollars? Yeah. So actually, it's a little bit misquoted because media hasn't separated between secondary transactions and primary. So a lot of the initial...

announcements of Klona fundraising was actually secondary transactions and we weren't raising that. So I think I was Sequoia's most, I hope I was, or I've been implied that I was one of Sequoia's most capital investors

efficient investments for the first 10 years. Now, then as we decided we were going to go all in on the US and we were going to expand much faster into new markets and so forth, at that point of time, we started investing heavily and we reached a state where our worst EBITDA month was a negative $150 million, which basically on an annual basis meant about a burn rate of a billion dollars. Now, that is obviously a massive amount of money. But to your point, Ben,

At that point in time, investors were cheering us on and giving us a valuation of $50 billion, which meant that that actually billion dollars of loss per year was a 2% dilution. A 2% dilution per year, right? Which is very low. A 2% dilution is very low for trying to achieve that big opportunity. And I think there is...

validity still to the fact that we are operating in one of the largest addressable markets in the world. Payments and financial industries like a trillion dollar opportunity. So it's not like unthinkable that a company in this industry could be worth hundreds of billions or even a trillion dollar eventually.

Like a visa, right? Yeah, exactly. It's not unthinkable. To some degree, it made sense, quote unquote, right, in the world. With that said, though, I still obviously, as a healthy individual, as a healthy human, you do reflect back and you say, was every decision sane? Could some of the decisions be made differently? And I think particularly in my opinion,

I should have been more careful about hiring. Most of the marketing spend, the investment we did in marketing and market expansion, that I don't regret at all. I feel that like we expanded too fast in hiring. We should have been a little bit more careful about that. That I regret, right? So there are regrets that I have. I imagine also there was a big element of, you know, the...

Sort of Bill Gurley saying of like, you got to play the game on the field, right? Like you've got Afterpay playing a game on the field there. And it's sort of like, well, you're going to play that game or you're not going to play that game and you're not going to be relevant. And that's exactly it, right? And that was so clear to me. I mean, a lot of our kind of peak valuation went from like,

Because we were, I think in 16 or 17, we had a $2 billion valuation. In 19, we got five because Dragoneer actually believed that we had a chance in the US, even though Afterpay was kicking our ass.

Then a year later, we got a $10 billion valuation because Silver Lake said, not only do you have a chance, but you actually seem to be outperforming after pay. And then, you know, a year later, we got a $30 billion valuation because the investor says, no, you're actually far ahead of the game and you're making really, really well on that. Right. And that was like the narrative that played into that. I think to your point, like it's always easy.

with the benefit of hindsight to say like, yeah, this and that and so forth. But to your point, you're trying to make the best out of every situation, you're trying to make the best decisions that you can. And I still think if I look at the fact of like, the company soon going to do over $3 billion worth of revenue, and it's this size after 20 years, I think it's still a fairly successful company. I think it's an okay achievement, right? So I think that like, you have to look at it from a longer perspective. It doesn't mean that there wasn't mistakes that were done along the way, right?

What you said a minute ago about hiring AI and the future, I think we have to talk about that before we wrap up. You've set the stage with AI as sort of the vision for the industry for the future, but it's also here now. Tell us about what you're using AI for, the stuff you've been in the news for recently. Sure. Actually, it also partially relates to the challenge that I said and the Champions League stuff because

I read the Elon Musk book and I didn't read all of it, but I read some parts of it. And there was one thing that stuck with me actually, which was that like I've thought about Elon Musk predominantly from the perspective like it's amazing. Look, he's building electric cars, rockets. Like I just I can't even compute how you can be active in all these different areas and create these tremendously successful companies. Like it's just mind blowing to me. Like it's so inspirational now.

Then there obviously is everyone who has his pros and cons and his challenges, just like everyone else, right? Anyways, but the one thing I truly reflected on reading that book

was the fact that he's a freaking cheap bastard. Like he is so cost conscious. I mean, do you think about it? Like everything he talks about through that book is cost. Yeah, you know, the NASA, when they build a rocket, they have an air conditioning unit that costs $3 million. And we went to Home Depot and bought one for $5,000 and it worked as well. Like there's all these things and it's just, and he doesn't do that on a single occasion. He does that across the board.

I saw recently some people presented to me the numbers of SpaceX. It's a freaking profitable company with high revenue growth, right? And it was just so impressive. And I thought to myself, with Klana, I have first been part of growing this company with others as a profitable company growing first. And then we made it into, we invested much more and we had our loss-making years and kind of really being funded by VCs and investors. Right.

And now I just think that like the ultimate challenge is a revenue line that goes up and a cost curve that goes down. That must be the ultimate accomplishment if you can accomplish those two things. Now, with that said, AI is definitely an enabler of that. Now, at the same point of time, I want to be mindful. I mean, Klarna currently has about 4,000 people. Part of the cost reduction we can find is doing more with less.

But at the same point of time, I think it's the most painful and difficult and challenging and sad thing to go through layoffs. I think it's very difficult. I would rather never have to do it again in my life if I could avoid it. But we do recognize the fact that as every tech company, we have a retention rate where about 20% leave the company every year because people in general stay five years, which is pretty typical for tech.

And so that basically means if we stop recruiting, the company will shrink by 20% per year, right? And that's kind of what we're managing towards right now. So we stopped recruiting in August, in September, and September, October. And since then, we're not hiring. We're hiring a bit on the engineering side still, but in general, we're trying to not hire at all. And we're reapplying and rethinking our organization and structure as we go to kind of manage it down.

And we're trying to do that in a thoughtful way, but it allows us to not have to lay off, right, which we really want to avoid. And we're using AI in all sorts of areas to figure out, like, how can we do more with less? And it's fascinating because you do realize that when you've been growing this fast and you've been hiring at that pace, there's so much duplication internally. There's so many people doing kind of similar things in slightly different fashions.

And if you can figure out a way where you can have people contribute to each other's work and build on top of each other's work, rather than constantly reinventing things from scratch or redoing things or spending too much time doing manual stuff, then that obviously would make for a much more successful and inspiring and fascinating company. And I think AI is extremely well positioned to do that. Now, and one of the areas that's been the one that we have been most publicized for is

was as we started exploring this within customer service. And so outside of the 4,000 people that Klarna employs directly, we have in general had about 2,000, 3,000 agents that are employed by customer service companies that we hire as suppliers. And then they help us with customer service errands. And what we realized was that there was an opportunity, obviously, to become less dependent on that and introduce AI into that mix.

Now, I think, again, to some degree, that's always what product development has been about. Oh, technology is a deflationary force. It improves the productivity of an individual to make it so any individual human can create the most economic value possible. Right. And I think in addition to that, also, if we before AI tried to make our app easier to understand,

or easier to navigate or added features. Part of the intent of that was obviously that less customers would feel that they had to call us to resolve an error and that they could solve it themselves.

And that wasn't just because we wanted to reduce cost of customer service, but it was also because consumers want that. Like they don't want to necessarily call customer service for everything. They want to be able to resolve it themselves and just do it and have a simple app, right? So to some degree, a lot of product improvements have already been correlated to higher efficiency and less errands, right? And so the only difference this time around is when we started applying AI to actually deal with customer service errands directly as an alternative to human agents, right?

we had two major breakthroughs. So one major breakthrough was when suddenly the customer satisfaction of the human who had interacted with AI versus the human agent was on par. That was a huge breakthrough because we've had like, you know, everyone hates these IVR systems, like press one for this, press two for like, nobody thinks that's a better experience than a human agent, right? And the same is like the chatbots online, like, oh my God, you tried to ask a question, it's like some insane, stupid answer. And like, so we've all had these bad experiences.

So when suddenly we could actually construct a model that allowed us to create an answer that the customer satisfaction was on par, that just was mind-blowing to us. And then...

When we saw that, we were like, okay, let's now launch this across the board. And of all the product features I've ever launched in this company, I've never seen anything that we pushed a button and it removed the number of errands that our humans had to deal with by two-thirds. So two-thirds were taken over by the AI and then one-third was left with our humans. And so that was a surprise to us. It's just such a dramatic effect on a single feature release.

And then fortunately, in this situation, because of the human aspect of this, the fact is that we have been using customer service companies that, you know, in combination employ probably over a million people, the fact that 700 full time agents were less than needed by Klarna now.

Would in that case just mean that these agents would now work for some other clients of these huge customer service companies. But these companies employ a million people. So like the 700- It's not like you were laying off 700 people. No, exactly. And it's not like those companies will have to lay them off either because they will just deploy them to, I mean, there's always been fluctuations, right? Like where different clients of those customer service companies will have this. So in the short term, there's no implication for anyone's job, right? It's just an implication that Klana has a lower cost of customer service and a higher customer satisfaction.

But obviously we also felt obliged from a more kind of human perspective. We wanted to actually share this because we said, look,

Obviously, if other companies start copying and doing similar things, there will be real-time implications for those jobs. Like over time, it won't be any other client to just shift over to, right? And we felt that so far, most of what we've seen in AI has been more like beautiful demos and beautiful prototypes and this and that, you know, whatever. And like, hey, I'm going to have ChatGP write all my emails now.

and then you do that for a few times and then you're like, "Yeah, but I don't really like this email, so I'm going to type it myself." And then you're like, "Ah, it's not really doing my-" You spend more time reworking the email than the... Yeah. Exactly. We haven't seen that many real life business implementations that were of that size that actually produce such significant outcomes. So we felt that we wanted to share it with the world and say, "Look, we've actually been able to do this and this is the outcomes." And I think over time to also encourage politicians and society to consider what are the implications.

of this because it will have eventual implications right so yeah so that's been very fascinating to follow obviously you know in silicon valley at least early stage founders i've noticed for the last close to 10 years especially people who worked at bigger companies before

They always have this dream of like, I'm going to start a company. I'm going to be like Instagram. I'm going to be 13 people. I'm never going to have a big team. I'm never going to scale. I don't want the complexity. I don't want the man, you know, it's never actually been true. You know, like you never could really do that. And you probably still can't. Maybe with the exception of WhatsApp. WhatsApp, I was going to say Facebook bought both of them. Yeah, Facebook bought the two of them that did it. And then scale them up to hundreds and thousands of them. Right, right, right. Exactly, exactly.

But like now for the first time, like I hear that from founders and I'm like, well, that might be true. That might be true now. Or at least it's a lot more true than it used to be. Yes. No, I think that's true. And I have this thesis, which I call tigers, which is that within, you know, six to 12 months, we will start recognizing a few companies that have really,

taken AI to the core of what they do, have really reimagined how they work, how they ship code, how they ship product features. And I think that what you will start seeing is those companies accelerating ahead in specific industries

You know, I'm pretty excited about what I see Brian at Airbnb sharing and what they're doing. He might very well do that in that industry. There will be others. And I hope that Klana will be one of them. And I think what you will see is that these companies will produce higher revenue per employee than we have seen historically ever. If you look at a company like Klana, we used to operate at maybe like $0.6 million per revenue per employee. We're now at about a million dollars, almost a million dollars in revenue per employee.

Apple and Netflix are at $2 million. It's only really the old companies that operated like $6, $7 million of revenue per employee. So I think that you will start seeing these companies operating at like $5, $10 million per revenue per employee, right? Goldman Sachs is a million. Visa that you referred to, I think, is 1.1. So that is like the metric that I'm keeping in the back of my head when it comes to how this will evolve.

And I think those companies will also be much faster at getting new services out there. They will improve the quality and the pace of their software development. Then you can like AGI and all that stuff, whatever, when that happens, who knows? But like the point is that like, I think in the shorter terms, in the six to 12 months, you're gonna see some companies pick up the pace. And I think it's gonna be revolutionizing. I genuinely believe this is going to be something very different because if I am that traditional bank,

As an example, and I'm trying to compete with this, like, I just don't understand how that's going to work. Like, I just don't, I can't compute, like, how am I going to do that, like with the decision making process and the slowness and, you know, the technology stacks that they sit on, and like, it's just going to be very, very difficult. So we're going to see a massive revival of fintech.

And I think you see the early signs of it. Just look at what NewBank is doing. You know, even, you know, companies like Dave that I was a big fan of and then got highly criticized, but now seem to be doing quite well. You see Monzo in the UK. Revolut is doing fantastic. I mean, I think in six, 12 months, people will talk about the revival of fintech as an example in that industry. But there will be other industries as well where you will see this happening. And so it's going to be a very exciting and interesting and challenging industry.

So maybe I haven't played that Champions League final yet. Maybe still ahead of it.

Well, Sebastian, we expected to have some good discussion in the payments industry. This is a whole new chapter that you sort of opened up at the end here. And we'll have to have you back on the show, I don't know, in the next six, 12 months or at the AI pace, maybe in the next two or three weeks. Yeah, exactly. We got Tiger. I like that. We'll credit you with that term. It's much better than unicorns. Yeah, yeah, yeah, exactly. That'll be fun. It'll be interesting to watch. Well, thank you so much for having me. Thanks, Sebastian. Sebastian, appreciate it. And listeners, we'll see you next time. We'll see you next time.