Klarna CEO talks state of consumer in buy now, pay later landscape

The buy now, pay later industry continues to take hits due to elevated interest rates and the resumption of student loan payments. Klarna CEO Sebastian Siemiatkowski joins Yahoo Finance Live to discuss the company's profitability while growing its consumer base and keeping its customers' best interests at heart.

"We're definitely still seeing e-commerce suffering from a little bit of coming back to normality," Siemiatkowski explains."What you are seeing is also that obviously in the U.S. the checks and people savings rates just went through the roof, people were paying down their debt at a massive rate."

Siemiatkowski outlines how consumers are navigating the current economic environment, artificial intelligence, and the CEO's greatest lessons about the industry since the 2008 financial crisis.

Video Transcript

SEANA SMITH: It's good to have you back here. So really-- you're really bucking the downward trend that we're seeing more broadly speaking within this space. There were so many critics out there saying that now is an extremely tough time for companies within the buy now, pay later space. You're actually doing pretty well. How?

SEBASTIAN SIEMIATKOWSKI: Well, yes. Thank you. It's actually-- well, the thing is that, you know, not a lot of people know, but the company was profitable up until 1819 when we started investing heavily in our expansion to the US and some new markets. We're still generating in Europe about $1 billion of gross profit annually. And now, finally, we've been able also in the last 12 months since kind of investment sentiment shifted, and people wanted to see more profitability than growth. We have been focusing on optimizing and getting our US business to that level. So now we've seen 3/4 of consecutive profitability in the US market as well, which is very, very exciting.

ALEXANDRA CANAL: And one thing we're watching closely here at Yahoo Finance is the expiration of that student loan moratorium. How do you expect that to impact your business?

SEBASTIAN SIEMIATKOWSKI: Well, the point is that like, I think, you know, one thing that is fairly misunderstood in media around the buy-now-pay-now products that we offer is that they have been built with customer's best interest at heart, right. So we don't offer a revolving. We only offer installments as fixed time. We try to always give you both a debit and credit option as opposed to a credit card, so everything is on credit.

So the average outstanding balances in the US are about $120 to $250 compared to $5,000 for a credit card, which means that we have a very healthy consumer that is using credit very responsibly. And you also, because we underwrite every decision-- credit decision in real time, when we change-- when a macroeconomic change as we're seeing right now is coming, it actually takes us only two months before we have underwritten half of our balance sheet according to the new model. So it's a very agile business model compared to a bank that may take three years before new underwriting rules actually affect a majority of the balance sheet.

So this is why we're seeing 30% losses below credit card industry standards and gives us an opportunity to be much more agile in the macro environment like this. So actually, we do not expect any of those changes that you mentioned like the student loans having any significant impact on our loss rates, even though they may obviously have so on the bigger economic or macroeconomic environment.

SEANA SMITH: So Sebastian, you still see, it sounds like you still view the consumer, the customer here as in a very strong position despite some of those headwinds that we've been talking about.

SEBASTIAN SIEMIATKOWSKI: Well, [INAUDIBLE], I think, you know, the important thing obviously, and you see that very clearly in the US, is that unemployment has not risen yet, right? And in general, if you look at like people's like long-term economical situation, employment is the critical factor. As much as obviously interest rates increases may mean that spending shifts a little bit, that there's a different, you know, portfolio of spending than there was, and people may be a little bit more careful in their spending. In general, the loss rates for them to increase we would have to see a significant increase in unemployment rates as well.

SEANA SMITH: Sebastian, what does that shift look like? What are people spending on now that they weren't six to 12 months ago?

SEBASTIAN SIEMIATKOWSKI: Well, I do think that still we're, you know, we're definitely still seeing, you know, e-commerce suffering from a little bit of like coming back to normality, right? So for a while there during COVID, we thought that e-commerce would be 90% of people spending or something in the future. And what you are seeing, though, is also that obviously, in the US, there were the checks and people's savings rates just went through the roof. People were paying down their debt at a massive rate.

I mean, you saw Amex had one of its worst quarters during COVID, because they are so related to travel spending, restaurant spending. And now, it's kind of the reverse where Amex has posted some of its fastest growth. It is in those categories, restaurants, and travel is actually still in some sectors doing quite well, even though you do see overall a slowdown due to the recession. So consumers are a little bit, in my opinion, better off than what, you know, maybe the impression that you get from media is.

ALEXANDRA CANAL: Sebastian, you mentioned that macroeconomic environment quite a few times here. I want to read this quote from the earnings call. You said some claimed Klarna would face difficulties in the tough macroeconomic climate with high interest rates. But having led the company through the 2008 financial crisis, we knew we had a strong and resilient business model to see us through. What did you learn from 2008 to help set up your business?

SEBASTIAN SIEMIATKOWSKI: Well, I think, I mean, when we started the company we were simply providing a digital alternative to classical retail banks and card options. And we copied a lot of their business models, where we had a too big dependency on late fees. We had too much revolving credit, which revolving to me is one of the worst concepts, because people don't really understand revolving, like, what am I paying? And when am I ever going to pay this off? And people build balances.

So one of the things that we started experimenting with and trying to learn was to find a healthier credit model, one that would both give consumers an option. And there's a McKinsey study in the US that showed about 20% of the credit card population in the US is very tired of old dirty tricks of it. I always recommend to watch credit cards explain on Netflix is a good-- we'll take you through all the tricks that the banks have been doing on us.

And so there's like a big part of the population very tired of those tricks. And so if you build good products for them that they enjoy and that are more friendly and not trying to push you into too much success debt, then as a consequence of that you also get better performance during a tough environment, because you simply have people using it more responsibly as well.

So this is very obviously different than the impression people have of buy-now-pay-now-later in media. But actually, if I compare our credit products to the credit cards, they are simply better for consumers.

SEANA SMITH: Sebastian, you've jumped in on the recent AI excitement lately here with a number of your investments being in the AI space right now. How does it though-- we talk a lot about companies maybe mentioning AI here and there on their earnings calls. But it's not really impacting their business, helping their revenue, their bottom line here, our top line down the line. How do you see it helping your business, helping Klarna financially?

SEBASTIAN SIEMIATKOWSKI: I'm so happy that you asked that question, because I think that's exactly is. There's so much noise. And people are like talking about this and that and making press releases. We have internally had about I think 2025 more kind of serious initiatives, which are targeting different areas. And we just in, I think, it was in May took our first one live that has already by removing basically fairly boring unnecessary work elements that were just boring for people to do but saved a lot of time.

So I think we've already seen, you know, about $4 or $5 million worth of savings on an annual basis in unnecessary. So this is like very concrete to me. It's real-- it's real efficiency gains. That's coming out of this. And then you obviously have to be mindful of the privacy aspects and a lot of other things that are consistently being mentioned. And yes, it's not-- if you want to use it for math, don't use it for math. It's not great for math. You know, like there's things that people will write, oh, it didn't do 2 plus 2 correctly, whatever.

But if you apply it correctly, there are already very concrete gains from efficiency. And then also, we obviously have a very exciting amount of products coming out soon that we think will have also material impact for consumers but even just like, you know, a few million bucks is quite good.

SEANA SMITH: It is quite good. I don't think investors are going to be really hating the fact that you are able to save a few million bucks because of some of these investments. Sebastian, always great to have you. We look forward to having you back on Yahoo Finance soon. Thanks.

SEBASTIAN SIEMIATKOWSKI: Thank you for having me.