Klarna CEO Sebastian Siemiatkowski joins Yahoo Finance Live to discuss growth rates, post-pandemic consumer spending, inflation, investor sentiment, company expectations, and the outlook for the buy now, pay later industry.
- Welcome back, everyone. The buy now, pay later industry has been under pressure as of late with the Swedish payment firm Klarna recently announcing two rounds of job cuts after seeing dramatic losses in the first half of the year. Joining us now is Klarna CEO Sebastian Siemiatkowski. Sebastian, thanks for taking the time here with first and foremost this morning. As you think about the business right now, what the vision for the future looks like, and the necessary team, the necessary structure within the team as well to advance Klarna into the reality of a business and BNPL that has grown year over year over year dating back to 2019, what does that look like to you?
SEBASTIAN SIEMIATKOWSKI: Yeah. Well, look, I think it's not necessarily the performance of the business that's changed in the last 6 to 12 months. Actually, we're doing better than ever. Our growth rates look quite strong considering the fact that last year comps were COVID and now we're out of COVID. So obviously slightly less spending online . But it is investor sentiment that shifted, right. So investors were leaning very much into the future.
And now we're much more focused on current profitability. And that obviously has changed the valuations of all tech companies. And we've been one of the ones affected by that, which, unfortunately, doesn't allow us to invest as much as we've done historically. We were investing almost $1,000,000,000 a year. And now we're moving back towards profitability. The company was profitable for its first 14 years of existence. So it's a shift. It made sense when you had a $45 billion valuation to see 2% dilution a year in forward looking investments. It doesn't make sense when valuations are slightly different.
So we had to make, unfortunately, adjustments to our investment levels, our cost. And that, unfortunately, led to us also having to say goodbye to some great colleagues of ours. With that said, actually, I think it looks very favorable. Our products are more sound than credit cards and hence have a better role to play in their worsening recession as well, which I've seen since I've run this company over the financial crisis in 2007 and 2008. So I've kind of seen how it works both in tough times and great times.
- Sebastian, just given your investment plans, like you just mentioned, and the growth of the business, that last funding round of $800 million, how long do you think that will last?
SEBASTIAN SIEMIATKOWSKI: No, so we know that, according to our plan, it brings us back to profitability, which is exactly what we also communicated to our investors. And, again, I mean, the company was valued-- or was profitable up until 2018, where we were actually trading at, like, I think our most profitable year was 16% EBITDA. So we know how to make the business model work. And it's always been profitable. It's just been that we've invested very heavily into the future. And, unfortunately, current investor sentiment doesn't allow us to be that much forward leaning as we would have liked.
- Sebastian, hey. It's Julie here. It's good to see you. What kind of credit loss trends are you now seeing as things globally seem to be taking a downturn? Are you seeing those numbers climb for you? And can you give us any insight into trends specifically geographically or the type of customers that are maybe defaulting or struggling a little bit more?
SEBASTIAN SIEMIATKOWSKI: Sure. I mean, in a way, the interesting thing is that we haven't yet-- we've always been very cautious. The same happened with COVID. Everyone expected at that point of time the recession to impact. It was only a small part of the population affected. Obviously, this recession looks slightly different. But one thing that people not always appreciate about our model, right, the credit card gives you-- an average outstanding balance on a credit card is $5,000. The bank is committed to that.
They're kind of also-- the whole business model is built on trying to make you borrow as much as possible. Our average outstanding balance per consumer is 100 bucks. And our business model is built on the idea of them paying that back in four installments within two months, which means that we turn around our balance sheet 12 times a year. If we change our underwriting model due to changing macro conditions, as we're seeing currently, it takes us two months for 50% of our balance sheet to be underwritten according to the new tightened credit model.
So that gives us a level of agility that you usually don't see in the banking sector, which obviously, majority of durations on balance sheet are two years or longer. So that is very different, and which is one of the strengths that is underappreciated in the market and by media in regards to our model. And it's also helpful for consumers because it means that we're helping them not to overextend themselves in a worsening economic recession.
So we have already tightened both our slightly longer credits, because we do have some credits that are like one or two years, even though that's a very small part of our business. But we also tighten our credit giving in regards to our shorter term credits. But again, the fantastic thing about the business model, both for consumers and ourselves, is the fact that you get this immediate response and improvement in the quality of the business and the quality of the balance sheet.
- Sebastian, just to follow up on that, we were looking at some of the stats from the Consumer Financial Protection Bureau that had actually showed 10 and 1/2% of borrowers were charged at least one late fee in 2021. That's up from about 8%-- 7.9% to be exact-- in 2020. And there is some correlation to the higher prices that consumers are paying, of course. But how has that also kind of trickled into your data? Where do you see that because of higher prices there are more late fees that are needing to be assessed?
SEBASTIAN SIEMIATKOWSKI: So we haven't actually seen that trend to that extent. And I think, again-- but, obviously, in worse economical environments, it would be odd if you don't see some issues or slightly worsening performance in your credit portfolios. But again, it's very, very different if you have a long-term loan and can have a big balance sheet and you can't get out of that balance sheet. It's very different when you kind of, basically, every month, people apply for a new loan of 50 to 100 bucks.
And I think to some degree, some consumers, that's the whole promise of buy now, pay later. I feel sometimes the unfortunate fact is that buy now, pay later currently is a big term, is being used for a lot of different things. To me, what really buy now, pay later is is interest-free short-term installments. And that business model, which some-- and some of our competitors do apply. Not all of them. Some do something different.
But that is a business model that's very healthy for consumers. Zero interest in a rising interest rate environment. Installments based. So you pay back on time and so forth. So it attracts a consumer base that's very thoughtful about their credit usage and opposed to a great credit card where you take all of your monthly statement, groceries, everything included, and you borrow against it. We say do it on a single transaction level. Use debit for most of your transactions. And then use credit for that. So, actually, the consequence of all of that is that you do see a much better performance on your portfolios compared to the traditional credit card companies.
- And Sebastian, I got to ask you about a potential IPO, right, which was widely reported on earlier in this year. Obviously, market conditions have changed quite a bit. What are the current plans. And if you're not going public, what would you have to see in either the broader markets or specifically for the company to change your mind?
SEBASTIAN SIEMIATKOWSKI: Well, the funny thing is that like it was one thing what media have reported. It's slightly different what I've been trying to say. So if you look at interviews back in October, November last year about a year ago, I was saying that I didn't like the market. I felt that it was too volatile, too inflated, and that I would prefer to IPO a company like Klarna under conditions that maybe resemble more what Google did a few years back, which was kind of a mid time, right. Right now, we're kind of in the opposite. You're in a very depressed market. A lot of volatility again and a lot of uncertainty.
Maybe one or two years from now, things have stabilized, people have a little bit better of understanding of what is the size of this recession, how big will it be, what are the consequences? But it's also not the hype type of environment we had a year ago. And I think that would be an ideal opportunity. I would love to come to the market when we have really even further proof in our business model in the US. We're already making $1,000,000,000 in gross profit in Europe.
We need to show profitability in the US market as well. But we still want to come to the market when we have tons of opportunity to grow ahead of us, which we still have. It's a fantastic market to be in. The payments industry is like a trillion dollar market opportunity. So the addressable market is almost infinity in itself. So tons of opportunity like that. So something like that. But again, we have made no clear commitments just yet.
- Well, we look forward to talking to you on that debut day when it happens. Klarna CEO Sebastian--
- But in between now and then too.
- But in between now and then, of course. Klarna CEO Sebastian Siemiatkowski--
SEBASTIAN SIEMIATKOWSKI: Thank you.
- --always good to see you. We'll talk to you soon.
SEBASTIAN SIEMIATKOWSKI: Thank you. Good to see you guys. Thank you so much for having me.