Q3 2025 Earnings Call Transcript

Good morning, everyone, and welcome to Klarna's Third Quarter 2025 Earnings Call. My name is Andrea Ferraz, Head of Investor Relations and M&A, and I'm joined today by Sebastian Siemiatkowski and Niclas Neglen. Our Q3 results were released at around 7:30 a.m. Eastern Time, and they are available on the same link as this webcast.

During this call, we will discuss our business outlook and make forward-looking statements. These statements are based on our current expectations and assumptions as of today. Actual results may differ materially due to various risks and uncertainties, including those described in our most recent filings with the SEC. During this call, we will present both IFRS and non-IFRS financial measures.

A reconciliation of non-IFRS to IFRS measures is included in today's earnings press release, which is distributed and available to the public through our Investor Relations website as well as filed with the SEC. Please note, unless otherwise stated, all comparisons in this call will be against our results for the comparable period of 2024. [Operator Instructions] Before we move to Q&A, we'll begin with a short presentation. Sebastian, please go ahead.

Hello, everyone, and welcome to Klarna's first earnings report, quarterly earnings as a public company. Very excited. I'm Sebastian Siemiatkowski, the CEO and Founder of Klarna. And with me, I have Niclas Neglen, our CFO.

Let's get right to it. Most of you are probably familiar with Klarna, 114 million active consumers, 850,000 merchants and above $100 billion in GMV. And we have grown this network quite extensively in the last few years. We are having users across all parts of life.

These are female, male, all types of educational background, living in all areas. And as you may know also, Klarna is today much more than just buy now, pay later. We offer pay in full, pay later, fair financing. And as you will see, more and more neobank features.

Our reach is global, North America, Canada, U.S., most of Europe and Australia and New Zealand. But let's look at today's headlines. So today, I'm very proud to focus together with you on three topics: growth acceleration. It's fantastic that we're expecting to see above 30% revenue growth for Q4. We also have a record quarter for fair financing product.

It actually grew over 139% year-on-year, and I'll tell you more about why, associated with the number of merchants that we're seeing growing there. And then we're celebrating that Klarna has now actually issued over $0.5 trillion over our 20 years. And thanks to our leading underwriting technology, we have continuously lower losses than industry standards. Those $0.5 trillion has actually been issued with less than 70 basis points, put that against any benchmark, and you will see that's pretty impressive over 20 years and 26 markets.

But let's go back first a little bit in time. 2015, Klarna is -- about 10 years ago, we're sitting down with most of what is the current management team, asking ourselves, what is the future of tech? What is the future of fin? And we realize this world is about to change. Eventually, we will all have digital financial assistance that helps us save time, save money and be in control of our lives.

And we realize this will also have large implications for both the financial industry, the retail banking and technology. And you can think about it this way. They -- both of these markets are pretty much malfunctioning. They have the classical fallacies of nonfunctioning markets, such as the fact that it's hard to search and find the right things.

But that is going to an end now. AI is going to change, and ignorance will stop being a business model. These lock-ins that people have been able to rely on, forget about them. They're going to go from strategy to nostalgia because now AI agents will be able to move all of my so-called proprietary data, preference and all of that between different providers.

And finally, this means the moats are drained, the gates are open. We're going to see a dramatic increase in competitiveness in both financial services and tech. We're very excited about this. And what it means is that trust is the new oil, not data anymore, but trust.

The one that customers actually trust to truly care to their best interest are going to be the ones that are going to gather the most following. In addition to that, customer service minimization is going to be something that we can forget about. Historically, banks have put us on 45-minutes holds and the big tech companies, they don't have customer service at all, just FAQs. Forget about that.

That's a thing of the past. So the quiet life that we have observed among the big tech and banking companies are over. Complacency means end of business. Marble offices are gone, and the free gourmet cafeteria is no longer culture, it's overhead.

This is what we're about to see. And we can see that it's already starting to happen. Pre-AI tech, we saw tremendous perks, 0 customer service, products killed without consequence. And now we're starting to see year of efficiency, intense AI product shipping urgency and the first real competitive threats in 20 years.

And that is quite exciting because if you look at those two sectors, fin, retail banking, that's a $520 billion profitable profit pool that is addressable to Klarna. And we only cater to 0.6% of that today. And ads and technology companies are another $500 billion. These two combined is $1 trillion.

Now remember, this was estimated by McKinsey, but also by Claude, and I have to admit that Claude was significantly cheaper than McKinsey in making these estimates. Now what does this mean? Well, we say in Sweden, one person's dead, another person's bread. This is pretty much it because this means that Klarna is having a fantastic opportunity to go after these two massive profit pools.

And we're going to do that by 100% focus on customer obsession, growth, operational efficiency and leading the AI innovation. And I think that here, I want to highlight that those days when tech companies and banks could not wake up every day like retailers do and restaurants do, focusing on how do I bring in customers through the door, how do I give them the best offer, the best service and how do I make sure I operate very efficiently, so I don't go out of business. Those days are gone. And the businesses in these industries that are willing to really pursue this and work effortlessly on these topics, they are going to win and they're going to grab a lot of market share in these markets.

So let's talk about customer obsession at Klarna. Well, what we are doing is very simple. We give people back time, we give people back money and we give back them control. And this goes far beyond.

A lot of you will be familiar with buy now, pay later, but we do offer a number of other services like searching for products at the right price, making sure that it's easy to pay your bills and manage your finances, to show you where your packages are in real time, so you can go and pick them up and give you control and insights of your spending habits. And in addition to that, we offer you a lot of give back money. I mean just a number of money that our customers have saved on customer -- on not paying interest with our Pay in 4 interest fee is in the billions. And in addition to that, we offer cash back and other features as well.

So this was the very topic. I think something I would like to focus on today a little bit is that our form of credit is really the more sustainable solution. And if you would ask that digital financial provider -- the digital financial assistant of the future in what they would argue is the best form of credit, I can tell you it's not going to be credit cards with $6,500 outstanding balance with tremendous fees and never-ending payback over revolving. That's not going to be the one.

It's not going to be point-of-sale financing. Yet again, another way to charge high fees, it starts at 0% financing, but then after a few months, they start to push you into 36%, and it's also not the best one. The best one is going to be the buy now, pay later with Klarna. Why?

It's low average order value, so you're only borrowing about $100. Your average outstanding balance with Klarna is $88 versus these others. The interest rate is 0 and you pay back on fixed installments. This is a healthier form of credit, which is attracting an audience that is very aware and conscious about their spending. This is also visible in our credit losses and our charge-off rates, as you can see, are a fraction of these competing credit products.

There are other ways in which Klarna already today really distinguish itself. And just today, I want to focus on one to just highlight it to you. Klarna is the only payments network in the world that collects SKU level data on basically a majority of all of our transactions, which means that when customers buy with us, when they buy with a credit card, they're used to seeing what you see on the left-hand side. You will all recognize it from your banking apps.

You barely understood where you spent, just some merchant name that you can barely read and some amount. With Klarna, we have the full SKU level. We know exactly what you purchased, so we can show you images of the items that you bought. As you can see on the right-hand side, the Nike Tech here and so forth.

You can see the sizes, the colors. You can also then, as a consequence, report returns much more easily or if you have warranties or other things that you want to follow up on. So that is a tremendous value and a differentiation and richness of information that we carry at Klarna. So putting customer obsession is really what we've been focusing on a lot and even more so in the last year.

We have this very strict process where we start with insights. So we generate -- we do over 200 consumer interviews every week. We have -- we basically inspect visually 5,000 interactions in detail per week. And this drives a lot of what we call actionable insights, which are average actually about 75 currently per week.

The expected value of delivering on them are estimated at $300 million of lifetime transaction margin. And we're very, very important to us that they are crystal clear on what is broken, how could it be fixed and that we have these very quick estimates of the financial impact and the efforts to fix them. And then we obviously work effortlessly to deliver these improvements to our customers. And currently, we're shipping at a rate of about 20 improvements a week with an estimated lifetime value of about $15 million in transaction margin.

And each of these shipped improvements is verified for impact, for quality and effort. This is the core of our customer obsession process to just effortlessly talk to customers, look at these recordings and then understand how we could improve on them. The fantastic effects of this are that numbers don't lie. We have 73 in NPS, 54% in global brand trust and 41% in global brand awareness.

Remember, as I said, trust is the new oil, more than data. Data will flow freely, trust doesn't come freely. Trust only comes from hard work like the one I just displayed. And this is why we don't just have customers, we actually have fans.

These consumers, when you talk to them, they rave about Klarna, they rave about what we're offering them, and they exhibit a huge amount of trust for what we offer them. Now this then brings us to growth. Now with growth, we have our objective #1, and that is that Klarna should be available everywhere Visa is, that we basically -- and we do that through what we call our default global distribution partner play. This means that we go to the biggest PSPs in the world, the ones that are doing over $1 trillion worth of volume.

And then we have worked with them to say, Klarna shouldn't just be an alternative that you add on as a merchant. It should be standard, default. When you sign up for the Stripe, Nexi, Worldpay, you should automatically get Visa, Mastercard and Klarna in the default offering. And that is something that we are -- have been pushing for years and are continuing to push for.

And you can see now this quarter, we add Clover to this club of signed partners and some of them are already even live like Stripe and Apple Pay that are basically ramping up now with this new offer. And you can see that, that's having a real, real impact on the number of merchants that we're adding because if we're ever going to hit the 150 million acceptance points that Visa has, this is only through global distributions that this will happen. And you can see that it's starting to pay off the strategy as we went -- we added a record of 235,000 merchants this quarter, up, and it's now growing at 38% compared to a year ago at 13%.

Obviously, we're also still expanding with the world's best brands as well. So some of the renewed or expanding partnerships, you can see on this, and that is obviously still a big important part of our strategy, but the distributions of our PSPs, acquirers and technology platforms is the key one that's going to drive the most of the millions of merchants that we want to attract to Klarna to be on par with Amex, Visa and Mastercard. Objective 2, and this may be something that you're not familiar with, and that is that a lot of merchants offer Klarna, as we said, about 850,000, but not all of them have been offering all of our payment methods.

And this is also an important thing. We want customers to be able to expect that each of the payment method that they recognize with Klarna, which is the pay in full or pay now, it is the pay later and it is the fair financing should be available every merchant. And we have made fantastic progress here, especially on the fair financing side, as you can see, just between last year, we were 80,000, now we're 150,000 merchants. It means that still only 18% of our merchants actually offer fair financing, but it's a significant improvement.

And this is driving -- this is what is the explanation for driving that fast growth in the fair financing product. We just doubled the amount of merchants that offer it. And so consequently, you can see more than almost doubling the volume as well. We're also working effortlessly to improve our pay in full offering.

This is really -- you could -- if you would like to call it the big wallet competitor to some of our big wallets out there because this allows you to pay the full amount. Currently, we have about 43% coverage, and it is growing, which is great. We do a lot of things here to make sure that debit is an important payment method available at every checkout out there when people see Klarna. Now then we have our third objective, which is to go from payments to full neobank.

And in order to explain to you how we do that, I will take you quickly just through the customer acquisition channel that I think is totally revolutionary and very different. Most banks will acquire customers through promotions, through standing in the airports and bug you when you're running to your flight. What Klarna does is we're available in all of these millions of checkouts and people will see us, we are associated there with fantastic brands, be it a Nike, a Macy's, a Sephora, and we bug you and say, "Hey, you know what, why don't you use us to pay this time around rather than your card." And it turns out it is so simple to start using Klarna.

It's almost as simple or even as simple as using your existing card. And this drives -- this is what has allowed us to accumulate 114 million active users which is fantastic. But obviously, they only use us -- some of them only use us for a single purchase. So what we then start doing is saying, hey, you know what, if you download our app, you will unlock a world of additional features, additional things that you can do, like we saw on how you can see your purchase history and understand exactly what you purchase or make it easier for you to return.

So about 49 million monthly active users and 76% of the total have downloaded our app. So that's the next step. And then we say, hey, when in that app, beyond just seeing your purchase history, you can actually use it for shopping. We have our shopping browser.

We have cash back. We have tons of things. And what you can start seeing happening now is there's about 10% of the population that uses these features. So it's much smaller, but look at what's happening on the average revenue per customer.

It's going from $28 to $90 on that segment of audience. And now here comes the card, which we're super excited. I'm going to show you some more amazing metrics on our card. And what's interesting here is only 3% so far has picked it up, but it's starting to pick up rapidly.

And you can see that when people start using our Klarna card, then the average revenue per customer jumps to $130, which is actually 4x as much as the average active user. And in addition to that, we're also expanding the bank offer, the balances, to store a positive balance, to be able to use our savings products and so forth. And you can see there as well, the average revenue per customer is very, very different. So each one of those are very early, but we can say the funnel is working.

This channel is amazing. It brings in customers at a fraction of the cost that our competitors are spending to attract the same users. And we're now seeing that we are able to transform them into a richer relationship that gives consumers more value but also allows Klarna to generate more revenue per customer. So first, what about the card?

People ask me about why should I get the card? Well, first and foremost, the purpose of our card was to bring back the control of debit or credit. Some of you may remember when you were kids, at least when I was a kid, working at Burger King, you would swipe your card and press 1 for debit, press 2 for credit. People really loved that.

But the problem was banks didn't love it because you weren't borrowing enough money when you did that. You weren't building up a balance. You weren't putting all of your purchases per month on a balance and then you were less likely to revolve, less likely to build up that balance. So banks remove that, but we know there's a big segment of customers in the U.S., we call them the self-aware avoiders, which McKinsey has said is about 20% of the audience, we think it's even bigger.

But the point is that, that's an audience who have tried those credit cards, who realize that they're a debt trap, realize that they're product of the devil as some of them call them, and that they're all about pushing into debt. So they really enjoy this control of press 1 for debit, press 2 for credit, and we're bringing that back, and we see tremendous demand for that. But the most common thing I hear when I say that is people tell me, "Yes, that would be a nice feature. But what about my perks?

What about my loyalty points? What about all the other perks that I get on my credit card?" And that's what you're seeing here is now not only have we launched the card with 1 for debit and 2 for credit. But in addition to that, we're now rolling out the debit card with credit card perks. And the demand for this has been through the roof.

We're very excited about this. It's just about to roll out and get launched, but I can give you a funny example. I tweeted about this and said that anyone who would produce these funny memes will actually give us -- will have an early access code. And it was just -- you should go to X and watch these memes.

It's really, really funny. And then one of our customers suggested, look, if you personally cut my Amex, I'm there. And we said, fine, I'll do that. So we had almost 1,000 people who indicated that they wanted us to sign up to get their credit card cut by our -- by me personally.

So we think that's showing some very good promise to the demand of this product. And we're seeing across social media, there's tons of interest as we present these products to our audience. So this objective #3, from payments to full neobank, what is the numbers? What is it looking like?

Well, the fantastic thing is thanks to the success of the last quarter, we have now surpassed one of our main competitors in global active card users, hitting 3.2 million, which we're very excited about. And we can see that U.S. obviously has been a big contributor to that with going from virtually 0 to 1.4 million active cardholders in the U.S. market. So it's starting to really, really work, and we're excited about trying to continue to accelerate this in additional markets. You should be aware here that Europe was a little bit later to the game.

So U.S. was first, and we expect to see even more great success here in Europe as well. And that is also being seen in our card volumes. As you can see on a year-to-year basis, they're now growing almost at 100% rate. And that also has contributed.

So I would say, doubling the number of merchants offering financing has grown financing product a lot. You can see here what we have done through the card. And all of this is paying off in an acceleration of our revenue growth. So here again, what you can see now is for the U.S. that we are now actually this quarter reporting 51% growth year-on-year, which we're very excited, which means that we're far outpacing our local competitor in growth.

And in addition to that, you can see that it's also picking up across the board in all markets and also the strong growth in the U.S. is contributing a lot to the growth overall of the company, meaning that we're now almost on par in global growth as well. We have picked up to 28%. And this is while increasing take rates, which is a strong sign of the preference and interest in our products. So finally, a few words on operational efficiency.

It's fantastic now that we're celebrating that we have underwritten $0.5 trillion since inception. And we've done that with south of 70 basis points of credit losses. And this is partly due to the fantastic short durations of our credit. That means that through the macroeconomical cycles that we have gone through over those 20 years, issuing all of this in over 26 markets, when macroeconomical swings happen, we can change our underwriting models.

And in just about 60 days, we have -- more than half of our balance sheet is underwritten according to the new model. That's a level of agility that none of the large banks can compete with. Most of them with their credit card portfolios and their mortgages and so forth will sit and try to refresh their balance sheet for years after economical changes have implications on how you should underwrite. And we have also continued to transform Klarna's productivity.

So you can see here that our revenue per employee, as we've been talking about previously, has continued to increase. We're now at $1.1 million per employee, and we hope to continue to do that acceleration. And part of that is due to AI and just a focus on operational efficiency, which not through layoffs, but through natural attrition as we haven't hired for a few years has now led to the number of employees to shrink by about 47%. But we want to highlight here as well is that not all of that comes through on the total staff cost.

And the reason for that is we have made a commitment to our employees that all of these efficiency gains and especially the applications of AI should also, to some degree, come back in their paychecks, so that they are fully aligned and -- they are incentivized, aligned with the investors to drive these changes through the company. And that's you're seeing as the compensation per employee has risen from $126 to $203 through that process, which gives us a perfect alignment between our employees and our investors in driving the financial goals of Klarna. So we continue to see very demonstratable value from Klarna's AI assistant.

This has been reported before. The update, as you can see, it used to do about 700 full-time jobs, now it's doing about 853 full-time jobs of a saving of $60 million. So we continue to invest in this. And you can see also that the focus on operational efficiency that we said in these AI times will be so important has led us to allow us to do about 108% revenue growth while keeping OpEx flat, which I think is pretty remarkable and unheard of as a number among businesses.

With that said, I'm going to hand over to Niclas for the financial update.

Thanks, Sebastian. As you mentioned, Q3 was a landmark quarter for Klarna, a quarter where our investments in growth, especially in the U.S. and fair financing started to compound exactly as we expected. I'll now take a few minutes to walk through the financial update. Let's start at the top line.

GMV grew to $32.7 billion, and the U.S. grew 43% year-over-year. Consequently, revenue grew to $903 million. And in the U.S., we saw revenue growth of 51%. The transaction margins came in at $281 million, reflecting a planned accounting lag from fair financing that I'll talk more about.

Importantly, the lag is temporary. We're actually guiding to $109 million plus increase in Q4 on transaction margin dollars as those revenues start compounding. So this slide really captures the story of the quarter, faster growth now with profitability accelerating right behind it. The foundations for our growth remain the same.

It's the building blocks you see on the right, growing with our strategic partners, scaling with the large global merchants, ensuring consumers have the Klarna card and building out that full suite of Klarna's flexible payments at more merchants. As we've already said, fair financing is a key contributor to Q3 '25 performance. In the U.S., it's up 244%. Fair financing is now available at 151,000 merchants, an increase of 3x over the last 2 years.

Couple that with the new forward-flow agreement that we put in place, enables a very capital-efficient way for us to continue to expand this product. Overall, revenue growth is outpacing the market. We continue to see an acceleration based on the foundations of our building blocks, and we're coupling that with an increase in take rate in a very sustainable way. This page is central to understanding the impact of our success in accelerating growth through the U.S. fair financing.

It creates a short-term profitability lag in Q3 '25. On the left-hand side P&L, we show the transaction margin dollars based on realized losses increasing by 25% year-over-year. You can see that correspondingly on the right-hand side chart, where you see $297 million going up by 25% to $371 million based on those realized losses. In fact, the $91 million of upfront provisioning is primarily driven by fair financing and drives the $280 million transaction margin dollars you see in Q3 '25. While that is the case, we're guiding towards a Q4 '25 of $390 million to $400 million of transaction margin dollars driven by the fact of -- that revenue from the success of the fair financing compounding over time.

So let's just recap how accounting for fair financing works. Here's an illustrative example of a consumer who has a 6-month loan. We provision for the potential credit losses upfront, while we actually earn revenue over time as the consumer pays us back. As planned, our numbers reflect the growth in fair financing and the associated accounting processes.

You can see that in the chart below. The gray parts of the bars show the upfront provisioning from the success of our fair financing product. While we can see the realized losses, the actual losses that we have recorded are actually very stable and coming down by 1 bp in Q3 '25 based on that continued improved underwriting. In fact, when you look at fair financing, you can see delinquencies falling 5% year-over-year, while GMV has been growing at 139%.

Similarly, U.S. charge-offs remain stable within expected ranges. In summary, we have strong top line growth with GMV and revenue driven by an acceleration in the U.S. and in fair financing. That's driven a planned profitability lag in Q3 '25, and we're guiding towards an acceleration in transaction margin dollars in Q4, driven by us being able to continue to compound the revenue that we've seen from the success of our growth.

Thanks, Niclas. We'll go to the investor questions first, and I will read three questions from say.com. The first question from [ Salem ] is, how can Klarna stay competitive against traditional credit card companies that offer buy now, pay later options?

Yes. I think Klarna -- I've gotten the competitive question ever since 20 years back when it was us versus PayPal in Sweden and then it was us versus PayPal in Germany and then it was us versus payments companies in the U.K. and the U.S. I think that like -- I mean, in essence, how do you compete? You stay customer obsessed, you make sure that you build -- you listen to your customers, and you build the features that they want.

You make sure that you are operationally efficient and don't waste money. And then you just keep on grinding and grinding. I think that, obviously, you could argue that when Klarna was still a small company, the prerequisite -- a small company may be grinding as much as they want, it's still hard to scale it into a large-scale company. But Klarna is at scale now with 114 million users globally, we are one of the largest banks in the world with a number of customers.

And now we're exploring and looking into how we add additional value to those customers. And we're seeing that, that is accelerating in the numbers. So I feel we are very well situated to compete against the traditional companies who, most of them, I would say, expose complacency, lack of customer obsession and rely on high barriers of entry and low -- and high switching costs for their competitiveness rather than operational excellence and customer obsession.

Thanks. The second question is from Benjamin, who asks, does Klarna have any plans to pay dividends to shareholders?

No, we have no such current plans or ambitions. But I mean, obviously, we hope that Klarna will continue to improve its profitability and so forth. So in the future, nobody knows what's going to happen.

And the third question is, how do you intend to improve profits on your current business model?

There are a multitude of things. I mean, as you saw here Niclas explain, spent some time on is the profitability lag that is created through the high growth of fair financing as a product, which is fantastic accomplishments and really primarily stems from the fact that we've doubled the number of merchants that offer this product. But as you can see, that's still only 20% of the portfolio, and we hope to achieve 100%. So we would expect these products to continue to grow.

Over time, in most markets, Klarna has on a, what we call, transaction margin. Am I using the right term, Niclas? Yes? Good.

The transaction margin has been somewhere around 50%, 60% over a longer period of time in these markets. And a lot of that comes back to maturity, on like having enough repetitive customers, maturing your underwriting models for that specific geography and so forth. And we believe that, that's very achievable in all of our markets. The U.S. is a slight different, which is worth highlighting.

And many times, people ask us about credit losses, but what we focus primarily in the U.S. right now is payments fees. Payments fees are actually the same size as losses in the U.S. market. And this is because of the settlement costs that are -- and the nonregulated credit card markets that we see in the U.S. So you may remember that in Europe, there's a regulation, credit cards cost 20, 40 bps.

In the U.S., they may cost 150 to 200. So similar as we've seen other companies, some of you have been in payments and fintech for a long time will remember PayPal and how they basically sought to increase the difference between their funding cost and their payment fees. And this is exactly the same thing we're going through. We have tons of initiatives to drive down the payments cost, which should allow the U.S. market that is currently running at positive gross -- transaction margins, but not as high as in some of the more mature European markets. And I think that's the biggest, biggest one that's going to have the biggest implication on the transaction margin.

As you can see, below transaction margin, the operating costs, we have no plans whatsoever to increase any spending there currently because of the efficiency gains that we're seeing from AI. We don't believe that hiring is the right approach at this point in time. It could be small hiring here and there, but not anything that will have implications on the net. Yes.

Great. Thanks, Sebastian. So I have asked the analysts to e-mail me the questions so I can pass them on to management. So I will go ahead and do that.

So the first question comes from Tim Chiodo at UBS. And it's about Apple Pay in store. Now they estimate that U.S. Apple Pay could be approaching $1 trillion of volume by 2027, meaning that even if 1% was via BNPL, Klarna would have a reasonable share of that business.

Can you talk about how the Klarna team sizes up the potential opportunity associated with the Apple Pay channel even more broadly, including the online experience traction you've already seen? And as a follow-up, Affirm counts Apple Pay-related volumes, which are carded, as Affirm card volumes. Will the recognition be the same here, so we can use for comparability purposes?

I'll leave the second one to you, Niclas. But I think on the first one, I can answer that. Hopefully, you noted the slide where we were talking about objective one, which is to reach the same amount of acceptance points as the big networks like Visa and Mastercard. Some of you will remember Amex 20 years ago was not accepted widely.

You could maybe use it in a restaurant or an airport but not everywhere. And Amex did a fantastic work to roll it out and make it available everywhere. Klarna is going through that process right now, and that is the objective one that we're referring to. And we have already a few years back, identified that this is not going to happen by us signing every merchant ourselves.

In order for us to reach that scale, we need to work more closely with our distribution partners. So that's number one. Second, companies like Stripe, like Apple Pay and others who have acceptance everywhere, who can drive that rollout of Klarna, making Klarna more available. So with that said, however, we had worked with some of these partners for many years, but we had never worked as we've always been an alternative payment method, something that merchant would have to go in, post-signing up with a Stripe or Worldpay, et cetera, and then add on.

And that as well was clear to us was not going to make us into millions and millions of acceptance points. So we went for our holy grail that has been to become default, meaning that when you sign up with these partners, we should be default and we should be available. And that we're seeing tremendous success with already. You saw some of the ones in the slide.

You can see that it is having a very positive impact on the growth of number of merchants. When it comes to Apple Pay, it is slightly different because the acceptance is already there, and it's more about customer adoption. So we have teams that are focusing internally using that customer obsession methodology that we showcase you where we are looking and interviewing customers using that product, looking at customer interactions and then making sure that all the minor glitches and things that can be improved are weeded out and that works really, really well. And we see a lot of scale and growth in that portfolio.

But in addition to that, obviously, then the second part is just education, marketing and educating our consumers about the availability. And we have some interesting upcoming things that are going to happen there as well. I don't want to get ahead of myself, but like there's some interesting stuff that's going to come there to make it even more attractive and grow the awareness. As you saw in that slide, becoming a neobank, everything with Klarna is we have so many tons -- great features and many of these features drive additional revenue per customer as well.

And a lot of -- but we have 114 million users, right? So there's -- a lot of it right now, the focus is really how do we make sure that all these users actually use us and use all these features. And so that's where a lot of the effort is, and that is true for Apple Pay as well. When we -- regarding reporting, I'll hand -- glad -- over to Niclas on that topic.

Thanks, Sebastian. So yes, so today, we don't actually include Apple Pay in our card volumes. This is what you're seeing today where we're announcing things around the card, it doesn't include Apple Pay. Apple Pay is growing really strongly. So is Google Pay. And I think globally, we're seeing really, really strong adoption for Apple Pay as well, particularly in the U.K.

All right. Thanks. So the next question comes from Sanjay at KBW. And he asks, the 4 million Klarna card sign-ups in 4 months seems really strong. What are you seeing in terms of usage and uplift in GMV from consumers who are signing up for the card? What's the ARPAC from a card customer versus one that doesn't have a card?

I will gladly leave that to you, Niclas.

Sure. So I think we had some of this on the slides, right? But what we're seeing from the card, ARPAC is around about $130. Now that's obviously only 3% today of active card users. So you can see where that's going in comparison to the $28 that we have on average on our 114 million active users. So we'll continue to see, I think, strong performance on that overall.

Great. The next question comes from Jason from Wells Fargo, and he asks, the credit beta looks good in Q3. But are you seeing any signals in your data suggesting that you may have to tighten the credit box in any of your major geographies, especially as we head into the holidays and consumers potentially lean in more on BNPL?

Look, I think, again, the key message that we've been trying to get out and that I feel very -- that I really myself think a lot about is the fact that the audience using Klarna is what we refer to as the self-aware avoiders. These are users who usually have used credit cards historically, found them to be not aligned with their best interest or even as I would quote some customers, the product of the devil. And the point is that like you end up racking up debt of $4,000, $5,000, you're paying high interest on that and you're revolving for eternity. Buy now, pay later, $100 average order value, the fixed installments, 0 interest.

Obviously, our fair financing products are very affordable as well. So I would argue that the Klarna customer is a more conscious customer. It's one that is a little bit more thoughtful in how to spend on debit, how to spend on credit. And this is partially why we've seen after underwriting $0.5 trillion over 20 years, these below 70 bps losses over time.

And the other thing that we highlighted was the agility of the model, right? So because we underwrite in real time, it allows us, when we see macroeconomical shifts, to adjust those models. And in just 40 days, more than 50% of our balance sheet is underwritten according to the new standards. And that gives you an agility.

So the question then is, I would say, have we any reason currently to make any adjustments? And the honest answer is no. We have not seen anything in our data or in our spending that suggests that there should be currently any changes. What we have communicated, and I've said on some interviews is that in the midterm, I am keeping a close eye on whether we may see what is the inverse of credit underwriting in my 20 years, which would be that generally speaking, normally in lower -- in more worse performing macroeconomical scenarios, you would see implications for low-income household, blue-collar jobs, et cetera.

With AI, it might very well be that the implications are the inverse, that it's actually going to affect high-income households and white-collar jobs to a larger degree. And that's what we're keeping an eye on to see if we want to make an adjustment. But so far, nothing has -- but I'm keeping a close eye and we're keeping a close eye on the unemployment numbers and particularly trying to understand in those unemployment jobs or numbers, what is -- how is the split between these professions and what are the implications for that. So it's one to keep a close eye on, but nothing that we have acted on so far.

All right. Thank you. So operator, please go ahead and open the lines for the analysts.

[Operator Instructions] Your first question comes from the line of James Faucette of Morgan Stanley.

I wanted to ask about your partnership with Walmart and OnePay that was highlighted in your prepared remarks and slides. But wondering if you can give us any insight on how that's developing so far in terms of adoption, credit quality, even if just directionally?

So to answer your question, the OnePay, Walmart relationship is really going well. I think we are firing on all engines. External data, you can see that we've basically taken up the vast majority of volume with that relationship. And so we're moving forward really nicely.

Generally speaking, it's going to plan with regards to the type of consumers we're seeing. And I think we're just seeing many, many opportunities, James, for us to continue to develop that relationship with OnePay and Walmart.

Our next question comes from the line of Jason Kupferberg of Wells Fargo.

I know you asked one of mine already. But let me ask you this, just on the fair financing side, I think you said you're now at 18% of your merchants. And I was wondering what percent of your total GMV those merchants represent? And then just any targets, where does that 18% penetration rate go to potentially over the next year or 2?

Because obviously, that should ultimately be pretty accretive to the TM line.

Yes. Great. Thanks for the question. I don't have an exact figure with regards to the percentage of volume overarchingly.

But I can say is that as we're continuing to work, to Sebastian's point, with the partnerships, we're going to see this continue to expand, obviously, to the suitable places. But ultimately, we're seeing that we're continuing with the partnerships to be in default in more places, allowing us then to have all of our full features or product sets with each of these merchants, right? So I would expect that to continue to become a very significant number, right? Obviously, with respect to certain verticals, you would have less opportunity for that, right, with a very small ticket, high frequency.

But generally speaking, we would expect most of our merchants to be able to have that product set as well. And so it's all about just working through the integrations, working through the partnerships that we have and continuously doing that throughout our 26 markets and beyond.

Your next question comes from the line of Darrin Peller of Wolfe Research.

All right. Congrats on your first quarter out of the gate being a good quarter. It's nice to see the U.S. GMV growth continuing to accelerate during the quarter.

So if you could just touch on the key drivers here again. I know fair financing is one of the main contributors, but anywhere else you're seeing the momentum? And what's the sustainability of that? And I'll just ask my two together.

Just one more is on PSP default partnerships. I know that was clearly an exciting opportunity in terms of TAM. So how are the partnerships ramping in line? Are they in line with your expectations?

Just a little update there.

I think that the -- when it comes to the partnerships, as we said, like we concluded a few years back that like growing merchant-by-merchant is just not going to scale. You're going to have to work with PSPs. You look at the Stripes, the Worldpays of the world, JPMorgan Chase, all these guys, they have trillions of dollars of volume, right? So finding out ways to work with them, finding good partnerships and then also not just becoming an alternative that has a small 1 percentage of the volume, but actually coming default is super critical.

I think one of the things that actually doesn't get enough attention here is the Stripe Link partnership, which in itself is like many of you now using Stripe will notice that you have this one-click experience, not that dissimilar to what Shopify does and others. And the benefit now is that Klarna is the main provider of that, which means that everyone getting a Stripe Link gets the option to use our buy now, pay later, which becomes an even faster way to reach all of the Stripe merchants that offer that already. So all of this is just like different ways of distribution of Klarna. Another one in Europe, which is actually important is this Vipps announcement.

It might sound small, but it means it's opening up for third-party partnerships with local schemas, with local payment schemas and so forth. So all of these things are going to -- but the difference with this kind of growth is obviously, it's not like you launch and then go live and everything. These are like long-term strategic relationships, you need to sign the contracts, you need to find the reasons for them to do it. You need to set up the technical integrations.

And as you will be familiar with, some of these companies are M&As. So they will have different tech platforms for different subsets of the volumes. So you need to integrate on all these platforms. But what we're happy about this is we think it's like setting a foundation for long-term growth of the company.

And we can see that clearly now is the ones that already are live like the Stripe you saw on the slide or the Apple Pay and so forth, that is actually starting to really be visible in the growth of both number of merchants and volume. So we think this is nice because it sets the foundation and will continue. And there's really no reason why we would -- this would stop or anything. We're on a good trajectory here and things is going to continue.

I think that's been very important for the U.S. The other one is making sure that we actually then offer all payment methods, not just one, as you saw. And then the third one, which we're super excited about, is that card growth that has already outcompeted globally -- on a global level, one of our competitors there. But also even on the U.S. level, we think fairly soon, we'll be able to catch up.

So I think that the -- there's good belief to be optimistic about the opportunities in the U.S. in the short and midterm.

I would just add there, if you don't mind, like basically, if you think of it, there's $7 trillion worth of volume flow through these PSPs that we've signed, right? We're going to start ramping -- we started ramping up with Stripe and a few others that Sebastian mentioned. And over the coming quarters, we will continue to do so. But when we talk about something being live, yes, it's live, but there's still multiyear worth of growth here to Sebastian's point, right, which is really, I think, important to point out and highlight.

And with regards to your other question, just around verticals, I was looking through kind of -- we're actually seeing a very broad-based growth across all of our types of verticals, which just shows how we're more and more becoming an everyday spending partner.

I think it's worth highlighting as well is that in Europe, we are used to being 20% share of checkout. In the U.K., as an example, not uncommon for Klarna to be 20% share of checkout, on par with PayPal. In other European markets, we could see 40%, 50%, even 60% share of checkouts. In the U.S., it's predominantly still 5% to 10%.

This is entirely natural. This is exactly the same that we've seen over the years in every market we come in. We're at about 5%, and we start growing 10%, 15% and so forth. So also like as a share of checkout, there's tremendous opportunity to grow in that regards we believe.

And then people will have argumentations like is the same going to happen in the U.S. and in Europe, et cetera, et cetera. But from our point of perspective, there's no reason to believe that we could not achieve that, and we're going to definitely work hard to make it happen.

Your next question comes from the line of Mihir Bhatia of Bank of America.

I wanted to just maybe talk a little bit about the provision line item. And I appreciate the detail you guys went into in the prepared remarks. But maybe just to put a little finer point on it, the provisions for credit losses, they're up 17 bps quarter-over-quarter. And I was just wondering if you could talk about the drivers of that.

How much of that was new loans versus changes for the loans on balance sheet? Because just given the credit performance, it seems like a pretty big jump. Any color on how we should think about that going forward?

Yes. So I mean, obviously, we are scaling the book quite quickly, right? And so given that the vast majority is really on -- is really with the new cohort of growth that we're seeing, right? I would expect that to kind of move -- over time, start normalizing, right?

But I think given the speed and the size and the opportunity and the fact that we can continue to compound with so many new merchants through the partnerships that we have, I think it will take a multi-quarter view for us to fully kind of get into a more normalized mix, if that makes sense, Mihir.

Well, we think it's very good. It's very healthy. It's like a subscription business. You should take the marketing cost upfront and you have revenue over the lifetime of the customer.

And that's the same thing we're doing here. I mean the dominant impact on that line is because we're taking the cost upfront while the revenue is coming in over time. And so that makes a lot of sense. Obviously, some of our competitors, when they sell more of what they generate, they book both the cost and the income immediately.

But we also know and you -- many of you will be aware that, that is also less affordable. It is actually more profitable to do what we're doing and putting it on our balance sheet. So it's a trade-off between how much we sell off and so forth. But from an accounting perspective, this makes a lot of sense.

This is diligence. This is smart and thoughtful to do it this way. And for us that have been -- myself been with Klarna for 20 years as an investor, a shareholder, I've seen us go through these cycles. And as you start growing fast because of the number of merchants that we've added on financing has doubled, then you're going to see these short-term profitability lags' implications on the P&L.

Understood. If I could ask a follow-up just on Southern Europe, pretty strong growth there. Anything in particular -- anything to call out there on what's driving that growth?

Yes. I think that the -- thank you for highlighting that. We actually -- we spent, I would say, 2022 and '23, Sykes, our Head of Commercial, spent a lot of time on really setting the foundation in Italy, in Spain, in France, in these large markets that at that point in time, we hadn't really been as successful in, and we hadn't yet outcompeted the local competitors that existed. And it's really nice to see that pay off.

I think one thing that's underappreciated about Klarna is global coverage. And the point is if you're talking to retailers across the world, if you're talking to Sephora that's operating obviously in all these markets, it just has such a tremendous value to be able to work with one provider as Klarna across all these markets. I remember clearly being in a meeting with IKEA and they once said to me like many years ago, "You moved from the local payment method to the regional one." And I was like, "Yes, but here's global with PayPal. How do I get in that quadrant?" And now we are, right?

And what's helpful about that, obviously, we also have salespeople on the ground across the world, right? So we have people in Barcelona, we have people in Tokyo, we have people in Portland, next to Nike. We have across the world, over 40 locations. They sit close and work with these retailers.

These are long-term relationships, and we make sure that we're live with these merchants across all markets. So we're getting a lot of value of that in these markets like France and Spain, Italy because they just roll us out. And that allows us to be very competitive on a local level as well. And I think that's being seen.

But we actually think there's more potential there. There's more work to be done on improving the quality of the product and so forth. So we think there's a good potential to continue growing in these markets as well. But very helpful to have this global distribution partnership with people like Stripe and others who are going to automatically turn us on in all these local markets.

Next question comes from the line of Nate Svensson of Deutsche Bank.

Congrats on getting out there with the first quarter. I wanted to ask on the Elliott partnership that we saw the news come across this morning. Maybe you could talk a little bit more about the process to bring them on board? What they saw in Klarna to get them comfortable?

Why you decided they were the right partner? And then I guess we saw that $6.5 billion number there. Does that give you enough runway to meet your ambitions for U.S. fair financing? Or do you think you're going to have to additional partners?

And then sorry for making it a three-parter, but just on the revenue recognition, there. It sounds like you will be selling some of the back book over. Should we assume the entirety of the front book will be sold to Elliott? Sebastian, I think you had mentioned making this decision between how much to keep on, how much to sell.

So just more details on the revenue recognition from that partnership would be helpful.

Sure. Great. So yes, I mean, Elliott is a great partner, and we work with them on a number of other transactions as well. I think generally speaking, it's always going to be a balance for us between profitability, ensuring that we can continue to grow and ensuring that we don't dilute our shareholders in that growth through the capital given that we're a bank, right?

So those are really the three vectors that we think about. And I think this is a great partnership. Elliott is a strong partner. They understand us.

They know us well. We've done other transactions with them in the past. And from our perspective, this one is a really, really good partnership. I do believe the runway that we have with our growth potential that we've just spoken about here will give us an opportunity to continue to do more of these things over time, right?

And again, thinking about those three balances of profitability, ensuring that we minimize dilution to shareholders, grow the best return on tangible equity while also growing the business in the size and ensuring that we can do that. So I think that's really the economics around it.

Thanks, Niclas. I'm going to take, again, since some of the analysts sort of just ended up sending us the e-mails. So Will Nance from Goldman Sachs is asking, could you talk about your engagement with merchants around advertising into the holidays? Where are you now? And where do you aspire to be in terms of merchants viewing Klarna as a way to drive sales and engagement with consumers?

Yes. So I think that this is actually one of the things I'm very proud and happy about, and I think has made a big difference in this -- we were talking about this customer obsession work. You saw me presenting a little bit on how we do it. You saw those customer interviews that we do and we review all the experience and so forth.

And a big part of that is obviously feeding actionable insights, not only for us, but also for our partners. So what we do out of that process, we come and we recognize like how could we help Sephora grow their business? How could we help Etsy grow their business? How could we help eBay grow their business?

And this generates like very, very concrete advice and suggestions of changes, of improvements, marketing campaigns, to your point, and so forth. And that's what our sales teams are then interacting with. And we've seen a fantastic uptick in trust and people wanting to listen because I think maybe more like every other traditional company, we used to come and say, "Hey, we have this idea, and this could have this impact, and it could be like something more complex." But now we're coming with like super concrete, real well-explained, very, very high-impact changes that can be fixed, and we're seeing that having a very dramatic effect.

So -- and marketing activities is obviously a big part of that. There's tons of things we can do like how we position the payment method, how we show it on the website. And obviously, 0% financing, fantastic opportunity, one of the things that I think Klarna has underinvested in, and we are now really ramping up and making sure that we're offering. I think 0% financing is such a fantastic opportunity.

A lot of merchants and a lot of brands want to offer affordability without lowering their prices. And also, what we see is that 0% financing is driving a fantastic audience to Klarna because it attracts a more broad spectra of FICO scores. So it is fantastic in many, many ways. And that's going to be a continuous focus with our partners.

You're going to see us do a lot of things in 0% financing.

Fantastic. And I think we have time for just one more. It comes from Rob Wildhack at Autonomous. And the question is, wonder if you could talk about the transaction margin by product.

What kind of transaction margins are you seeing on the U.S. fair financing volume? And how should we expect them to -- the mix to impact the overall transaction margin as you grow that product? Where does that transaction margin settle out at steady state?

Yes. Good question. I mean, look, there's a lot of different products that we're launching, right, and that we're working and building that are new, whether it be through the card and otherwise. But let's talk about fair finance because you mentioned that one.

So generally, we target between 3% and 4% transaction margin dollars. I think that's a fair approach. And as we continue to ramp, that obviously will be accretive to the overall portfolio. But again, at the same time, we're also, to Sebastian's point, building out the pay in full elements and such, right?

So we are going to have variations to that. I think the key thing for us is really can we serve as much of the customer share of wallet as possible and are we relevant in every single time that they want to make a payment as an everyday spending partner. That's what we really need to focus on. Then as you know, we've spoken about this before, it's all about having a very trend-based focused model, where we look at how we're developing over time, given the fact that we are growing in 26 markets across -- with 114 million users or consumers and with so many merchants, right, and across so many vectors.

So we're going to continue to kind of do that. And as we guide, we'll guide towards the transaction margin dollar growth basis on a volume view rather than trying to just nail down a particular unit economics on one or another.

All right. Thank you so much. And with this, we conclude the call. We thank everyone for joining, for putting up with our technical issues. And with this, we conclude the call. Thank you.

Thank you so much.

Thanks, everybody.