Q4 2025 Earnings Call Transcript

Hello, everyone, and welcome to Klarna Fourth Quarter 2025 Earnings Call. My name is Filippa Bolz, Head of Communications at Klarna, and I'm joined today by Sebastian Siemiatkowski and Niclas Neglen. Our Q4 results were released at around 7:30 a.m. Eastern Time, and they are available on our Investor Relations website.

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 in 2024. [Operator Instructions] Before we move to Q&A, we will begin with a short presentation. Sebastian, please go ahead.

Thank you for joining Klarna's Q4 earnings call. Klarna is accelerating its growth of our banking relationships and our revenue per customer. Millions of consumers are adopting more of our services, the Klarna Card, Klarna's Deposit accounts, Klarna Fair Financing products and, of course, our well-known buy now, pay later services. Now this is exactly what we had planned for and wanted to achieve.

And in Q4 2025, the adoption of these products accelerated beyond our expectations. As we scale this business, delivering on profitability is a key priority. In Q4, we delivered. Active consumers reached 118 million, up 28% year-over-year.

Merchants grew to 966,000, up 42% year-over-year. GMV came in at $38.7 billion, above the top end of our guidance and revenue grew 38% to over $1 billion, also beating guidance. Now let's put these numbers in perspective. We are a bank with an exceptional network that is growing at 38% revenue year-over-year.

In '25, we did over $127 billion worth of volume across 26 markets and across 3 continents. And we're growing exceptionally well on every top line metric, cementing our U.S. as well as our global leadership position. Transaction margin dollars before provisions grew 31% to $622 million, an acceleration of $107 million versus prior quarter. And after provisions, transaction margin dollar was $372 million, up 17% year-over-year and up 28% sequentially from Q3. Now the fact that transaction margin accelerated quarter-over-quarter points to the compounding nature of our model as more of our cohort's mature revenue and it's compounding at a faster rate.

Now I want to be direct and transparent. This quarter's transaction margin dollar result did not land where we guided. We take that seriously. The acceleration in lending growth is the primary driver of that outcome.

Now let's look at an illustrative example of that to understand the impact I'm speaking about. In this example, we have about $1 billion of loans originated. The lifetime profit of these loans, you can see on the left-hand side is $100 million in revenue, while your provision would be about $40 million and you would have other costs of $25 million, resulting in a net profit of $35 million. Now like all banks, we recognize these loan cohorts over a period of time.

In the first quarter, as you can see on the right-hand side, we would recognize a fraction of the revenue, but we would recognize all of the expected provisioning upfront. This results in a first quarter transaction margin dollar drag of $25 million, as you can see on the red there. During the remaining quarters, we recognize the remaining revenue as well as the other costs. So the resulting lifetime net profit remains the same $35 million.

It is simply spread over time and we see a $60 million positive impact on the P&L for the remaining quarters. This effect in the first quarter happens even when the underlying economics are strong and credit quality is stable. This is value creation that is deferred. For every provision we book today, we gain a future profit stream.

Now let's take a Klarna example. For $2.5 billion of U.S. Fair Financing portfolio originated this quarter, Q4 '25, we booked $80 million in provisions upfront, and we recognized $40 million in revenue. So yes, this quarter, that's a $40 million headwind.

But there's an additional $180 million of interest income still to come, while the cost, the expected credit losses have been provisioned for already. Just to repeat, faster growth, faster adoption means lower upfront transaction margins and operating profit. So when you look at our Q4 transaction margin dollars of $372 million, this primarily reflects the fact that the adoption of our expanding set of banking services are growing faster than we expected, including Fair Financing, GMV currently growing at 165% annually. At the same time, to support our accelerating growth in a capital-efficient manner, we ramped up our loan sales.

And in Q4 '25, we initiated our first Fair Financing forward flow with $73 million of gain on sales recognized in Q4 '25. Continuing this strategy will further accelerate our profitability improvement in '26. Now let me speak to exactly what that growth looks like and why we're so confident in our strategy. Our partnership strategy, as described on our previous earnings call, continues to compound and support our long-term strategy of being ubiquitous everywhere as our payments network expands its acceptance points. Over the year, we added 285,000 merchants, up 42% year-over-year. We continued to scale our default relationship with Stripe.

We began the default-on rollout with Nexi through Paytrail, and we expanded Apple Pay and Google Pay into additional markets. We also launched new partnerships with Emirates, LEGO, Vinted and StockX, while further deepening our relationship with large global merchants such as Walmart, Lufthansa and Etsy. At the same time, we're accelerating our product ubiquity, ensuring that we have relevant payment options wherever the consumer shops. We doubled the amount of merchants where fare financing is available and continue to expand our pay in full product to almost half of our total merchant base.

The benefit of building that network, close to 1 million merchants globally across 26 markets, online and offline, is that we've already captured the hardest thing to win, the consumers everyday spend. The checkout moments where trust is built, and that is the foundation. And now we're leveraging it. Once you have the everyday spending relationship, once the consumer is using Klarna 10, 15, 20 times a year at checkout, the step into a banking relationship is natural, low friction and extraordinarily cost effective.

There is no cold start. We already know these customers, and they already trust us. And in Q4, this played out at an accelerating pace. Active card users grew to 4.2 million, up 288% year-over-year.

Consumer deposits reached $13 billion, up 37%. And our most engaged consumers, the Klarna banking customers, reached 15.8 million, growing at 101% year-over-year. This growth is not linear. It is compounding as we build deeper relationship with our consumers.

Let's deep dive into a comparison of that total consumer base versus the banking consumers that have adopted more of those banking products. Our base of 180 million Klarna consumers is growing at 28% year-over-year and transact about 10x a year with us. They have an average revenue per user of about $30. But now look at what happens when that relationship expands into a deeper banking relationship. Those 15.8 million consumers transact nearly 3x as often, 28.5x a year with an ARPU of $107. The average deposits jumps from $64 for our paying customers to $475 for our banking customers.

And credit balances remain modest. Compare that to any credit card bank that would usually be at about $6,500 or 10x as much. And the charge-off rate moves from 0.6% to just 1.1%, a fraction of the 4% to 5% you would see at normal standard credit card banks. So more engagement, more revenue, disciplined risk.

That's the conversion we're driving, and it's why we're leaning into this growth despite the near-term provisioning drag. Now this expansion of our banking product is built on our transaction relationship with our consumers and the knowledge we have built around risk management for the past 20 years. Our proprietary underwriting systems that we've developed underwrite every single transaction. We don't issue revolving credit, and we leverage our deep understanding of our consumer spending habits as well as external data.

The result is consistent and stable charge-off profiles as evidenced by the stable 3% to 4% charge-off rates for our U.S. Fair Financing product. And we are delivering all of this with a fundamentally different operating model. Leading into technology allows Klarna to deliver a range of services with a headcount that is a fraction of the size of a traditional bank.

Klarna's success is built on talent density and relentless focus on efficiency, and we believe this is a lasting competitive advantage. Now look at this, revenue per employee now reached $1.24 million in '25, a 3.6x increase since '22. And critically, we've reinvested some of these savings back into our talent. That's the operating leverage that compounds alongside the banking growth I've just described. Since 2022, we have accelerated our revenue growing 104%, while at the same time, managing our adjusted operating expenses effectively as it has declined by 8%.

In 2026, we expect to continue to expand revenues faster than our operating costs as we focus on building the consumer bank of the future. As we provide 2026 guidance for the first time, we are incorporating this growth trajectory and the associated timing effects, while being disciplined and realistic in how we frame expectations. The underlying trajectory, revenue compounding, cohorts maturing, a lean cost base give us confidence in the path ahead. Thank you.

Thank you for that presentation. We'll start with 3 investor questions from Say Technologies. The first question is from Shubhayan. When are you planning to become profitable? Klarna's share price has declined since the IPO and investors aren't happy. What changes do you think may be needed in the organization or the product?

That's a great question. So as our illustrative example showed, this is how the dynamics work in general. Every additional $1 billion in loans that we add in a single quarter will reduce TMD or transaction margin dollars by something like $25 million that same quarter, but it will increase transaction margin dollars by $60 million in the upcoming quarters. So the more we grow in these books, especially the more profit we're generating for the future.

So the real question is simply, do we want to make more money even if it means slightly less today to make significantly more tomorrow. You might also though ask, obviously, for how long. Well, the good news is we have natural cushions. As we sell more loan portfolios where revenue and costs are recognized immediately, the timing effect diminishes.

We did $4.5 billion in Fair Financing last year, growing 165%, winning deals like Walmart and rolling out across all Stripe merchants and so forth. So as these growth rates obviously eventually will normalize, so will this dynamic. Some of you may even remember JPMorgan Chase faced this, Jamie Dimon famously said on the Sapphire card that he wish he taken twice the losses. This was 2017, slightly different rules, but the same concept.

So the question becomes, given that we can issue those additional loans, should we? And as a shareholder, at least my answer is an absolute yes. Klarna has issued over $0.5 trillion in loans over 20 years with record low losses across that entire period. That's a proven underwriting machine.

And when we have the opportunity to deploy that machine and create significant value, we should. In addition to that, to answer the question even more specifically, Niclas will speak about our guidance soon to give you a more concrete answer for this year.

Thank you. The second question is from Marc. How will you prioritize capital allocation between reinvestment, debt reduction and shareholder returns over the next 12 to 24 months?

Well, I think it's -- we're seeing really fantastic growth here, and we're seeing an amazing acceleration in the adoption of our banking products. And you may, at the same time, some of you may have picked up that we have a rapid product announcements, and we're basically quickly closing any feature gaps to both neobanks and incumbents alike. All of this while being disciplined on costs. So the outcome of this translates to more revenue and more profit.

And when it is in the books, we can also discuss what we will do with it.

And the third and final question is from Adam. With the 102% surge in credit loss provisions reported in Q3 '25 still weighing on sentiment, what are the latest delinquency trends? And how confident are you that provisions will stabilize or decline as a percentage of GMV heading into 2026?

Thanks, Filippa. That's a great question. From a credit perspective, what we're seeing is actually stability, not a deterioration. Provision credit -- for credit losses actually declined in Q4 versus Q3 from 0.72% of GMV to 0.65%. And that really reflects both a stable delinquency trend and an impact of the increased loan sales that Sebastian previously explained.

Thank you. We will now move to questions from the analysts. [Operator Instructions] Our first question comes from Sanjay Sakhrani at KBW.

I appreciate all the commentary. Niclas, do you mind just digging a little bit deeper into this quarter's impact from the excess loan growth? I'm just trying to parse apart sort of the provision related to credit versus the provision related to growth that sort of speaks to that mitigating impact on transaction margin dollars. And then maybe if you could talk about how it might affect 2026, that would be great, too.

Great. Thanks. Sanjay, thanks for the question. Look, I mean, in Q4 '25, and I think the dynamics are here are twofold, right?

You're seeing a very strong growth and seasonality that drove significantly higher pay later volumes, and those are on our noninterest-bearing loan product, right? These are actually classified as sold or held for sale as part of the cost of funds, which you can see in the broken-out report that you have on the CFO letter, right? And these loans are actually primarily sold through our forward flow programs. And so those loans are measured at fair value.

And so the result is that you get a fair value adjustment that is substantially offset by a corresponding reduction in the provisions for credit losses. And while you then see the credit losses that we have today, primarily then driven by Fair Financing. And if you think about it, right, and we've broken out the Fair Financing volume as well in the back end of the paper. But ultimately, what you're seeing is a mix shift towards Fair Financing that was stronger than what we had expected as we're seeing more and more banking consumers coming with more banking product with us.

And that's really what's been driving that. '26, we have a guidance there, and I can take you through the details of that. But ultimately, we're seeing similar trends there. Year-to-date in January, we're seeing good, moderately stronger growth than in Q4 '25. And so I think we're heading in that right direction from that perspective.

Perfect. Thank you so much.

Okay, great. Maybe just one follow-up.

Okay. Go ahead.

Go ahead. Go ahead, Sanjay.

Sorry, I didn't know if I could ask to. Maybe just one quick follow-up for Sebastian. I mean maybe just how you feel like the Walmart rollout has played out, if you're happy with it and sort of any traction otherwise you're seeing in the United States?

No, I think Walmart is obviously one great accomplishment, and it's looking really well when you look at the rollout. But I think that what excites me the most is the strategy that we set up that we're executing on, which is to become a truly third-party network and rely even stronger on the distribution of our partners, be it JPMorgan Chase, be it Stripe, be it Adyen and so forth. And that's why you're seeing these acceptance points and merchant numbers coming up so much. This is also why you're seeing Fair Financing growth because not all of our merchants historically have that.

And the way we now work with our distributors is we try to make sure that they offer all of our payment methods. So not only is it about number of merchants that accept us, it's also about making sure that pay now, pay in later as well as Fair Financing is available at every checkout. So there's always a relevant payment option independently of what the retailer might be selling, everything from furniture to games. And so -- and that's really what's kind of -- what is the foundation of this growth.

But at the same point in time, it's early days. A lot of these large distributors of ours are still implementing, still taking us live and so forth. And that's why we're very pleased about this because we know that this will continue to drive very solid growth for us in the coming years. So very happy about what we've seen so far with Walmart and also generally seeing the effect of this both in the U.S. and then globally as well.

The next question comes from Will Nance at Goldman Sachs.

I was wondering if we could drill down into the transaction margin expectations for the coming year. As we look at the guidance that you guys have laid out, it seems like transaction margin is coming in roughly 10% or so below current consensus expectations and hear you on sort of the front-loading impact of provisions in GMV. But when we look at the first quarter, GMV was much closer to the guide, whereas transaction margin was something like 3, 4 points below. So I guess with that context, can you talk about the transaction margin trajectory that you are expecting now versus what you had previously expected?

What are the changes? And how do you think about the path to getting towards transaction margins in the kind of 115% to 120% range where the company had operated historically prior to the big expansion in lending?

Sure, Will. Thanks a lot for the question. I appreciate that. So maybe just before kind of answering you specifically, I think it's good for me to just take you through our thoughts on the guidance and how we've kind of thought about it.

So I'll start with that a little bit. Start with the first quarter, right? So we've -- like I said, already entered 2026 with a strong momentum. We're tracking modestly ahead of Q4 '25 levels already.

The banking products, fare financing, the Klarna card, et cetera, remains the primary driver of that growth, and we're seeing that continued strong adoption, right? So that is one element of what we're seeing into '26, right? Our forward flow programs, which are providing that kind of capital-light foundation for the sustained higher growth, we actually expect to continue to execute some of these agreements throughout the year, including one in Q1, and that's actually reflected in our transaction margin dollars and our adjusted operating income ranges for Q1 as well. Transaction margin dollars as a percentage of JV is also expected to be broadly consistent with Q4 '25 as we continue that investment in supporting the rapid scaling, right?

And so what you should be able to see then when we get into 2026 in full year, right, you're going to see that GMV growth and revenue growth in line with 2025, which on the context of $127 billion worth of volume this year, I think, is very, very healthy growth. As the mix of maturing Fair Financing cohorts increase, what you're going to see is revenue compounding through the year and transaction margin growth accelerating into the second half. And that's really the natural payoff of that upfront provisioning model, which you highlighted yourself, right? So adjusted operating income margin is expected then to become greater than about 6.9% as we continue to have that revenue and TMD outpace the growth of our operating costs, right?

So ultimately, in very simple terms, when you look at transaction margin dollars, it is really a mix question of the geographies we're growing in, but also in regards to how much Fair Financing that we're doing as part of that banking evolution that Sebastian spoke about.

That's great. I appreciate all that color. And just you mentioned the offloading dynamics starting in the first quarter, likely continuing for the year. I was wondering if you could provide your latest thoughts on just expected offloading on the Fair Financing book in the U.S., maybe relative to the amount of loans sold in the quarter.

Is there any kind of parameters around percentage of production sold that you guys are targeting for the full year as we just try to true up that part of the model?

Yes. So we're not going to give exact guidance because we are really commercial in the way that we think about this. We have some great partners that we work with in this regard, but we also want to be sure that we balance it, right? So my expectation is that we're looking at the transaction in Q1. If you look at Q4, we sold about $1.6 billion.

This transaction will be slightly smaller than that, right? And so what we'll see is through the year, as and when it makes sense to do these sales, we will be executing them, and that might change depending on quarter-to-quarter, right? So that's probably the best I can answer at this stage.

Over to our next question, which comes from Jason Kupferberg at Wells Fargo.

So can you just talk maybe a little bit more specifically about what you're embedding in the guidance for 2026 for Fair Financing, specifically just in terms of loan growth there? I mean, obviously, you're going to lap Walmart later this year, but I would like to get a sense of what's assumed in the initial outlook here.

Yes. So we're not going to give a specific split, but what I can say is that we're going to, from an absolute volume base, accelerate in comparison to 2025. Now as we go through the year, just given the fact that we started where we started and have been scaling so quickly, the year-over-year percentage comps through the year will kind of pan out or it kind of decelerate to some extent, right? But that's from a percentage perspective. On an absolute basis, we're continuing to compound.

Okay. Understood. And then maybe one for Sebastian, just big picture. On agentic commerce, I think a lot of debate out there about what branded button presentment and prominence might look like in a truly agentic world where transactions are being completed natively on an AI platform.

How is Klarna thinking about that, preparing for it? Obviously, you guys have announced some partnerships, but would just love to get a sense of what your crystal ball is in terms of what consumer checkout experience might look like in that scenario down the road.

Thank you, Jason. Fantastic question. Look, I think there are many ways to answer that. I try to keep it short.

But first and foremost is that like we have believe that this is the evolution of e-commerce for a long period of time. That's been part of our thinking. As a consequence of that, we have thought it was very important to have the partnerships and distribution of people like Stripe and Adyen since those are often the companies that people go to, to implement agentic commerce. And so by making ourselves default and always available in all these points, that makes us like always available in those points as well.

In addition to that, you see things like we launched with Apple Pay and Google Pay makes us again available everywhere where those are being used, which again then gives us additional coverage in this. But then obviously, we also court the big AI companies, and I can't promise anything there, but like obviously, that's part of what we do as well in that sense. I think the additional thing that I find very promising is that the conviction that we have which is that buy now, pay later is a healthier form of credit than credit cards. The fact that it's interest-free, fixed installments and so forth.

This is truth. And then sometimes people write about different things in media this and that. But the truth is if you go and ask even the big AI companies, which form of credit should I be using, which is the one that's most healthy. It will recognize the benefits that buy now, pay later provides.

And so we think the fact that we have a healthier product also means that even AI will recommend to rather use this one than revolve at 30%, right? So I think like all of these combined, these are the -- we feel that we're very well prepared and that we are in a great position as this agentic commerce rolls out.

Our next question comes from Harshita Rawat at Bernstein.

So I want to ask about the competitive environment. Some of your peers have talked about intensified dynamics in Europe and the U.S. Maybe talk about what you're seeing in the market? And then also maybe comment separately on the consumer kind of I think there's concern around continued kind of pressure on the low-income consumer.

What are you seeing and hearing from your customer base, both in the U.S. and Europe?

Harshita, Sebastian, I'll jump in on that one. Let's start with competitive. I think that the -- I feel very, very confident on this topic. And the reason again comes back to what we said about our partnerships.

It was always very critical to me to become a global payment solution. So many times, we talk to merchants in different markets, and they look for global solutions. And now Klarna is perceived as a global solution, which means that we get tremendous benefit from working with everyone from an H&M to Shein to a Walmart to Sephora. The fact is that they can work with one party that can offer pay now -- buy now, pay later and fare financing across all of these jurisdictions.

This has not been -- even look at the big home electronics manufacturers, none -- that has never been possible before. So the geographic coverage means a lot when it comes to signing these deals, and it's unparalleled. Nobody else in the industry has the geographical coverage of Klarna. So you will always find individual companies and individual markets, but that is just giving us such a tremendous strategic advantage that we see.

And that's also super critical when we work with the Stripe and the Adyen of the world because there -- it's also for them much more interesting to launch with somebody that can offer their services at such high global coverage. So I feel very, very confident in our continuous ability to grow and preserve margins throughout. Now when it comes to the consumer, we are very confident and feel very solid here as well. What we're seeing is that, again, the audience that uses our product is an audience that is what we call the selfaware avoiders.

These are financially conscious, both American consumers and European consumers who are actively keeping away from credit cards, who are borrowing much less. Their average balance may be on a credit card, people would have $4,000, $5,000. As you saw in our presentation, a pay, what we call a Klarna paying customer has $100. A Klarna banking may have $400 or $500. So it's actually 10%. And so these are financially conscious customers. They enjoy the fact that our products are 0 interest, fixed installments.

They find them as a healthier alternative, and they're also keeping their economy in better shape. So we see good performance. We see that they are shopping as they used to, they're spending as they used to, and they are also borrowing responsibly, which we appreciate and find is important.

The next question comes from Darrin Peller at Wolfe Research.

I really just want to go in a little bit more maybe for Sebastian on the tools. But basically, the idea of where you believe the right balance should be between lending and interest income and transactional streams. Just as far as the company's longer-term goals, I understand it's demand driven to some degree and to the most degree. But anything you could help us with and where you see that sort of leveling off?

And then Niclas, just maybe on a short-term basis, we're also trying to understand where we expect to see the inflection on provisions offloaded to a degree that it actually does help the TMD grow at a faster rate this year potentially.

Maybe you want to start, Niclas?

Yes, sure. Thanks, Darrin. I appreciate it. I think it's a good question.

If you look at it, what we actually are looking at from a TMD perspective is a significant uptick in growth, right? And you've seen that kind of sequential increase both from Q3 into Q4 now, right, with TMD. And I think as we continue to compound through the year, like I said earlier, Q1 definitely still has a lot of that rapid growth coming in. And then you start kind of cycling into an absolute growth balance, but then the percentages from a comp perspective kind of recede a bit into the second half of the year, right, which is kind of what I said.

So I think that is kind of the short answer to that. And I think you're going to see that continuous TMD acceleration through kind of the second half of the year, as I said earlier.

Thank you, Niclas. Sorry, Darrin. Would you mind just repeating your question for Sebastian?

Yes. I was just trying to figure out what do you guys' think is the right mix sort of in a steady state? Obviously, you're in hyper growth right now around Fair Financing in your banking products, but trying to get a better sense of where you think that should level off, where you'd like it to level off, thinking about interest income as a percentage of the mix of the business versus other revenue streams.

Yes, it's a great question. That's -- I think as a rule of thumb, even for myself, when I look at those provision for credit losses, the rule of thumb is that 80% of it is associated for kind of forward-looking, while 20% is kind of backwards looking. So to your point, obviously, as we're growing Fair Financing right now, and we're kind of in that phase of that being a high-growth product at this point in time. But I don't think that is necessarily always going to be the case.

When we look and compare ourselves to other neobanks, some of the other neobanks are much -- most of them are much smaller on the lending side and much bigger on deposits, on subscriptions, on tiers, et cetera. So partially, what we're seeing right now is just the effect of the strategy that we implemented a few years back to, again, have our partners distribute us. And you saw that number as well in the presentation that still only about 200,000 merchants offer Fair Financing of the total 800,000. So there will probably be some continuous growth there as more and more offer that product. But I'm very keen on growing the other revenue lines as well, the marketing revenue, the subscriptions revenue and so forth.

And I think that finding a healthy balance as well as deposit revenue as well. So I think over time, it's probably going to skew more again towards the other revenue lines, but that is a little bit more -- takes a little bit longer time. And it takes time, obviously, because we're a fairly big bank right now. So like even if we make changes to our products and so forth before you fully see that materialize in the numbers is a little bit further out.

Next question comes from Tien-Tsin Huang at JPMorgan.

I want to ask on the processing cost side, if you don't mind, a model question. Lots of moving pieces, I know with partner and product ramps as we've discussed here. But how should that processing line trend in relation to GMV? Any insight there to share?

Sure. Yes. Thanks, Jason. I think in -- the reality is like partially, this is a mix question with regards to how much volume is coming in from the U.S., et cetera, as well as the type of product that you take on and the tender of that product.

So in the short term, you're going to see something similar to this that you've seen through 2025. But I think the evolution of this in the longer term or medium to long-term, right, is very much one of the -- and you've heard Sebastian say this before, one of our focus areas is really to find ways to improve that line, right? And so we are actively looking to find ways to get that trend line to move in the opposite direction, not only purely from a mix perspective, but actually getting things like now that we -- now we have a current account, we have the balance, et cetera, and we're starting to see refunds come into our accounts, which obviously then reduces the requirement for us to use other rails.

What we have slightly working against that right now is also that we have more card issuance, right, as more and more consumers are using us. So similar to some extent, similar to the Fair Financing upfront provisioning, we are making some investments here with now over 4.2 million active card users, right? We are seeing a lot of growth, and that obviously has a bit of cost in the upfront. But what we actually are creating is a very sticky consumer that's going to help us then to be able to drive more of the transactions within our own rails, which will help to reduce that processing and servicing line.

And I think to add to that quickly, Tien-Tsin Huang, is that, I mean, we -- in this case, we're coming from Europe where payment and funding costs were virtually 0 or very low. And then we move into the U.S., and we've seen significant growth. And we know looking at other fintechs and competitors that are larger and originating in the U.S. that there are smart ways to fix this. But it's going to be a continuous focus for us to do that, obviously, because to your point, there's tons of potential in there, but we need to execute it, implement it and see the results in the financials.

Understood. So it's a work in progress. Good to know. Just quickly on the -- I think, Niclas, you mentioned stable delinquency trends. It looks like from the charts in the shareholder letter that some of the newer vintages on the delinquency side are a little steeper and higher than prior vintages. I'm just curious if there's any surprises there. Or I just want to better understand those trends.

No, there are no surprises there, right? If you look at it, again, you have to understand that we're obviously ramping quite quickly through these processes. But at the same time, you're seeing that it's very much within the trend base that we expected. And as you go -- your models, as you scale, get better and better.

And you can see that's why I actually included not only the 60 days past due view, right, which is we've been showing consistently, but I also show you the 30 days past due, where you can see that those trends are normalizing over time, right? And I think that is a really key point here, right? We underwrite every single transaction. We've been doing this for 20 years.

Yes, we are scaling the business, but what we're actually doing is doing that in a very disciplined fashion. And we have the ability with our low average order values and short durations to be able to manage and flex these models consistently, and that's really what we're showing on that page.

I think in addition to that, what's also important is that we -- the way we think about it is that we prefer starting with buy now, pay later and pay now with small value transactions, $50, $100, build a big audience of customers that we get to know that we've underwritten, that we've seen their payments performance. And then we're scaling like we're doing now for financing, where a large proportion of those Fair Financing volumes are existing customers that we already have relationships and doing underwriting for a few years. And that's a critical part of our thesis, which we think is very special to Klarna that it's important for us to be in those daily transactions, both because it grows a stronger relationship with the customer, but also means that we understand them better.

We follow them for a longer period of time, and it makes -- it helps a lot in the underwriting decision.

Yes. I would say that the vast majority of our Fair Financing that's being underwritten is with consumers that have had products -- other types of products in advance.

Moving on to Mihir Bhatia from Bank of America.

Maybe first question I had, I just wanted to start going with the Klarna card. Can you just talk a little bit more about how consumers are using the card? Is it actually becoming a top of the wallet card? Or is it just being pulled out more for financing transactions? Are you seeing differences in geographies or the types of customers use -- in -- how they're using the card?

Yes. Mihir, it's Sebastian. So I -- we are excited about it a lot. I mean I think that I probably -- I was trying to find a bank issuer that had launched a card with this kind of number of active users on such a short period of time since this basically started rolling out in summer.

I think it's actually unprecedented, which is pretty cool. We see very good usage of this product, both in the U.S. and Europe. What we're happy to see is that it isn't, to your point, only a -- or as you mentioned, it isn't just being used for like a pay later or Fair Financing card. It is actually has a very healthy proportion that's being used for debit transactions for day-to-day spend, which is exactly what we wanted to do.

So when we think about this, again, like when we move consumers that we call them the Klarna payers to the Klarna bankers, we want them to adopt more of our financial products. And that is both deposits, debit spending as well as credit to some degree and other -- the subscription tiers and the loyalty cards and the cash back offers that we do and so forth. So we're very optimistic about what we've seen so far in regards to that.

Could I just add something there, Sebastian. I think it's really critical point to make that what we're seeing is a high teens growth even in established markets like Sweden, where we have 80% population penetration. And that is very much because of the card, right? You're seeing that people are adopting us both online and offline here.

And I think that's a very unique positioning for us to find ways to grow with our customers in the way that Sebastian described, but also then ability to expand that monetization opportunity as well.

Got it. And then if I could just follow-up, I want to go back to the questions around the trajectory of transaction margin as a percent of GMV or revenues, however, you want to answer it. But look, I think I hear you regarding the mix and the Fair Financing growth pressuring 2026 margins a bit. But I guess, like when does the delayed profit from the back book start to offset some of that growth?

Like how are you thinking about those margins maybe as you go out a couple of years? Where do you think transaction margins should settle out? Like your competitor has obviously given some guidance. And I was just wondering if you have a view on that, like where transaction margin as a percent of GMV should settle out medium to long-term?

Okay. So I think TMD, generally speaking, right, is now moving towards -- and we're not going to give like longer-term guidance and beyond 2026. But I think we gave some frameworks previously -- and we've talked about the range of somewhere between 1.5, 2 percentage points. But again, like the key thing here is the mix of the revenues that we've got, right? And so the way I would think about this is that we can really think about what is the trajectory of the Fair Financing element of this and how that is moving forward and scaling.

And I think as we get an understanding of the abilities of balances of this, we will see how those things proceed.

Moving on to Robert...

Maybe I can add something on the topic, just if you like -- I mean, generally speaking, Klarna has always seen over my 20 years is that you either go through high-growth phases. When you go to high-growth phases, you always see slight temporary deterioration in GMV and margins, et cetera. And then as you kind of mature a little bit and growth comes down, then profit transaction margin dollars return. So this is always a continuous discussion because when you grow faster, then as we've seen, for example, the accounting that was described and so forth, and this always results in these kind of effects.

So that creates a lot of confidence for me.

Sorry, I think -- yes, that's a much better answer to the question. I think from the perspective of long-term guidance, I think the key thing is we're focusing on '26 right now and how we're thinking about the transaction margin there is really how you should all be thinking about it.

Moving on to Robert Wildhack at Autonomous Research.

You've talked a lot about the upfront provision for banking services. And I guess in the letter, those banking services include Fair Financing, but you've also got some products in there that at least to me, would seem lower loss like the card and savings. So that's -- I think the thing I'm having trouble understanding is like how does -- fare financing was always going to grow this year, but then you're going to also grow into products that would seem to have a lower blended loss content, yet there's more pressure on the transaction margin, not pressure, but it doesn't go up as much in '26. So how do you square those 2 things?

Yes. Thank you, Robert. Great question. Look, I think that the 2 things are important here.

The -- what surprised us was the embracement of Fair Financing among our customer base. So more people took up this product than we expected. And hence, on the transaction margin dollar, you saw more negative pressure because of that upfront booking, which is the primary driver of that. So that is it.

But to your point, we're also seeing all these other products growing really well, the card, the subscriptions. Now ironically, they also come with a slight additional upfront cost. For example, every time we issue a card, there's costs associated with that at the front end of it. So each one of those, but those effects are obviously more limited.

So we think that you're going to see a positive impact that's going to come as those products have also been growing. I mean the subscription products and so forth. So I feel quite optimistic here on this topic as well. I don't know if you want to add anything, Niclas to that.

Yes. No, I agree. I mean the subscription; we're already seeing a huge amount of people coming in. We have about 3.5 million already, and we're seeing that just expand on a monthly basis. So those revenues will start building up over time through 2026 as well.

Okay. And then I see the negative fair value adjustment on pay later in the funding costs. Given the short duration there and your ability to grow deposits and the balance sheet capacity you have, what's the benefit of selling pay later at a discount?

So the vast majority of the economics of that actually sits in the merchant discount rate, right? And so the purpose of this is really from a liquidity as well as from a capital perspective. We've done a few of those, and we may do some more in the future. But ultimately, the key thing here is really to be able to balance how much return I get from every asset that I get in.

So there's also a value to Sebastian's earlier point of holding Fair Financing that generates a higher yield as well. So it's constantly a mix of ensuring that we keep ourselves capital light that we can continue to grow and expand as much as possible. But we want every tool in the toolkit, and that's why we've leveraged this type of transaction.

Moving on to Nate Svensson at Deutsche Bank Securities.

Maybe I'll sneak in 2 here. Then some questions on the competitive environment, agentic placement. Maybe a related question on that is just the topic of exclusivity, which I think is probably worth exploring in light of some recent comments from your competitors in the U.S. I guess our understanding is that exclusivity is more the exception than the rule in the industry.

Obviously, you guys have Walmart. I guess just in light of what we're hearing from competitors, do you think that dynamic is going to change? Is Klarna going to try to go after more exclusive deals? Or is something like Walmart once again kind of more the exception than the rule?

And then briefly, maybe this one is for Niclas. Just on funding costs. I know earlier in the Q&A talking about funding costs moving from Europe to the U.S. that went up again quarter-over-quarter in 4Q, presumably because of the continued fast growth in the U.S. Just wondering how we should think about funding costs as a percentage of GMV in 2026 as the year progresses.

I can start. Nate, thank you for the question. Look, I think it is -- I think that this exclusivity -- I mean, sometimes it makes sense to sign those, but I always tell my sales guys that like the best competitive advantage comes if we're the most preferred payment method in the checkout by the consumers. And so as much as sometimes it could make sense tactically to enter such deals, we don't mind being side-by-side with others, just like Visa has been side-by-side with Mastercard or Amex has been side-by-side with them for a long period of time.

So instead, what we focus on primarily is that there's always customer preference. And we know by experience that there are some merchants that even offer 3 options, for example, within the buy now, pay later space, and we see that we get -- we grab the highest share of checkout among consumers. And that, to me, is like the primary thing to keep an eye on. Then tactically, occasionally, it could make sense to be exclusive, nonexclusive, et cetera.

But also in addition, I mean, we see what's amazing now with Apple Pay, for example, is that anyone in the U.S. that has any card from any bank can use Klarna buy now, pay later as an example, on any merchant without -- so I think that's the right way to think about it. Build consumer preference is the key long-term strategic objective. Over to you, Niclas.

Yes. Great. Look, the reality is if you look into some of the details in the notes, you can see that what you'll see with cost of funds because we model it in accordance with the forward views on interest rates, et cetera, you would expect that to decline in line with forward interest rates, assuming that they are correct, right? And that's really how we model it.

And then like I said, we have a stable outlook with regards to the forward flows that we're doing. So those are there already practically speaking. So to me, that should be support an improvement over time, depending obviously on the interest rate base that you see, right? So that's simply where I'd say.

I think the key thing is also just to note on your comment with regards to the U.S. I think it's important to appreciate that it's not really just the fact that we're moving or we're expanding more volume in the U.S. It's actually we're expanding our volume across the board, right? We have very, very healthy growth, both in Southern Europe, but also like I mentioned earlier, in our established markets because we are expanding that banking services that we were speaking about.

Your next question comes from James Faucette at Morgan Stanley.

Appreciate all the commentary here. I wanted to follow-up on a couple of points that were made earlier. I guess on -- I want to go back to the TMD and that kind of thing. Is there a point -- and I recognize that the pace of Fair Financing growth will naturally drive [ BQs ] higher.

But I'm wondering if you could talk to us about how we should be thinking about a delinquency high watermark where you might -- if you got to that, you might feel like you were compelled to pull back on GMV. Just helping us bracket how we should think about that, especially as you continue to ramp their financing and some of the other initiatives.

I'll let Niclas answer that. James, but again, like I think it's important to remember, Klarna under the time I've been here, has underwritten $0.5 trillion with record low credit losses for that, right? So we are -- we have an extremely strong confidence into our underwriting, into our proprietary models and so forth. And as we've highlighted here, we see this as predominantly a question about timing than nothing else.

And that's the same that we think about here going forward. So yes, so I think that's the beginning, and maybe you want to jump in more specifically.

Yes, sure. James, I think the key thing when you want to think about this is that because we, firstly, underwrite relatively low average order values, and we do so on very short tenures. We have the ability to constantly adjust the portfolio, which is what we do. So it's not so much a question of like, oh, well, there's this bar for something.

It's more a question of how comfortable do we feel with those continuous cohorts that we're looking at. And we're not just looking at cohorts on a quarter or a month or something. We're looking at the cohorts literally on a weekly basis, right, and understanding the performance of that. And that's what we've been doing for 20 years.

That's what we're going to continue to do, right? And so I think we've evidenced historically, and we've talked about it before with regards to how can we adjust this and what are the impacts of those adjustments as we go along. So that's really how we think about it. And obviously, we're always trying to keep an eye on that profitability and ensuring that we do this in a balanced fashion, right?

And I think we've evidenced that we can do so over the last 20 years.

Yes. I think like underwrite primarily to existing customers keep low average balances per customer, again, $100 versus $500 on the banking versus like the big banks being at like $5,000 on a credit card. So keep like -- keep low tickets per on average and then have very short duration in general compared to other banks, right? Like they sit with credit card volumes that are commitments for -- like continuously, we have very, very short durations and have great abilities to adjust our underwriting to macroeconomical conditions.

Got it. And then I wanted to follow-up on more of a thematic question. I know most of this conversation today has been around kind of the mechanics here. But any initial takes on how unit economics in agentic e-commerce will evolve for Klarna, especially in an environment where it seems like some of the labs are charging merchants as much as 4% or more.

No, I don't think really, we have a comment on that. I mean, again, what we've seen is that like we have great distribution and we're growing. And we have -- we generally still see U.S. as a higher margin opportunity because Europe is used to seeing lower cost of payments, and that's where we've been coming competing from.

Next question comes from Harry Bartlett at Rothschild & Co Redburn.

I just had a question on the GMV guide. I mean it implies kind of a minor decel. But I just wanted to touch on your comments around the U.S. Fair Financing, Klarna card all kind of coming in above your expectations and a year-on-year acceleration.

So I guess, does that imply that maybe there's a bit of an offset in some other products or other regions? And maybe you could just give some color there.

Sure. Thanks. Harry. Look, when you look at the '25 versus '26, we are literally growing at the same pace off the back of a significant amount of volume, right?

So ultimately, when we look at these guides for '26, like I said before, we are very much focused on ensuring that we get the -- continue to grow at those paces across all these markets. And I think we're seeing very good growth across all of them.

Yes. And I would just add again, since we're coming a little bit to the end here, Harry. I think, look, looking at Klarna, we set out as an ambition to grow a global retail bank. And when I look at this quarter, I see that we're on a fantastic trajectory towards that.

We have 120 -- almost 120 million users globally, growing at 28%. We have 15 million now banking, growing at over 100%. We're seeing all the different new revenue lines, such as subscriptions such as the card and also Fair Financing growing at a very, very healthy rate. And I think it's very likely that Klarna, if it continues on this trajectory, will become one of the major retail banks in the world.

I mean, if you even look at the current card growth rate and you just say that you extrapolate that forward, you are very soon to be one of the bigger issuers of credit cards and cards in the world. So I think that, that is -- we're very excited about what we're seeing. And then we -- yes.

Thank you. We now have time for one final question, which comes from Timothy Chiodo at UBS.

I want to hit one around TAM expansion and the topic of 0% loans to consumers merchant funded for the longer term. You mentioned earlier talking about sort of starting with smaller loans for new customers as you build, I'm just assuming in the U.S. market. But as we look at TAM expansion going to higher income consumers, maybe with better credit profiles, it's a bigger topic for your competitor. I was hoping you could just give an update on where this sits within your mix of GMV and where it could go in terms of offering longer-term pay later merchant-funded loans to consumers?

And then I have a follow-up on the U.S. business.

All right. Thank you. That's a great question. Look, I don't think it's necessarily a smaller topic with us.

We just have a lot of topics to cover. So I think that like from our perspective, our experience from Europe is that Klarna over time becomes an everyday spending partner for every consumer. I mean you have to remember, in a lot of our original markets like the German-speaking ones or the Nordic-speaking ones or the Nordic ones, we're seeing like a population penetration of like 70%, 80% or 50%. So it's really everyone using this product of every background and type.

And we believe that the same will over time happen in the U.S. as well, and then you will adjust your offering. 0% financing for that is a fantastic offering. And we see great demand among global retailers and global brands, again, because they're looking for that kind of offering across the globe. They want to work with a provider that can do that with them in all markets. If you're a home electronics or a phone manufacturer or whatever it might be, you find it interesting that you can sign one contract and work with one team, and then get this live in more than 20 markets.

So very much of a big priority for -- Sykes, who's not here today, our Chief Commercial Officer, but not necessarily what we covered mostly today on the call. So yes. And the last question, maybe Niclas, I don't know if...

Tim, you didn't ask...

No, he didn't ask the last one, Tim, sorry.

That's okay. Yes. It was on the U.S. volume growth. If there were any undercurrents that you could talk about.

We would have expected a slightly faster growth in the U.S. in Q4, given Q3 had a partial contribution from Walmart and Q4 had a complete or full or close to full contribution from Walmart. And we were just wondering if there were other factors that might have led to that lack of acceleration in U.S. volume.

I must say that I'm happy to hear that you have high expectations on us. Personally, I'm very, very pleased with the performance in the U.S. And -- but what I do know is that when it comes to all these big strategic partnerships like that, there's always fixing this, fixing that, a little bit extra this and that, and you work on kind of continuously doing that. And that will continue to happen in regards to all these partnerships, both the ones you mentioned as well as the ones I've been talking about like the Stripes of the world and the Adyens of the world and so forth.

So there is continuous more work getting done there, and we're seeing fantastic results.

And with that, we conclude the call. Thank you so much, everyone.

Thanks, everybody.

Thank you so much.