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Welcome back to the rundown for another weekend deep dive. Today we are talking about Klarna. The Swedish Buy Now, Pay later company is gearing up for an IPO which is generating a ton of buzz on Wall street and amongst retail investors. So in today's episode, we're going to break down everything you need to know about Klarna. How they make money despite not charging interest, their plans to expand beyond just Buy Now, Pay later and that their business model is sustainable despite established tech giants and banks jumping into. Got a good one for you today. Let's dive in. Now, before we dive into Klarna's business model and their ipo, let's talk about Buy Now, Pay later as a whole because it's gotten very popular over the last few years. Buy Now Pay later is essentially a service that allows shoppers to split purchases into smaller interest free payments spread out over several weeks or months. And I imagine you buy $100 pair of shoes instead of paying $100 at the time of purchase. The the shopper can spread that purchase out as four weekly payments of $25 each. Now, this isn't really a revolutionary concept. It's just like a modern rebranding of installment payments and layaway that have been around for over a century. But what Klarna did was bring this concept into the e commerce era and integrate their pink button into the checkout pages of hundreds of thousands of online merchants all over the world. And no surprise here, but shoppers absolutely love it. Buy Now, Pay later transactions as a whole have hit $342 billion globally in 2020, up from just $2 billion a decade ago. Today, Buy Now Pay later accounts for nearly 9% of all E commerce spending and it's still growing fast. Now, there's some downsides to this, which we're going to talk about later in the show, but it's pretty easy to see why this has gotten so popular. It allows shoppers to buy more stuff without having to deal with credit card companies or paying interest. But that begs the question, if Klarna isn't charging the shopper interest like a credit card company does, how are they making money? So let's talk about their business model. Klarna has been around longer than most people realize. It was founded all the way back in 2005 in Sweden by three college kids. Their idea was to make online payments easier. You fast forward 20 years. Klarna now has over 111 million active users across 26 countries. They have partnerships with nearly 800,000 merchants. So Klarna has reached an impressive scale. And the way they actually make most of their money isn't by charging the shoppers, and it's instead charging a fee to the merchants selling the product. Let's go back to the shoe example. Let's say you buy $100 pair of shoes from Walmart. This example might not be super realistic because Walmart probably doesn't sell $100 shoes. But just stick with me here. So you buy the shoes and you use Klarna to split up the purchases into four payments of $25. What Klarna does next is they send $97 immediately to Walmart for the purchase. The shopper then pays Klarna $100 over the next four weeks. So Klarna ends up profiting $3 on that transaction. That $3 difference is Klarna's cut for taking on the risk and more importantly, for helping the store make the sale in the first place. And the reason that merchants are willing to pay the 3% fee to Klarna is because the data shows that shoppers are willing to spend more if a buy now, pay later option exists. So if Klarna didn't exist, the store might not have made the sale in the first place. Or maybe they might have sold less. This ends up being a win win for all sides because Walmart makes a sale and gets paid immediately. So the shopper gets their shoes right away and klarna gets a $3 profit. So that's why they're willing to pay Klarna the merchant fee, which ranges between 2 to 3%. And that merchant fee is Klarna's bread and butter. It accounts for 76% of their revenue. So Klarna's business model and growth relies on gross merchandise volume, which is the total value of stuff sold through their platform. And right now that volume is growing like crazy. Klarna says that their gross merchandise volume hit $112 billion in in the 12 months ending June 2025. And their revenue for that same period was up 17% year over year to $3 billion. A huge driver of Klarna's growth has been the U.S. in fact, the U.S. is now Klarna's largest market. The company got a huge win earlier this year when they announced a partnership with Walmart. So momentum in the U.S. is accelerating. U.S. revenue grew 38% last quarter. And they still see a massive Runway in the US because only 10% of US consumers are are using Klarna right now, compared to 82% in their home country of Sweden. And the company is now already looking beyond just Buy now, pay later and trying to expand to other areas of finance. So let's talk about it. Klarna has bigger ambitions than just being a Buy now, pay later company and having a pink button on the checkout page. The company is expanding their product offerings all over the world into different areas of finance. They've started offering banking products in Europe, including credit cards and savings accounts. Funny how a Buy Now, Pay later company is becoming a credit card company. And they're also working on turning their Klarna app into a full on super shopping app. They want to be the app where people search for deals and compare prices. They even have an AI shopping assistant because everything has to be AI these days. @ the end of the day, Klarna doesn't want to just be the checkout lane at the grocery store. They want to be the entire mall. And they're planning to monetize the super shopping app with advertising. And honestly, it's starting to work. The company has grown their ad revenue from just $13 million in 2020 to $180 million last year. Now, it's still a small part of their business, but it's rapidly growing and it's a sign that the company can make money beyond just merchant fees. But the key question here is going to be, can they actually pull this off? Because going from being a payments company to being a bank or a super shopping app is a huge challenge. On top of that, there is a ton of competition in the Buy now, pay later space, including some establishment established companies that are getting in and they have a lot of money and a ton of advantages. So let's talk about it. Look, there's no doubt that Klarna's growth story here is impressive. And Klarna also has the advantage of being first in the Buy now, pay later space. But just being first doesn't always guarantee success. Just ask MySpace. Klarna's biggest challenge right now is that competition is absolutely brutal and it's getting even more crowded. First off, you have the traditional Buy Now, Pay later companies like Affirm and afterpay. We're going to talk more about those in a bit. But I think the bigger concern here is that existing Fintech giants like PayPal are starting to offer Buy now, pay later on their platform. On top of that, major credit card issuers including American Express and JPMorgan Chase have integrated Buy now, pay later features directly into their existing products. And these companies already have a massive customer base, which is a huge advantage. PayPal has 400 million users and they're already starting to see success from their Buy Now Pay later feature. Last year, Buy Now Pay later total volumes on PayPal reached $33 billion, and that volume is up another 20% in the first half of 2025. But I do want to point out that just because a big tech company is jumping into the Buy Now Pay later space, it doesn't always work out. Like Apple started offering Buy Now Pay later In March of 2023 via Apple Pay, but then they shut it down in June of 2024. For Apple, buy Now Pay later wasn't worth chasing. On top of that, it wasn't good PR for Apple because Buy Now Pay later does have some critics, which we're going to talk about in a bit. So. So for Klarna, the major advantage they have is they've already been in the space, they're already an established name and brand, and they have massive scale. Already they have nearly 800,000 merchants, which is double that of a firm. Klarna processes over $100 billion in transaction volume, which is triple the volume that a firm does. But despite all that, Affirm's market cap is about $28 billion at the time of this recording, and Klarna is expected to debut at a $14 billion market cap. I think this is because Affirm's business model is slightly different from Klarna. Like I said earlier, Klarna makes most of their money on merchant fees. So. So it's more reliant on transaction volume. They generate about a third of their revenue from interest bearing loans that they give to buyers for larger purchases. So a firm's revenue is a little bit more diversified. On top of that, Klarna's business model also exposes them to some key risk. So let's talk about it. This wouldn't be a complete deep dive if we didn't talk about some of the risks that Klarna faces moving forward. One of the risk is regulation. See, right now, Buy Now, Pay later as a whole operates in something of a regular regulatory Wild West. Right now, Buy Now Pay later isn't treated like traditional credit. So there are fewer rules around disclosures, credit reportings and consumer protections. But that could change fast. The Consumer Financial Protection Bureau has already started paying attention and some states are pushing for tighter regulation. If governments all over the world start treating Buy Now Pay later like credit cards, with all the compliance costs that comes along with that, it could seriously hurt Klarna's growth. And margins would also Open them up to more competition from credit card companies, and then you have the credit risk. When it comes to Klarna's business model. You know, Buy Now Pay later does make it incredibly easy for people to spend money. Maybe a little bit too easy. That's one of the major critiques of the service, is that it encourages impulse buying by misleading consumers into thinking purchases are more affordable than they really are. And that leads to overspending. People that use Buy Now Pay later might already be at a higher risk of missing a payment because. Because they might have already maxed out their other forms of credit, like a credit card. In a study by the Kansas City Federal Reserve, it found that 15% of buy now Pay later users with late payments are severely financially constrained. The study also highlights that the share of Buy Now Pay later users who have made a late payment is on the rise, growing from 15% in 2021 to 24% in 2024. Now, on a side note here, Klarna does actually charge a late fee if you are late making a payment. The company collected $472 million in late fees for reminder fees and other charges in 2024, which made up 17% of their total revenue. So, yeah, they advertise no interest, but there are late fees Now, Buy Now Pay later firms argue that the financial penalties associated with credit cards are much worse. And I think they do have a point. And right now, Klarna says that their delinquency rate is less than 1% compared with 10% for credit card debt. So it's pretty low. But if we have an economic slowdown or a recession, that that number will definitely go up. And the losses for all those missed payments will be felt by Klarna's bottom line, because they're the ones taking on the credit risk. So now that we've covered Klarna and their business, let's talk about the actual ipo. According to reporting from Bloomberg, Klarna is Planning to sell 34 million shares priced between $35 and $37 each. So if you do the math there, they're planning to raise about $1.3 billion. On the high end of the IPO. Klarna's valuation will be around $14 billion. Now, that 14 billion number is a massive haircut billion the company was valued at at its peak in 2021 when they raised a funding round from Softbank. As I like to remind everyone, 2021, absolutely wild time. Now, the good news here for investors is that Klarna has really cleaned up their act. They've now posted five consecutive quarters of operational profitability showing that the core business is working. The bad news here is the company is still losing money on a net basis. Klarna reported $53 million in net loss in Q2, which was actually worse than the 18 million loss from the same quarter last year. It looks like interest, expenses and other costs are still weighing the company down Now. One metric that Klarna loves to flex is the revenue per employee, because it sees that as a way to communicate how they are using AI to drive efficiencies in their business. Klarna now generates $1 million in sales per employee, which is up 46% year over year. Klarna made headlines this year when they said they were shrinking this workforce by 40% of partially due to their investments in AI. And they haven't been shy about talking up AI as a replacement for real people. Last year klarna said that AI agents were doing the work of 700 people and the company has bragged that it saves $10 million annually in marketing costs by leaning on AI. So I guess that means that all their ads and social media posts are just AI slop. I don't know. The CEO has admitted that there's been some slippage in the quality of work that results from a full time shift towards AI bots and they're starting to kind of rethink their AI strategy and it's definitely something they're going to have to tighten up as they become a bigger part of people's financial lives. So can Klarna's IPO live up to the hype? Personally, I'm not so sure. On the positive side, they've got massive scale, they have a strong brand recognition, and they're in a market that is still growing. Buy Now Pay later is projected to hit $184 billion in the US alone by 2030, so there's room for growth. But the challenges are real. The competition from tech giants and banks is intensifying, regulatory pressure is building, and Klarna still hasn't proven that they can consistently be profitable while growing. The $14 billion valuation feels more reasonable than the 2021 highs, obviously, but it's still betting on Klarna successfully becoming more than just a buy now, pay later company. They need to successfully branch out to becoming a banking slash super shopping now. I should say the timing for this IPO does help. We just had a huge summer for IPOs with big pops on the first day. We saw that with Circle and Figma. So that momentum could help Klarna on its first day of trading, but I don't think we're going to see the same level of pop that we saw with Circle and Figma. And I think long term, Klarna might have a hard time diversifying into other businesses. Maybe Klarna can carve out its own lane as a Buy Now, Pay later banking super shopping app, but I'm a bit skeptical. At the end of the day, Buy Now, Pay later might just be a feature and and now the company well all right, guys, that's it for today's weekend Deep Dive. Hope you guys enjoyed that one. Let us know in the comments what you thought about Klarna and if you plan to invest in the Klarna ipo. And if you have any topics you want us to cover in future Deep Dive episodes, let us know in the comments as well. By the way, if this is your very first episode of the rundown, just a heads up, we do drop an episode every day during the week where we recap what's happening in the stock market and all the corporate drama. So consider subscribing to the podcast if you're interested in staying in the loop of everything that's happening in the markets. Thank you guys so much for listening and watching. Shout out to Mike and Connor for all the work behind the scenes and we'll see you guys back here tomorrow.