LONG $KLAR - Klarna, the BNPL winner
The market vs. P14; 53% upside to FY26 PT
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Disclaimer: Nothing posted by P14 Capital should be considered financial advice. The author of this post holds a long position in KLAR. Please consult a financial advisor and/or conduct your own due diligence before making investment decisions.
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Klarna Group plc.
NYSE: KLAR | 01/09/2026
Thesis Summary
With a ~-21% return since the $40 IPO share price, it appears the bankers have beaten the ever-so-hopeful IPO investors in the game of grift yet again.
The market has written off KLAR as another failed IPO, with a business model more or less perceived as a “fad,” supplemented by the deafening view that the recent uptick in BNPL trends is temporary and merely reflective of a weakening consumer. Mr. Market has taken a pessimistic view on the revenue opportunity and frames the expansion of KLAR’s financing products as a terminal balance-sheet risk. On top of that, Mr. Market assumes KLAR’s margins will remain inferior to fintech peers and borrows further conviction from post-IPO selling pressure, 2025 tax-loss harvesting, and the anticipated overhang from March 2026 lockups. In short, Mr. Market sees no credible path to near or medium-term upside.
P14, on the other hand, views KLAR as a market-share leader with durable competitive advantages that are actively strengthening. The sustainability of BNPL growth is unfairly discounted despite demonstrably better credit quality than traditional revolving credit and a superior merchant value proposition tied to higher AOVs, better conversion, and repeat usage. More importantly, KLAR is not “just a BNPL player,” but a scaled commerce network and aspiring neobank with a uniquely valuable, SKU-level consumer dataset tied to the next generation of spenders.
The medium-term top-line thesis is anchored by several underappreciated drivers. Global BNPL TAM expansion benefits merchant fees and interest income across both Europe, where KLAR is the clear leader, and the U.S., where Fair Financing is gaining traction and beginning to displace peers and traditional credit. This is amplified by KLAR’s distribution strategy with default-on PSP integrations, landmark enterprise wins, and wallet integrations that extend reach at minimal incremental cost. Layered on top is a growing commerce media opportunity, as merchants increasingly monetize access to KLAR’s high-intent consumer base, and a rapidly scaling subscription and card ecosystem that creates a consumer-led GMV flywheel.
In parallel, alternative data trends point to KLAR benefiting from social arbitrage that has yet to show up in the market’s assigned multiple. In my view, the market is mispricing what I estimate to be ~30% revenue growth in 2026 at just ~2.5x forward P/S, a steep discount to peers with similar or inferior growth profiles.
P14’s view on margins is the polar opposite of what the market is pricing in. Transaction margin expansion is obscured by the accounting mechanics of Fair Financing, where upfront provisioning masks the underlying economics. As consumer cohorts mature, forward-flow agreements expand, and U.S. scale improves, these headwinds dissipate. Incremental margin upside is further supported by higher-margin revenue streams such as advertising and subscriptions, alongside AI-driven operating leverage across the opex base. Transaction margins are set to expand ~460bps in 2026, yet the stock trades at just ~6x FY26E TMD versus AFRM at ~14x, a divergence that is difficult to justify given KLAR’s scale, growth, and optionality.
The current setup of post-IPO technical pressure, tax-loss selling, and fintech apathy has brought KLAR to levels where upside may not be far off. Near-term upside is driven by a Q4 print showcasing solid growth backed by a stronger than expected holiday shopping season, a stimulated consumer in 1H26, with potential flow-based tailwinds such as a January effect. Medium-term upside will depend on a clear path towards margin expansion, one that I think KLAR is racing towards.
The bed is not all roses though. Aside from the market’s fundamental skepticism, a major thorn surrounding the KLAR thesis is the March 2026 lockup expiration, where ~11x the current trading float becomes eligible for sale. I argue this risk is already priced in to a certain degree.
In the P14 base case, assuming modest multiple expansion on FY26 results implies ~53% upside, while the bear case points to ~25% downside over the next ~1.5 years.
Business Overview
‘Twas likely a freezing day in November 2004 when Sebastian Siemiatkowski and his co-founders pitched “Kreditor” at the Stockholm School of Economics Entrepreneurship competition, only to lose the competition and be accepted into the SSE Business Lab incubator soon after. Drawing on Sebastian’s experience at a debt collection agency (Acme), he and his co-founders lasered in on Kreditor as their path to startup stardom.
Officially incorporated in 2005, Kreditor Europe AB, led by Sebastian, introduced a novel deferred payment option, Pay Later, in Sweden through its core service of e-commerce invoicing. Things started to get serious when the company hit its 1,000th merchant in 2007, with a true test coming in 2008 when the company decided to go “global” across the Nordics. A few years later, in 2010, Klarna (meaning “clear”) came to life with a much-needed rebrand. After achieving unicorn status at a $1B valuation in 2012, becoming Europe’s most valuable fintech at a $5.5B valuation in 2019, and reaching a peak $45.6B valuation during the 2021 fintech mania, Klarna eventually turned to the public markets to fuel its next stage of growth, IPOing on the NYSE at $40/share in September 2025.
Klarna has evolved into a fintech pioneer with a growing suite of products that together form a global consumer financing and commerce network, boasting ~114M active consumers and ~850K merchants across 26 countries, built on the invention of Buy Now Pay Later (BNPL) over 20+ years ago in Sweden.
As with many tech startups, Klarna has gone through several iterations and pivots throughout its history. At times, it almost feels as if the company is trying to be there every day, everywhere, and everything all at once. In my view, while this approach may be off-putting to some prospective investors, the combination of products and strategy is set to work well for the business and, by extension, equity investors.
Klarna’s long-term ambition is to become the de-facto global digital financial assistant designed to improve how consumers spend and save. That sounds like a word salad. In simple P14 terms, KLAR intends to continue milking merchants by delivering consumers who spend more than those using traditional payment methods, tapping into one of the largest customer bases of the next generation of spenders, while offering its own consumers low or no-cost services in return. Perhaps the best way to understand this model is to examine how the company makes money, but first we must understand the crux of the business: BNPL.
What is BNPL
Offered primarily online, with in-store penetration rising, BNPL allows consumers to split a purchase into short-duration installments at checkout, most often at 0% APR, with repayment measured in weeks.
Unlike traditional credit cards that extend a revolving line of credit, BNPL origination is transaction-led and underwritten in real time at the SKU level using transaction context, merchant data, consumer behavior, and historical repayment patterns, rather than relying primarily on FICO scores or static credit limits. Combined with a shorter average loan duration of ~40 days at Klarna, this structure allows BNPL issuers to adjust approval standards dynamically as conditions change, structurally capping loss severity relative to credit cards, whose balances typically revolve for far longer.
Automatic repayments, typically linked to a debit account, further reduce risk, while smaller ticket sizes mean many consumers prioritize paying down BNPL obligations ahead of credit card balances. Because each transaction is underwritten independently, BNPL providers can decline new purchases based on outstanding obligations and real-time bank data, effectively underwriting a bespoke installment loan per transaction. Across major credit metrics, this structure has resulted in materially stronger credit quality relative to traditional revolving credit:
Since its first iteration through Klarna’s Pay Later product in 2005, BNPL has grown from a niche checkout feature into an increasingly mainstream payment method embedded across both online and in-person commerce.
In 2024, BNPL represented ~5% of global eCommerce volume and is expected to grow at a 9–15% CAGR through 2030. Measured by GMV, the global BNPL market is valued at ~$560B in 2025, reflecting ~14% Y/Y growth. Adoption has been strongest in Europe, where BNPL originations grew 12%+ Y/Y to ~$190B and now account for ~11% of eCommerce spend. In the U.S., BNPL originations surpassed $120B in 2025, representing a >10% share of eCommerce. Despite this growth, BNPL penetration is a small fraction of the $6–7T+ global eCommerce market, leaving a long runway ahead. BNPL is forecast to grow 2–3x faster than card spend over the next several years, driven by younger cohorts reaching peak earning years, continued eCommerce mix shift, and broader merchant adoption across categories and channels.
KLAR’s revenue model and product stack
Klarna generates revenue primarily from merchants, supplemented by consumer fees and interest income. In the LTM, 73.5% of total revenue came from transaction services revenue, or $2.36B, up 16% Y/Y, while 26.5% came from interest income, or $850M, up 33% Y/Y. Within transaction services revenue, ~75% is derived from merchant transaction fees, which equates to ~57% of total revenue. The model is spend-centric rather than balance-sheet driven, differentiating Klarna from peers that rely more heavily on interest income.
In the LTM, Klarna processed $118B in GMV on its platform, up 14.5% Y/Y, following $105B in GMV in 2024, up 13.6% Y/Y. Approximately 89% of GMV is generated at merchant checkout, where the consumer selects a Klarna payment option, while the remaining 11% comes from direct-to-consumer usage, where consumers transact using Klarna-issued cards, either the Klarna Card or a one-time card, at any merchant that accepts Visa.
At the surface, Klarna may appear to be purely a BNPL player. While BNPL is the core revenue engine through merchant fees and interest income, the platform also generates advertising and subscription revenue layered on top of transaction fees. The foundation of the business remains its payment solutions.
Payment solutions
Pay Later allows consumers to split purchases into smaller installments, typically 4 payments, often referred to as pay-in-four. The product generally requires a down payment upfront, with the remaining installments due at two-week intervals. Consumers complete their purchase at the point of sale while deferring full payment, interest-free, compared to traditional credit where APRs average ~25%. Pay Later carries an average order value (AOV) of $80–$100, accounted for 79% of GMV in 2024, and grew 20% Y/Y to ~$83B.
Fair Financing. While initially at odds with Klarna’s original stance against interest-bearing credit, this product was launched in 2007 as monthly financing for higher-ticket items and was rebranded in early 2024 as “Fair Financing.” The product offers 6–36 month installment loans, typically used for purchases with $350–$400 AOV. Klarna charges interest on these loans, with U.S. APRs generally ranging from 10% to 36%. Fair Financing represented 5% of GMV in 2024 and grew 42% Y/Y. Over the life of the loan, Fair Financing generates ~4x the revenue of a standard Pay Later transaction.
Pay in Full. Launched in 2010, Pay in Full enables consumers to pay upfront using pre-filled payment details, with buyer protection and no fees. This product is primarily used by debit-card consumers seeking rewards and protections not otherwise available without a credit card. Pay in Full represented 16% of GMV in 2024 and declined 13% Y/Y, driven by the divestment of Klarna Checkout, the unbranded payments business in the Nordics, in 4Q24.
Taken together, these payment solutions generated 57% of Klarna’s total revenue in 2024 and ~75% of transaction services revenue. Transaction revenue totaled $1.6B in 2024, growing 17% Y/Y. Backing into revenue and GMV disclosures implies a 2024 transaction take rate of ~1.54%, up ~5bps Y/Y. Klarna does not disclose merchant fee rates by product, but market data suggests merchant fees of 3–5% for Pay Later, <1% for Pay in Full, and ~2% for Fair Financing. Rates vary by merchant size, volume, and geography, with higher take rates generally observed in the U.S. than in Europe.
Advertising
Advertising represents the next layer of transaction services revenue. This opportunity enabled through Klarna’s scaled shopping ecosystem and its large first-party traffic dataset.
The Klarna App, launched in 2018, has surpassed ~100M downloads and reached 49M MAUs by September 2025. The app enables product discovery, flexible payments, Klarna Card usage, order tracking, returns management, rewards, and customer support within a single interface. App users are materially more valuable. The average active user generates ~$28 in annual revenue, while users engaging in shopping and cashback generate ~$90. Advertising revenue is earned primarily through a CPC model when consumers click on sponsored placements or complete purchases discovered through the app. Advertising represented 6.4% of total revenue in FY24, grew 14.6% Y/Y, and accounted for ~10% of transaction services revenue.
Subscription fees
Klarna’s subscription offering is centered on Klarna Plus, priced at $7.99 per month. The program is designed to deepen consumer engagement and drive incremental transaction volume. Members receive waived one-time card fees, double rewards points, and access to exclusive merchant offers, in some cases exceeding $50 in value. By waiving fees and increasing rewards, Klarna incentivizes users to consolidate spend onto its network, shifting volume at the margin away from traditional credit cards. Klarna Plus surpassed 1M members in 3Q25. Subscription fees represented ~3% of total revenue, grew 131% Y/Y, and accounted for 4.2% of transaction services revenue.
The Klarna Card
Launched in 2018, the Klarna Card is a key distribution tool and closely tied to the subscription model. The card allows consumers to transact anywhere, online or offline, without merchant integration. Available across Europe and launched in the U.S. in July 2025, the card offers 0% APR Pay Later, no FX fees, and free signup. The U.S. launch generated ~4M signups by October 2025. Globally, the Klarna Card accounted for ~15% of transactions as of 3Q25. Card users generate ~$130 in annual revenue on average, compared to ~$28 for the broader user base.
Reminder fees
Reminder fees are flat, capped, clearly disclosed, and applied only when payments are several days late, following multiple reminders. These fees represent a declining share of consumer services revenue, accounting for ~69% of consumer services revenue in LTM-2Q25, down from 74% in 2024, and vary by region and payment type.
Neobanking services
Following the grant of an EU banking license in 2017, Klarna expanded into neobanking services that support its long-term platform strategy. These include bank accounts, savings products, Klarna Balance, and budgeting tools. While not always direct revenue drivers, they play a critical role in funding and retention. As of 3Q25, Klarna held ~$14B in consumer deposits, which funded over 90% of lending activity in the twelve months ended September 30, 2025. The majority of deposits originate in European markets where Klarna operates as a licensed bank.
Interest Income
Fair Financing is the largest driver of interest income and is significantly more profitable over the life of the loan than Pay Later products. European APRs generally fall in the high-teens to low-twenties, while U.S. APRs range from 10% to 36%, enabling more granular risk pricing. Although Fair Financing GMV grew 42% Y/Y in FY24, its interest income grew 20% Y/Y, reflecting the timing mismatch between upfront provisioning and interest recognized over the loan life. Fair Financing interest income represented 14% of total revenue and 57% of interest income in FY24.
Other sources of interest income include reminder fees, debt securities, and incremental merchant-related income. These accounted for 43% of interest income in FY24 and grew 54% Y/Y, driven primarily by debt securities.
Across all revenue streams, Klarna generated $3.2B in LTM-3Q25 revenue. On a GMV basis, this implies a consolidated take rate of ~2.71%, up ~41bps over the past three years.
KLAR’s pitch to merchants and consumers
At first glance, Klarna’s merchant fees appear expensive. Pay Later merchant fees typically range from ~3–5%, compared to <1% for debit and ~2% for traditional credit cards. This comparison, however, ignores the economics Klarna is solving for at checkout.
Klarna’s pitch to merchants is built around assuming credit risk while driving higher-value transactions. By underwriting each purchase in real time, Klarna absorbs fraud and credit exposure while enabling higher average order values, improved checkout conversion, and stronger repeat usage. Merchants that add Klarna see AOV increase by more than 20%, with reported conversion uplift of up to 20% and purchase frequency exceeding traditional payment methods by over 40%. Transaction-level underwriting also produces granular SKU-level insight into consumer behavior, reducing checkout friction and supporting Klarna’s advertising offering by giving merchants access to a highly engaged, high-intent audience for customer acquisition and brand visibility.
For consumers, Klarna positions itself as a flexible payments and financial management platform rather than a traditional credit product. The app offers a smooth shopping experience anchored by features such as order tracking, price monitoring, product discovery, and in-app offers that keep users engaged beyond the point of sale. BNPL adoption initially skewed toward Gen Z and younger millennials, driven by limited credit histories, preference for digital-first experiences, and aversion to revolving debt, but usage with older folks has started to broaden as Klarna expands its product set and integrates more deeply into everyday spending.
The strategy
The revenue streams above reinforce my view of Klarna trying to be there every day, everywhere, and across everything. At its core, Klarna is pushing into three large markets simultaneously: commerce through retail merchants, consumer neobanking, and technology-enabled advertising. Beyond the fast-growing BNPL category, each of these markets is large in its own right and offers a long runway for growth.
To penetrate the commerce market, Klarna requires a distribution strategy with global reach. A decade ago, the company recognized that it could not compete head-on with scaled PSPs such as Stripe and Adyen. Instead of positioning itself as a standalone alternative, Klarna shifted toward a “default-on” PSP strategy. Through integrations with platforms such as Stripe, Worldpay, and Adyen, Klarna increasingly becomes a default payment option alongside Visa and Mastercard, with new merchants receiving Klarna unless they actively opt out. This strategy is further reinforced through wallet-level integrations with Apple Pay and Google Pay. The PSP channel accounts for ~50% of Klarna’s GMV, with the top five PSPs contributing roughly half of that volume.
The second distribution channel is direct merchant integration, which defined Klarna’s early expansion. The company’s first major European win was ASOS between 2013 and 2016, followed by Urban Outfitters in the U.S. in 2015. Since then, Klarna has continued to secure large enterprise relationships across global retail, including Nike, Airbnb, DoorDash, and most recently Walmart. Direct integrations account for the remaining ~50% of GMV and generally offer superior per-transaction economics relative to PSPs, while PSPs provide a low-CAC, one-to-many distribution channel. Klarna’s strategy deliberately balances both, pairing deep integrations with retail leaders and broad PSP-driven reach. Over the 12 months ended June 30, 2025, more than 142,000 new consumers tried Klarna each day through merchant websites, showcasing the sheer scale of this distribution strategy.
This distribution engine, combined with Klarna’s consumer-facing pitch, ultimately drives top-line growth. Supporting this growth is a balance sheet strategy that underpins the entire model. As discussed earlier, more than 90% of Klarna’s funding comes from consumer deposits, a neobank-led approach that is structurally cheaper than wholesale or asset-backed funding. The advantage is amplified by a duration mismatch, with Klarna’s loans typically due in ~40 days while ~72% of deposits are fixed-term with an average duration of 319 days. This duration gap allows Klarna to adjust underwriting and lending policies far more quickly than its funding base turns over, providing stability through rate cycles.
I could go on about strategy, but the final piece worth highlighting is AI. As with most tech-obsessed CEOs, Sebastian with Klarna leaned aggressively into AI, particularly across customer service. Early missteps in 2024, when AI agents struggled with edge cases, drew criticism and forced a “positive-PR” toward a more “human-first” approach. Semantics aside, the economic impact has been meaningful. Klarna’s AI assistant now handles 69%–81% of customer service chats, headcount has declined 47% through natural attrition and automation, and revenue per employee has tripled to ~$1.1M over the past two years.
Operating leverage is inherent in the business model with transaction volumes scaling at low incremental cost, while opex discipline and automation drive margin expansion. Transaction margins have increased 84bps from FY22 to 36.9% in the LTM, with a peak of 47.7% in 2023. Adjusted operating margins have expanded 4,156bps from FY22 to 3.4% in the LTM, reaching a peak of 6.4% in 2024. The lumpiness of these margins will be addressed in greater detail in the margin thesis section of this report.
Competition
As with any relatively young, fast-growing market, BNPL is characterized by intense competition. Players such as Block’s Afterpay, PayPal, Zip, and smaller platforms like Sezzle continue to push deeper into BNPL. Given Block’s terrible acquisition track record, Afterpay’s growth has been obscured by Cash App distribution and accompanied by sizable impairment write-downs. PayPal is in a perpetual state of reinvention, attaching itself to incremental growth vectors wherever possible. Sezzle is oriented toward a lower-income consumer segment where credit quality is weaker, though it does benefit from a better subscription-based monetization model. In my view, none of these players pose a material threat to Klarna’s core position.
On the neobanking side, competitors such as Revolut and Chime target similar consumer cohorts. However, Klarna’s two-sided platform of merchants and consumers creates a structural advantage. Klarna’s commerce layer effectively turns it into a “shopping bank” that has already achieved scale on the consumer side, allowing it to retain deposits even when savings rates are marginally lower than peers. Consumers are not there solely to save, they are there to shop and transact.
Klarna is the leader in the global BNPL market, with an estimated ~30% share of global BNPL e-commerce volumes in 2024. Despite rising competition, Klarna has continued to take share, with total global e-commerce penetration now in the ~1.5–2% range.
In the P14 view, there are only two competitive forces that can meaningfully pressure Klarna over time. One is a longer-term threat, the other is immediate.
The longer-term threat comes from card-linked installment programs. Credit card networks and issuers are pushing installment features to keep volume on their rails. Citi linked installments to its travel booking platform in September 2024, and Chase launched a Travel Now, Pay Later product shortly thereafter. These offerings are often used alongside fintech BNPL rather than as substitutes, but they could gradually cap BNPL spend per user. This becomes more relevant over the next decade as traditional credit fully acknowledges BNPL as a competitive threat. By that point, I expect Klarna to be operating at even greater scale, with its neobanking ecosystem embedded across a much larger user base.
Over the next one to three years, which is the duration of my thesis, competition boils down to Klarna versus Affirm. First, you must forgive me for my click-baity title. When I say “KLAR – the BNPL winner,” I am referring to relative upside, not 100% market dominance. This is a growing market where all players will expand. I simply believe Klarna will grow much faster than the market.
On scale alone, the gap is meaningful. In 2024, Klarna originated nearly as much BNPL volume as Affirm, Afterpay, and Zip combined. Relative to Affirm, Klarna’s consumer base is ~4.75x larger, its merchant base is ~2x larger, and GMV is ~3x higher.
Klarna’s advantage is rooted in consumer scale and geography. With over 100M app downloads across 26 countries, Klarna is far more embedded in the next generation of consumer spending behavior than Affirm, which has ~30M+ downloads and is heavily concentrated in North America, with ~96% of revenue generated in the U.S.
This scale advantage directly feeds into Klarna’s merchant pitch. Global retailers care about volume, and Klarna can simply deliver more of it. The Walmart win is the clearest example, where Klarna displaced Affirm in Affirm’s home market. While critics argue the deal was won on pricing and diluted transaction economics, Klarna’s broader scale allows it to absorb concessions. The transaction also included 15.3M share warrants issued to a subsidiary of OnePay, vesting over five years at a $34 exercise price. Walmart is expected to add $3–4B in incremental GMV at run-rate and represents Klarna’s largest U.S. merchant win to date. Even if near-term operating profit is modest, the strategic value in consumer exposure (millions of consumers looking at the bold pink Klarna logo) and downstream U.S. GMV opportunities (WMT brand value) is significant. Importantly, any economics dilution applies primarily to merchant fees, not consumer interest income through fair financing.
After looking at the quarterly snapshot above, you may notice the significantly higher take rate AFRM has over Klarna. The truth is, AFRM deserves a higher multiple because of this. ~74% of Affirm’s GMV comes from long-term interest-bearing loans, driving a gross revenue yield of ~8.6%. These products carry higher AOVs, typically $280+, and deliver stronger lifetime economics once upfront provisioning is absorbed. This model supports Affirm’s GAAP profitability, with operating margins at 6.8%, compared to Klarna’s still-negative IFRS profitability in 3Q25. That gap will narrow as Klarna scales Fair Financing in the U.S.
While Klarna leads globally, Affirm still holds a higher share of U.S. e-commerce, at ~1.4% versus Klarna’s ~0.9%. That gap is closing quickly. Klarna’s U.S. revenue grew 51% in 3Q25, and U.S. Fair Financing volume surged 244% following recent enterprise wins with Walmart and eBay.
Affirm is now looking to expand into Europe, Klarna’s home market. While Affirm has an underwriting edge in long-duration financing, Klarna’s full EU banking license is a decisive advantage. Klarna’s cost of funding is ~2.4%, versus ~6.7% for Affirm.
There is a reason as to why KLAR is targeting the US for fair financing expansion rather than the EU. The US has far superior APR potential and the revenue yield is roughly double that of Europe. The U.S. is more credit-hungry, and now the regulatory environment has become more permissive. In my view, an aggressive European push by Affirm would pressure the very margins that justify its valuation premium.
Both companies are also diversifying revenue. SKU-level underwriting enables both to monetize merchant data through advertising. On subscriptions, Klarna has a clear lead. Affirm does not offer a subscription product and instead monetizes its card through interchange fees. Affirm’s card has ~2.8M active users, versus Klarna’s ~3.2M, with Klarna’s number set to rise meaningfully following its July 2025 U.S. card launch, which added over 4M signups and reached 1.4M active U.S. cardholders by 3Q25 (from 0 at the start of the year). This strengthens Klarna’s position with U.S. merchants and represents a credible competitive threat to Affirm.
While Fair Financing expansion runs against Klarna’s long-standing apathy toward banks and interest-bearing credit, it is simply capitalism at work. Emotions can be debated later, money comes first, and frankly, why not if they can do it better than a traditional bank? An area where I give Affirm credit is its zero-fee structure. Klarna, despite its consumer-first positioning, generated ~$250M in reminder fees in 2024. While this share is declining, it is something Klarna would rather not highlight if it intends to maintain an anti–traditional banking narrative. That said, Affirm likely recovers these foregone fees and more through the higher APRs it charges in the U.S.
The balance sheet
Contrary to what the market has priced in, Klarna’s balance sheet is solid. As of 9/30/25, KLAR held $6.8B in cash and cash equivalents, $1.66B in debt securities, and ~$10B in consumer receivables on the asset side of the balance sheet. On the liability side, KLAR had ~$14B in consumer deposits and $2.6B in borrowings and other liabilities, including warehouse financing facilities, subordinated debt, unsecured bonds, and commercial paper. Both cash and borrowings are temporarily inflated by ~$1.3B due to the purchase of central bank certificates that settle after the balance sheet date. As a result, cash will decline in the following quarter while the associated liability is eliminated, with the impact to debt securities already recognized.
As of 2Q25, Klarna reported a Liquidity Coverage Ratio (LCR) of 1,035% and a Net Stable Funding Ratio (NSFR) of 204%, both multiples above regulatory requirements and well in excess of major traditional banks. The LCR implies Klarna holds roughly 10x more immediately usable liquidity than regulators assume is necessary to withstand a severe 30-day stress scenario, while the NSFR indicates more than 2x the stable funding required to support its assets over a 1-year horizon.
As of 3Q25, normalized cash and debt securities covered ~50% of consumer deposits. In the P14 view, KLAR’s balance sheet reflects minimal exposure to duration and interest rate risk while providing ample runway and flexibility for continued growth.
This may be the longest business overview I have written in a while, but understanding Klarna’s history and competitive position is essential before turning to the forward-looking thesis. KLAR sits at a clear inflection point for both top-line growth and margin expansion, while the market is high in the cloudy skies of negative sentiment, which gives P14 the perfect opportunity to pick up on the business’ growth trajectory and operating leverage before the market does.
The top-line thesis
Given Klarna’s two-pronged business model across merchants and consumers, revenue growth over the next 2–3 years is driven by several overlapping levers. The primary drivers I focus on are growth alongside the BNPL market, the ramp in Fair Financing, GMV expansion via PSPs, direct merchant wins and wallet integrations, followed by advertising and subscription revenues tied to the Klarna card.
Growth with the BNPL market
Starting with the broad brush. The BNPL market is set to grow as all stakeholders increasingly recognize its advantages relative to traditional credit models. As with any major fintech shift, skepticism tends to dominate early adoption cycles. We saw this play out with the memes and negative press around BNPL and burritos last year. Over time, consumers will realize there is little semantic difference between buying a burrito using BNPL and repaying it in four installments versus buying it on a credit card and settling the balance at month-end. For consumers, the difference is economic. Small-ticket purchases financed via BNPL are cheaper with 0% APR on Pay Later offerings and materially lower rates than credit cards on interest-bearing options.
Ipsos reports in its latest survey that only 30% of U.S. consumers expressed trust in their banks, a sentiment that BNPL providers have leveraged to position themselves as "anti-bank" alternatives. Gen Z and millennials, Klarna’s core demographic, show structural apathy toward traditional banking and prefer clean, digital interfaces that bundle shopping, payments, and buyer protections. As these cohorts move into peak earning years, BNPL spend should scale meaningfully. Over time, P14 expects Klarna to deepen penetration in U.S. e-commerce, consistent with adoption curves observed across Europe.
Critics will eventually come to accept that BNPL underwriting, when executed correctly, is structurally superior due to its transaction- and SKU-level focus. Real-time underwriting allows tighter risk control than revolving credit limits. If the next generation of consumers prefers BNPL, merchants will follow. Paying incremental bps over interchange is rational if basket sizes are larger and retention improves.
Consensus growth forecasts range from 9–15% CAGR through 2030. I believe growth will exceed those estimates, and Klarna’s leadership position should allow it to outpace the market. Over time, KLAR increasingly becomes “the verb” in BNPL, which reinforces brand-led adoption and merchant preference.
Fair Financing
As BNPL skepticism fades and a maturing consumer base increases purchase frequency, demand for higher-ticket financing should naturally lift Fair Financing volumes.
Unlike AFRM, which has long operated a scaled term-loan product, Klarna is still early in its Fair Financing ramp. That ramp is only accelerating. Merchants using Fair Financing increased 87.5% Y/Y to ~150K in 3Q25. Importantly, unlike Pay Later, Fair Financing requires explicit merchant enablement rather than the default PSP activation, making this uptake a signal of organic demand rather than passive adoption.
That being said, this represents only 18% of KLAR’s 850K global merchant base, up from ~10% two years ago. This indicates the long growth runway, Klarna has with its EXISTING merchant base. Existing is capitalized because Fair Financing growth, particularly in the U.S., hinges on new merchant adoption.
Relative to the EU, which boasts >50% penetration across the top 100 merchants in major regions, KLAR’s penetration in the U.S. is ~28% among the top 100. While this is up materially from ~5% in 2019, that penetration still primarily reflects the Pay Later product. I am not suggesting that all U.S. merchants will suddenly adopt Fair Financing, but a brand-name win like Walmart meaningfully accelerates adoption. The Walmart deal alone is expected to contribute ~$3B in incremental GMV, a meaningful portion of which should flow through Fair Financing given the launch of OnePay Later Powered by Klarna at Walmart, bringing installment loans to millions of U.S. consumers. OnePay Later Powered by Klarna is set to become the exclusive term-financing option at Walmart once the rollout is complete.
Not only does Fair Financing generate a materially higher revenue yield, but KLAR is also smoothing its historically lumpy revenue profile by scaling forward-flow agreements. Klarna recently secured a partnership with Elliott to sell $6.5B in receivables over two years. Selling these loans allows Klarna to accelerate revenue recognition via gain on sale while reversing previously recorded provisions.
With U.S. Fair Financing GMV up 244% Y/Y in 3Q25, while also carrying higher monetization will naturally lead to incremental revenue growth in the future.
GMV growth from PSPs, Merchants, and Wallet integrations
In the short-term, I view Klarna as a payments/BNPL extension to my 1H26 consumer discretionary thesis. You can read it here:
Affordability being a key focus heading into the midterms should drive lower effective tariff rates (if not ruled illegal entirely), larger tax refunds, and a potential “tariff dividend” should support consumer purchasing power, particularly at the low end. This aligns directly with Klarna’s low-AOV concentration and should lift merchant-led GMV in the near term.
Klarna’s revenue growth over the next 2-3 years is primarily anchored in its transition from a checkout feature to a global commerce network which hinges on 3 GMV levers: default-on PSP distribution, enterprise merchant wins, and digital wallet integration.
The PSP strategy is the most scalable. Klarna’s January 2025 relaunch with Stripe enabled instant Klarna activation across 26 markets with zero code. Stripe alone is projected to process ~$2T in GMV by 2026, and default-on has already driven an estimated 100K+ merchant adds through 3Q25. Klarna is now scaling similar integrations with Nexi ($1T GMV), JPM ($2T+ GMV), and Worldpay ($2.3T+ GMV), and more recently the Clover win ($300b+). Historically, Klarna has accounted for <1% of PSP GMV. Even marginal basis-point penetration shifts driven by the default-on feature represent massive volume upside.
Ever since inception, KLAR’s strategy, even if it goes against the founder’s wishes (winning Asos in the early days) is to aim for the biggest when they enter new markets. This is exactly what the Walmart win is in the U.S. Aside from that, KLAR continues to win new major merchants like eBay, GAP, Instacart, and unique direct storefront partnerships like “Apple from Klarna”.
Digital wallets add a consumer-led volume layer. While Klarna itself offers a digital wallet, integration with the largest wallets is pivotal for distribution. Digital wallets like Apple Pay are entrenched consumer habits, and Klarna being fully embedded within these wallets provides instant access to a large user base that fits Klarna’s core demographic, as Gen Z and millennials increasingly favor digital wallet payment methods.
U.S. Apple Pay in-store volume could approach $1T annually by 2027, with the EU and UK collectively reaching $1.2–1.5T. Even assuming just 1% BNPL penetration, this implies a ~$20B+ annual GMV opportunity from Apple Pay alone. If Klarna captures roughly half of that BNPL volume, this translates to ~$10B in annual run-rate GMV. Adding Google Pay to the mix further expands the opportunity. Klarna’s current integration allows U.S. consumers to use Pay Later and Fair Financing wherever Google Pay is accepted online, with autofill support. Given Apple Pay’s dominance in the U.S., Google Pay GMV could reasonably reach ~$500B annually by 2027, implying an additional ~$2.5B in annual GMV opportunity for Klarna under the same 1% BNPL penetration and 50% share assumption. Taken together, these integrations provide Klarna access to a combined pool of over 200 million potential users.
Advertising
With more merchants come more consumers, and with more consumers come more merchants. With both comes advertising revenue. Klarna is directly exposed to commerce media, the fastest-growing segment of digital advertising, projected to grow at a 19% CAGR through 2027. Roughly 66% of the top 100 merchants in Klarna’s major markets already advertise on its network, and 86% of top U.S. brands currently use Klarna’s media offerings. With a more stimulated consumer in 2026 and BNPL penetration continuing to rise, it is hard to argue that merchants will keep ad budgets flat after two muted years when Klarna can offer SKU-level data and click-through rates roughly 3x the industry average.
Subscriptions and the Klarna Card
An underappreciated revenue stream is subscriptions. Klarna Plus alone drove subscription revenue up 7.5x to $90M in FY24 from $12M in 2022. Klarna is uniquely pairing rewards and cashback through subscriptions with debit-first and BNPL payments via physical and virtual cards. This materially improves the value proposition of BNPL in a world where consumers often choose credit cards purely for rewards. Paired with Klarna’s first-party traffic advantage, this is more impactful than the market gives it credit for.
The Klarna card is not just a subscription driver but Klarna’s most powerful monetization lever. Card users spend roughly 5x more in ARPAC and transact about 4x more frequently than standard users. The revamped U.S. launch in July drove a 5M consumer waitlist, and by 3Q25 the U.S. reached 1.4M active cardholders, up from effectively 0 earlier in the year.
A persistent bottleneck in broader BNPL adoption has been the lack of rewards in a debit-first model. The new Premium and Max tiers attempt to solve this by decoupling perks from spending, without layering on punitive APRs. That is the pitch at least, and once consumers are on the Klarna card, the behavioral pull toward using Klarna more often is obvious. Investor aside, I am considering the card myself.
Taken together, the Klarna card and rising subscription penetration create a consumer-led GMV flywheel over the coming years. Higher consumer engagement drives more GMV, which attracts more merchants and higher merchant fees. That same loop works in reverse as merchant-led GMV puts Klarna in front of new consumers, lifting subscriptions and card adoption. This dynamic should naturally feed into Fair Financing as higher-spending card users move toward larger-ticket purchases.
Revenue Build
Taken together, the P14 base case projects 25.3% Y/Y total revenue growth in 2025 to $3.52B, modestly above the $3.51B top-end of management’s initial FY25 guide. The upside vs. guide is driven by a stronger-than-expected holiday season, early traction from PSP distribution, and a likely conservative guide given that this is management’s first ever as a public company.
2026 is where the model inflects. Total GMV is projected to grow 25.9% Y/Y to $160.3B, driven primarily by Fair Financing mix expansion and continued Pay Later momentum, with Pay in Full stabilizing on easier comps. The model assumes ~$33B of incremental GMV in 2026, supported by multiple overlapping tailwinds: consumer-led GMV from Klarna Card adoption, rising BNPL awareness, Apple Pay and Google Pay integrations ramping, and merchant-led GMV from direct merchant wins, default-on PSP expansion across Stripe, JPM, Worldpay, and others. A stimulated U.S. consumer and macro support in the EU, including ECB rate cuts and fiscal easing in Germany, provides an additional lift.
I project a 4bps decline in transaction take rate in 2025 to 1.50%, with the rate flat thereafter. While the U.S. carries structurally higher take rates, Klarna will likely offer pricing concessions to win large enterprise merchants, leaving the blended rate broadly stable. Advertising revenue is modeled to accelerate to 20% Y/Y growth in 2026, driven by continued merchant onboarding and higher advertising budgets tied to a healthier consumer. I also project a declining reminder fee take rate as Klarna continues to clean up its consumer pitch relative to AFRM. Subscription fees are looking brighter than ever following the revamped card launch and new tiers, and I believe an 80% growth rate in 2026 is reasonable and may still prove conservative based on recent history. Altogether, transaction services revenue accelerates to 26.4% Y/Y growth in 2026.
On the interest side, I project Fair Financing interest income growth of 36.5% in 2026, while the remainder of interest income decelerates to ~8% Y/Y. Including the expected gain on sale from Fair Financing receivables sold to Elliott, “true” Fair Financing interest income grows ~39% Y/Y in 2026.
Taken together, this translates into a 30.1% Y/Y revenue growth in 2026.
In 2027, I expect some moderation in top-line growth, but continue to believe Klarna can deliver 21.8% Y/Y revenue growth, and move to be a high-teens to low-20s grower thereafter.
The margin thesis
The top-line picture for KLAR is attractive, but the key reason the stock trades at a steep discount to peer AFRM is the market’s skepticism around margins (along with other non-fundamental factors). As such, medium-term upside depends on a clear and credible path toward margin expansion over the next two years. I break this down into transaction margin drivers and adjusted operating income drivers.
Transaction margin drivers
Processing and servicing costs represent fees paid to external parties to settle transactions, including payment fees to card networks and financial institutions. FY25 is expected to see a 6bps headwind as a % of GMV, or roughly 160bps as a % of revenue, driven primarily by rapid U.S. expansion. The U.S. has materially higher interchange fees at ~150–200bps versus ~20–40bps in the EU due to lighter regulation. The P14 base case assumes 2bps of leverage as a % of GMV in FY26, with costs flat thereafter. This is supported by several factors. Visa and Mastercard have agreed to reduce credit interchange rates by ~10bps for five years and cap rates for eight years. While currently viewed as insubstantial, even a 1bp benefit is incremental for Klarna at scale. Additional leverage comes from a shift toward ACH repayments in the U.S., payment bundling that consolidates multiple installments into single settlement events, and neobanking initiatives such as Klarna Balance, which encourage funds to remain inside the ecosystem and bypass intermediaries. As U.S. volume matures, Klarna also continues to benefit from scale-driven negotiations with PSPs. Over time, processing and servicing costs should structurally decline as scale and purchase frequency increase.
Provision for credit losses has been the primary bottleneck to transaction margin expansion. Fair Financing, while highly profitable over the life of a loan, requires Klarna to book loss provisions upfront while interest income is recognized over time. This creates a temporary profitability lag that the market is currently extrapolating as permanent. As Fair Financing cohorts season, recurring interest income begins to outpace upfront provisioning. In FY25, provisioning is expected to increase ~15bps as a % of GMV, or 480bps as a % of revenue, reflecting the rapid ramp in Fair Financing. The base case assumes provisioning is stable at ~62bps of GMV in FY26 and FY27. Over the long run, holding loans on balance sheet is structurally more profitable given Klarna’s low-cost deposit funding, allowing it to retain the full interest yield rather than sharing economics with third-party investors. That said, as Fair Financing continues to scale, provisioning volatility becomes more visible QoQ. The Elliott forward-flow agreement is a clear attempt to balance this dynamic and smooth reported margins. Under the gain-on-sale model, upfront provisioning is offset by a gain on sale in the same period, improving the visibility of underlying profitability. As U.S. underwriting data improves and forward-flow capacity scales, provisions should be stable as a % of GMV in FY26–27.
Funding costs are the final major component of transaction costs and reflect the net interest expense used to fund consumer financing. Klarna’s banking license is the core advantage here, allowing 90%+ of lending to be funded by consumer deposits. The 4bps increase as a % of GMV in FY25 reflects start-up costs tied to new forward-flow arrangements and the need to raise deposit rates to support rapid GMV growth. These effects are expected to fade, with funding costs declining ~6bps in FY26 and ~2bps in FY27 as deposits reprice and scale benefits emerge.
Taken together, the P14 base case projects transaction margin dollars of $1.264B in FY25, effectively in line with management’s $1.261B guide. Based on the drivers above, I project 460bps of transaction margin expansion in FY26 to 40.5%, followed by 90bps of expansion in FY27 to 41.4%. These estimates may prove conservative with scaling advertising and subscription revenues, which are essentially pure-margin revenue sources.
Operating margin drivers
I will keep this short. If there is one area where management has consistently delivered, it is operating leverage. FY25 is distorted by elevated transaction costs, but the longer-term opex trajectory remains intact. AI-driven efficiency is already visible, with AOI margins improving from -38.1% in 2022 to +6.4% in 2024, and there is little evidence this trend is slowing. The CEO literally talks about going into Cursor to edit simple code himself, lol. Whether this leverage comes through layoffs, natural attrition, or AI, I do not see anything derailing Klarna’s path toward continued operating leverage.
Customer acquisition is essentially free marketing through PSPs and merchants, as it is almost impossible to miss the big pink logo at checkout, alongside process centralization and AI-enabled content creation. As a result, sales and marketing is expected to see significant leverage, declining from 11.1% of revenue in FY25 to 8.1% by FY27. Customer service and operations should continue trending lower as a percentage of revenue, reaching ~3% by FY27 and declining in dollar terms. The AI assistant currently handles 81% of all customer service chats, performing the work equivalent of 853 full-time agents. G&A is expected to decline as a percentage of revenue from 8.9% to 5.4% by FY27. Management has stated they do not intend to resume high-volume hiring and expect headcount to eventually decline to ~2,000 employees (from ~2,900 today) through natural attrition. Approximately 85% of engineers now use AI copilots to write and review code, enabling rapid product iteration without a corresponding increase in engineering payroll. I continue to expect tech and product development to be the largest component of the opex base at ~14% of revenue, stepping down modestly to ~13.5% in FY26 and FY27.
All said and done, I expect AOI margins to reach 10.7% in FY26, up 890bps, as the initial impact from elevated transaction costs laps, with further expansion to 14.5% in FY27. Operating expenses will continue to grow in absolute terms, but at a much slower pace than revenue.
Management has laid out long-term goals of 50%+ transaction margins and 30%+ AOI margins. Over time, the business should converge toward these levels. Mature markets such as Sweden already generate ~57% transaction margins, versus roughly ~21% in the U.S., which should narrow as the U.S. market matures.
TMD and AOI Build
Social Arbitrage
The first note I referenced KLAR on was around social arbitrage, and how all I could think of when learning about that investment strategy was KLAR and BNPL. “Social arbitrage” is a fancy term for identifying shifts in consumer behavior or cultural trends before they show up in financials. In KLAR’s case, it is the divergence between the market multiple and how the company is actually trending with consumers in the real world.
To back up my claim that KLAR is a social arbitrage beneficiary, we need to look at how the product is resonating with consumers. While this is ultimately a merchant-driven business, social expression comes from the consumer side, and that shows up clearly in the data below.
Global monthly active users. Alternative data sources show Klarna app global MAUs up 55% Y/Y and 5% MoM to 52.4M in December 2025, versus AFRM at 46% Y/Y and 13% MoM to 14.5M, with comps such as SEZL, Afterpay, and Zip lagging. In November, KLAR MAUs were up 50% Y/Y and 4% MoM, versus AFRM at 35% Y/Y and -5% MoM, suggesting KLAR and AFRM continue to cement their positions, with KLAR pulling ahead on momentum.
U.S. monthly downloads. Klarna’s 2025 relaunch of its debit-first card drove a sharp spike in U.S. downloads, with ~1M downloads in just 11 weeks, as the app is required to manage card and banking features. November 2025 U.S. downloads were up 33% Y/Y and 20% MoM for KLAR versus 1% Y/Y and 16% MoM for AFRM. In December 2025, KLAR U.S. downloads rose 52% Y/Y and 22% MoM to ~1.2M, versus AFRM at 1% Y/Y and 13% MoM to ~0.97M.
Similar trends are visible in U.S. download data, with Klarna appearing to take share from AFRM. I am not suggesting alternative data should be relied on in isolation, but these trends reinforce the traction the Klarna card and app are gaining in the U.S., the market of focus for KLAR.
App rankings. As of today, the Klarna app ranks 17th among the most downloaded shopping apps in the U.S. During the peak of the holiday shopping season, it ranked 8th. Worldwide, it ranks 23rd.
Industry reports. An Adobe Analytics report released on 01/07, showed BNPL hitting a record $20B during the 2025 holiday season (11/31–12/31), up 9.8% Y/Y, contributing $1.8B more than the prior year. Mobile wallets drove 82.2% of BNPL purchases, while Cyber Monday alone crossed $1.03B, up 4.2% Y/Y. BNPL was primarily used to trade up into higher-ticket categories such as electronics, apparel, toys, and furniture, helping push total holiday e-commerce to $257.8B.
Klarna itself reported triple-digit spending growth across entertainment, experiences, and automotive during the holiday season, signaling a clear shift toward experiential and higher-value purchases.
Taken together, these data points provide a social view of how Klarna is performing in the eyes of consumers. BNPL adoption continues to strengthen, and KLAR is increasingly becoming synonymous with that trend given its leadership position.
Speculative upside - Stablecoins and “Cult potential”
To fuel the social arbitrage seen in the core product, a speculative layer of upside in the shares is Klarna being clubbed into the stablecoin basket. I’ll be honest and admit that I have clowned stablecoin use cases before. The truth is, usage of these products is only rising and is starting to have a tangible impact in areas like B2B payments and remittances, with the crux of the use case being reduced fees and faster settlement times. Klarna launched a dollar-denominated stablecoin in November 2025 as part of a broader push to deepen its U.S. footprint, coinciding with the launch of its global membership program. I am interested to see whether this has any positive impact on Klarna’s own transaction margins.
The GENIUS Act has loosened the regulatory environment, and Klarna is taking advantage by partnering with crypto wallets, most recently partnering with Privy (a Stripe company). Whether this initiative has a material financial impact is yet to be seen, but it fits squarely into the future neobank and digital financial assistant Klarna is trying to become.
More importantly, if stablecoin use cases continue to gain traction alongside Klarna’s own success in the space, coincident with names like CRCL and other stablecoin-adjacent equities picking up, Klarna shares could very well be grouped into the same thematic basket.
Cult potential, as I define it, is a stock’s ability to amass a large and consistent retail following. When I think about Klarna, I think about its smooth branding strategy and how its product directly benefits the consumer by offering much-needed flexibility. In my view, if Klarna’s anti-bank pitch and two-pronged shopping and neobanking platform continue to resonate, it becomes not just a payment option but a habit embedded in everyday spending and saving behavior. That same dynamic can translate into a cult-like retail investor following, as consumers who use the product frequently, intuitively understand its value, and emotionally identify with the brand are far more likely to follow the company, talk about it, and ultimately own the stock.
This may sound like BS, but you’d be surprised by the retail following some lower-income-focused fintech stocks have built on X. DAVE and SEZL are clear examples.
Another speculative source of upside, given the high likelihood that KLAR was a 2025 tax-loss name, is the January effect. We are already seeing this play out, with the stock up 9.4% YTD.
Base case valuation
My excessively long, LONG KLAR pitch ultimately boils down to a simple valuation framework, consistent with how payment companies are often valued: P / Transaction Margin Dollars (P/TMD).
AFRM is currently valued at ~13.8x P/FY26E TMD, while KLAR trades at ~6.3x on my base case. I believe AFRM deserves a premium due to its higher take rate and more mature long-term financing model, which drives higher AOI margins (consensus 27.5% in 2026 versus KLAR base case 10.7%). However, the magnitude of the valuation gap looks excessive.
KLAR’s discount largely reflects skepticism around margin expansion, which I expect to fade following a few quarters of consistent TMD growth. Both companies should benefit as BNPL adoption exceeds expectations and credit quality misconceptions unwind. That said, given KLAR’s larger scale, broader geographic footprint, and dual shopping-plus-neobanking model, I expect KLAR’s top-line growth to outpace AFRM in 2026 (+30.1% Y/Y base case vs AFRM consensus projected +24.1% Y/Y calendar year 2026) while also offering more margin expansion optionality, with AOI margins expanding 883bps Y/Y in FY26 vs AFRM’s FY26 guidance projected to see 300bps AOI margin expansion (AFRM calendar year not used here as consensus estimates appear inconsistent).
The combination of faster growth and more expandable margins supports greater multiple expansion for KLAR. In an environment where industry growth surprises to the upside, momentum screens will favor the fastest growers and in my view, that is KLAR.
If the base case plays out, I see KLAR maintaining its ~10x LTM P/TMD on FY26E TMD, equivalent to expanding its current P/FY26E multiple by ~3.7x turns, still ~3.8x turns below AFRM. A 10x FY26E TMD multiple implies a $48.18 price target, or ~53% upside, which I believe is achievable within ~18 months.
While this thesis is contrarian to prevailing market sentiment, sell-side price targets largely cluster in a similar range.
Bear case and risks
An obvious risk to the thesis is a weak consumer, or rather, a weaker consumer. KLAR is over-indexed to lower-income consumers and, despite Fair Financing GMV taking off, Pay Later will still be the major GMV contributor. The consumer is already perceived to be weak (I’m not going to beat the K-shape drum again), but I see tailwinds in 2026. In the event that the consumer truly weakens, an interesting mitigant here would be an uptick in BNPL usage; as long as underwriting remains strong, BNPL players can actually benefit as consumers seek a cheaper source of credit. That said, if this weakness is prolonged, the benefit is likely to be short-lived. A majority of Klarna’s transaction volume is tied to discretionary consumer spending, which is highly sensitive to increases in unemployment or inflation across its core markets.
A test of the times - a 50% spike in default rates in 1Q26? With BNPL usage growing strongly during the 2025 holiday shopping season, there has been some online speculation suggesting that “BNPL default rates could surge as much as 50% in the first quarter of 2026.” This would certainly be a risk if true; however, given the liquidity on Klarna’s balance sheet, the company should be well protected from a near-term worst-case outcome. Moreover, I doubt this speculation reflects the actual data or the strength of Klarna’s underwriting. In fact, KLAR is seeing credit losses trend down.
Fair Financing risks. Unlike short-term Pay Later options, longer-duration, interest-bearing loans carry higher credit risk, and their profitability hinges on Klarna’s ability to accurately price that risk in a relatively unproven market. While the Elliott forward-flow agreement mitigates optically weak short-term results driven by upfront credit provisioning, stronger-than-expected Fair Financing growth would likely need to be met with additional forward-flow agreements, which may not arrive in time to smooth a given quarter’s reported results.
Deposit rate risk. When short-term interest rates in Europe rise, Klarna must offer more competitive APYs to depositors. The mitigant here is the duration gap and 2022 & 2024 are examples of how KLAR managed the ECB hiking environment.
Regulatory risk is another obvious factor. While the environment has become more lax with the CFPB effectively dismantled, democratic state attorneys generals are attempting to fill that vacuum. Additionally, Klarna currently conducts its U.S. operations without a domestic banking license. As Klarna scales its neobanking products, U.S. regulators may eventually require the company to obtain a formal U.S. banking charter. Obtaining such a license would introduce significantly higher regulatory oversight. The mitigant here is to switch to an originating bank partner model to facilitate and fund the majority of its loans in the United States, however, this will likely raise funding costs. Note that Affirm has been operating for years in the U.S. and they have not been required to obtain a U.S. banking license.
FX exposure – Because Klarna reports in USD but earns the majority of its revenue (~65%) and Transaction Margin Dollars (~85%) internationally, the company is exposed to a strengthening USD.
March 2026 lockups – Beyond the risks outlined above, a major non-fundamental overhang contributing to KLAR’s post-IPO underperformance is the release of ~11x the current trading float in March 2026. The current float is just 34.3M shares; following the expiration of the standard 180-day lock-up period, tradable shares will increase to ~377.3M. At first glance, this appears alarming, particularly given that institutions hold ~67% of total shares outstanding. However, this is a double-edged sword. Sequoia, the largest holder at 14.6%, has shifted its strategy toward long-term ownership of disruptive IPOs, trimmed only a small portion at IPO, and still has Andrew Reed on Klarna’s board, making a near-term exit unlikely. Among institutional holders, SoftBank (15M shares, ~4% of total shares) appears the most likely to paper-hand over time given its recent history. The other inevitable source of supply is the employee share pool, which I estimate at ~15–18M shares, likely sold quickly to cover tax obligations.
That said, the other side of the sword matters. In my view, 4Q represents a credible earnings catalyst, as it will be the first guided quarter and likely embeds conservatism. A beat, and more importantly, a clear path toward 2026 transaction margin expansion, would be a significant positive for shares. Every trade has both a seller and a buyer, and with KLAR increasingly viewed as a consensus bullish idea, it is hard to imagine buy-side funds and pod shops ignoring a name with accelerating revenue growth, market leadership in a growing category, and visible margin expansion. Liquidity, in that case, would be welcomed. If this fails to materialize even with a beat and an upbeat guide, the worst-case outcome is that the position requires active trading.
On a more fundamental level, the P14 bear case assumes materially slower revenue growth of 18% Y/Y in FY26 alongside weaker transaction margins of 37.9%. Under this scenario, I would expect KLAR to trade at 6x TMD, implying ~25% downside from current levels.
Conclusion
KLAR is a market leader in a growing category that is expanding into more lucrative products while benefiting from both merchant-led and consumer-led GMV growth. The risk/reward is attractive, with substantial upside optionality as the business approaches a clear inflection point for both top-line growth and margins in 2026. P14 currently holds a 7.4% position at an average cost of $30.67/share and intends to build this toward a 10% weight. While this is a high-conviction position for me, given ongoing industry skepticism, the market’s tendency to quickly lose interest in fintech, and the non-fundamental factors discussed above, I recognize that KLAR is a long that will likely require active trading along the way.
Most enjoyable and noteworthy writeup of yours I've read so far, along with the Cu and your What's Next posts. Psyched!
Thanks for this write up.