59. Can Klarna convince Wall Street?

0:00Welcome to The Difference Engine, the show for tech founders, investors and innovators.

0:11we've been doing this for a while now jonathan and i just wanted to flag to our listeners that we take this really seriously we love tech and we love where it's going uh but we're always going to call it straight right yeah we can't do it any any other way and you know certainly at the moment there are some things which are going really well definitely some things to applaud in European tech, but there's some other things, particularly the action of government, which we're not so keen on. So dear listener, you can expect even franker opinions and a more ruthless inspection of where we're taking tech in Europe.

0:47So on that basis, today we're going to be brutally honest about the hot news in fintech, banking and of course AI. But first, it's IPO o 'clock for Klarna.

1:01Klarna is finally going for it. It's IPO time and the IPO marketing has kicked off if the media reports are right. 13 to 14 billion dollar valuation right. It's a far cry from the 50 billion dream back in 2021. Still it's a solid rebound from the 2022 low but here's the real question has Klarna built enough category leadership to justify a public listing uh i'm not convinced Klarna's always felt more like a feature than a platform even though i do notice that a lot of um my younger colleagues use Klarna as a verb they'll say i'll Klarna that purchase so yeah i but i still think it's a feature yeah well generic you know doesn't make a category leader necessarily and you have to think about where's the defensive moat um you know they've got added products, debit cards, some AI driven shopping tools, and there's even been a broader push into digital banking.

2:02But is that a category expansion we have to ask ourselves, or just product bloat, trying to sell on added services to existing customers? So if you're gearing up for an IPO, an IPO, your initial public offering, the big fanfare when you're out there in a market that's obsessed with crypto, with AI, with deep infrastructure data plays, does claiming to be a better, essentially a better BMPL or buy now pay later provider, does that move the needle? I think some people disagree. Others, there are other podcasters available. I'm thinking here of the 20 BC guest Rory O'Driscoll, who's the, as you may or may not know, is the scale up ventures guy who invested in Box and in Omniture, very successfully sold to Adobe and DocuSign with his mate Jason Lemkin, him of Sastra.

2:51He described Klarna as no more than a financial player. Now, if you're a financial player, you can expect financial sector type returns, right? More in line with the performance of like mature banks or insurance companies. If you want big, big returns, bigger returns, a type that Rory and Jason like, then you've got to redefine the frontier. It's not about hedging your bets and competing on little bits of margins. Yeah, yeah. I mean, that's what worries me. much as I'd like it to as a European client. It doesn't feel like it's owning a new category. It's pivoting into spaces where others already dominate.

3:28Now, if they come out and said something like, we're not BNPL, we're the operating system for consumer credit, or something equally bold, that would be a different story. Yeah, absolutely. So this recategorization, if you will, of credit, of buy now, pay later, is just way too crowded. You have a firm. You have Apple Pay later, you have PayPal. Even the credit card issuers, Visa and MasterCard, are in the game, together with a few pump-and-dump players with some dodgy business models that always happen in this sort of market. Yeah, so are we recategorizing credit? What we are seeing is that Klarna appears to be trying to tell a resilience and maturity story.

4:07You know, that's fair enough. But technology category leadership is about forward-looking vision, not just bounce-back metrics. Longevity is why investors hold value shares like utilities and banks. And it has a value, especially in uncertain times when a few are making rash bets. Plus, U.S. investors are always skeptical about non-U.S. firms. Klarna's listening in New York, not Europe, because that's where the capital is. But culturally, U.S. markets reward bold, dominant, narrative-first businesses. Klarna's pitch feels I think you know just too euro conservative sensible almost apologetic perhaps a bit too proven yeah I know we got a little bit carried away over here in Europe with the BNPL stuff I remember and not directly relevant but sort of similar space Wonga payday loans TechCrunch in Europe said in 2011 selected this payday loan company as its top 100 winner everybody in Europe was really, really beating their chest.

5:13That company, Wonga, ironically beat out Spotify back in 2011, and we know how that's ended up. So I think if investors thought something was dodgy with Wonga, they perhaps wouldn't have raised£73 million, which TechCrunch reported at the time. And this just shows how fast things can actually move on. And here we are right now with an IPO right in front of us for Klarna. And, you know, let's compare it to a firm. So when a firm IPO'd in 2021, it positioned itself as a tech company with a clear mission and a CEO, Max Levchin, who was a known quantity, a Ukrainian immigrant who founded or co-founded the company's Slide.com and HVF even before he got to a firm.

5:59He was also an early investor in Yelp, which has had its ups and downs as we know, and was their largest shareholder in 2012. And let's not forget a certain company that he was also co-founder of and the former CTO of PayPal. Possibly less said about that, the better at the moment. But if you look in contrast, you've got a Polish immigrant to Sweden, Sebastian Semyakowski.

6:25Sorry there. Sorry, Sebastian. He started building Klarna at the ripe young age of 23, and he did co-found it with Nicholas Adelberth and Victor Jacobson back in 2025. So, you know, it is actually a great entrepreneurial story, including Sebastian meeting one of his co-founders when they were both working at Burger King, which we love. No jokes about flipping that. But, hey, just flip the burger, don't flip the firm. But, you know, if you think about, if you really compare him to Levchin, if you're considering a US float, Sebastian's really a 20-year one-trick pony on that. But, you know, albeit with great numbers.

7:12And albeit with a generic, as we discussed, it's confusing. Is this a category or is this just a feature? Klarna, not to be ignored, 111 million users, 20 % year-on-year revenue growth. and if you adjust a few things, the profit goes back into the black at the moment. And they did a really neat little 26 billion loan sale to the student loan company NullNet. That is smart financially. The problem is it doesn't exactly scream innovation. It just looks like cleaning the balance sheet. You're a hard man to please. I am. I see this stuff every day. But strong performance doesn't guarantee a strong multiple.

7:53without a clear category story. And that's the issue here. You know, in comparison to a firm which is going to be the benchmark on a US flotation, Klarna has been in recent years more of a shapeshifter. You know, one minute it's a fintech, next minute it's a fashion app, now it's a digital bank. So if you think about that, here's the big question. Is Klarna riding a wave of cautious optimism or are they hoping investors won't notice they truly haven't really led in anything since 2018? I don't know. A good IPO cleans things out. It brings in some funds and you can try some new stuff, but it doesn't sound like that's what Klarna wants to do, right?

8:39Yeah, probably a bit of both. Unless they come swinging out with some sort of category narrative that refrains what Klarna is not just what it has previously done I don't see them commanding long-term public market love which could be a nightmare for investors. Yeah I agree with that you know a good IPO might get them out the gate but without category leadership particularly in the US staying public could be a real grind and you know just thinking back to previous episodes as we've discussed previously now might actually be the time they need to stay private and to pivot away from BNPL and establish new category leadership credentials.

9:25Recently we've talked about whether government is fit to initiate potentially category-creating technology initiatives which they create with a fanfare only to find their leaders bizarrely disappearing more regularly than Spinal Taps drummers. Well it looks like at least one sector, one of them, isn't waiting around while a bunch of civil servants, quangocrats and politicians noodle about the impact of AI on the European economy and what we need to do about it. It looks like one sector, banking, traditionally a strength in this here part, has risen to the challenge, realising that it's change or be changed.

10:01And the time to act, if not yesterday, is right now. Right. So predictably, it's not one of the former high street behemoths or some financial firm that no one outside of London or Frankfurt has heard of. We're talking about Zopa Bank driving a new AI upskilling program, which they've snappily called Jobs 2030. 2030, Jobs 2030, very snappy. Apparently, they're forming a coalition to reskill 100 ,000 banking professionals in AI by, guess when? That would be 2030. It is quite a bold move, particularly for a neobank that started life pre-pivot as a peer-to-peer lender. Well, if that's as being reported, it's exactly the kind of proactive shift that we like and the industry must achieve and the country needs.

10:55Not least because the benefits-based living standards of the UK population are reliant on the performance of the City of London and our financial services for those taxes, those lovely taxes that make as much subsidies as possible, possible. I guess it's impressive that it doesn't look like some sort of feel-good techie plaster, because you think they're not just focusing on service-level adoption, right? They're building a deep sector-specific AI expertise, starting with fintech engineers, analysts, and operations leads. Well, the cynic in me thinks this either could be typical of the European approach of open source everything, and to counter what looks like a resurgent future US financial economy with dominance in crypto because the new US regime is legitimizing at pace crypto assets.

11:43And the Trump government has announced a new federal reserve, not of pork bellies, not of orange juice, not of gold. This one is crypto assets like Bitcoin, Ethereum, and perhaps even, who knows, Trump coin. So I don't know. I find this tactic of assuming leadership a bit questionable. It's failed before and recently. Remember when we had our new government and Peter Kyle, our so-called tech minister, claimed that the UK's leadership of AI would revolve around its lawyership and that every AI company in the world was somehow going to let the UK and the EU dictate the AI guardrails. And that was somehow going to tame the US at the time, big tech AI leaders, now the US and Chinese big tech AI giants.

12:31How long did that last? How long has this EU AI Act lasted in the face of Trump tariffs? Not very long. And from what we've seen, the EU AI Act could be weakened further. And the digital sales tax, which we assumed we could just put on large American big tech companies, has not gone community wide yet in the EU and looks like it will crumble in the face of Trump's terrorists. So who's going to blink first here, Jonathan? I don't care who blinks first here. We're not really talking about, you know, what governments and quangocracies and civil servants are doing here. We're talking about, you know, red in tooth and nail businesses realising that they have a big issue coming at them, and it's an existential issue and if they don't set the policy, take the initiative, they aren't going to be in any form of business because new AI first entities are going to come along and eat their lunch.

13:29So what impresses me about Zopa's initiative here is it's absolutely root and branch right the way through the value stack. It's not just a few training courses for some bewildered business executives and you know the fact is they're integrating a gen ai engineering program shows they're serious about the technical depth not just theoretical knowledge or talking a good game zopa is also walking the talk by launching their own coding academy to support it and that's a big investment in long-term capability yeah it makes sense a lot of ways the juniper research survey they quoted and presumably they also commissioned found UK banks are projected to save 1.8 billion over the next five years through AI and more telling that's based on the same amount invested that kind of financial ROI if it comes off when the game is actually survival is bold and hard to ignore.

14:27Yeah exactly plus 187 million hours saved I think you know mainly through you know as you would expect back office efficiencies. That's what they're claiming. So this isn't just about cost. It's about reallocation of human capital. Let's not pretend that the workforces aren't going to reduce accordingly. They almost certainly are. But the potential to free up time for higher value work could actually change how banks function entirely. And, you know, at least we can only hope that the retail banks might start finally delivering the customer service that have been forever promising in their shiny, but frankly, improbable and ultimately irritating ads.

15:18And it's hard not to join the dots here. there was a story in the Financial Times recently, front page story, Lloyds Bank, formerly British government owned, is actively PR-ing, going out with a story that their weakest 10 % of their staff will be let go. I mean, that's pretty bold and would talk to productivity and customer service improvements. Now, as a positive point, there is already momentum in the sector. Yeah, Spanish Bank Santander is rolling out mandatory AI training, as they should, and they are including marketing and frontline staff. So as long as they keep their jobs, you would think it's becoming part of their DNA.

15:56And that that level of commitment by the bank shows even legacy banks are really taking this AI shift seriously. Yeah, yeah. I mean, it's a smart response. I mean, we know Gen AI isn't just another tool, particularly when you apply it to a weightless industry like banking. um it's actually what peter donlan who's zopa's cto called a paradigm shift in applied computing uh right you know that's sort of buzzwordy bingo but i think we get the point and and uh you know donlan's got some chops in this he was previously cto at the online greetings card vendor moon pig how can you say moon pig without saying moon pig.com yeah and interestingly he was the cto that saw it through its public listing in 2021.

16:43So, you know, well done, Zopa. But the point is that Donlan is right. This isn't about adding an annoying and frankly useless chatbot to a website or automating a few simple workflows. We've all suffered from that. This is actually fundamental. We're talking about rethinking productivity, software development, decision making, you know, the whole kit and caboodle. Yeah, I spent last week saying human, human, human into a voice-driven chatbot just to get a human voice from Metro Bank as it happens. Of course, digital first banks like SOPA, they have an advantage. They haven't got layers of legacy systems.

17:25They've not got massive unionized workforces. And they've been putting machine learning into their operations for over a decade. And they can now, they've had a good chance of reshaping the conversation, even though they may have lost the initiative a little bit in recent years. As Nick Maynard from Juniper said in a statement of the bleeding obvious, digital-only banks could be key to leading the sector through this transformation. No shit, Sherlock. Yeah, of course. And with Gen.I.'s potential to rival the categorizing and redefining impact of technologies like the internet or cloud computing, banks that fail to adapt are yet again going to be left behind.

18:04Yet the UK skills gap is real and continues to be pernicious and government as it is composed of former state and charity employees is currently clueless across the board so unless the industry itself invests in education right now we'll have all the tech available but not the talent to implement and use it yeah and i think that's where initiatives like zopas um you know we have to praise them this jobs 230 or 2030 campaign is critical it's not about training it's about rewiring the culture and capabilities of the entire sector and the call for partners is also a nice sign that they realize it's a bigger problem than one company can solve.

18:44They're not trying to own the ecosystem which is a smart move they want to build it collaboratively with a skills base and support the entire industry. This is an innovation model being pursued actively in the SaaS sector by our good friends at BoardWave. So yeah nothing but praise. If the banks get this right we could see a very different landscape by 2030. You know, let's hope we'll get something that's more efficient, probably more intelligent, and ironically, hopefully more human-centric. The question is, though, who is going to move fast enough to stay ahead? And as we know, you know, the only certainty is change, and probably the only thing we know is that many things are going to be unknown.

19:33What future agenda-changing tech developments will we see in the next five years, which is of course a very long time in AI. Only time will tell.

19:50European fintech, will it redefine US retail banking? For years, Europe has had a tech advantage over the US in two domains, digital telecoms and online banking. And I say digital telecoms and online banking because Europe's lack of a single telco network, unlike the States, where it got broken up famously, has allowed advanced national champions to leapfrog the US. I'm thinking of Vodafone here in the UK, Telecom Italia, etc., etc., Deutsche Telekom. In consumer banking, unlike the US, where there were literally hundreds of small banks, are relatively larger national players and or early adoption of smartphones meant we could build digital banking rails and innovate faster.

20:32Think chip and pin, faster payments, open banking. But is the balance starting to tip back now? Did you see the news about our UK neobanks, Revolut and Starling, looking to buy nationally chartered US banks? The FT said UK fintechs exploring buying US banks to speed up their push for licenses. So according to the Financial Times of good old London, both Revolute and Starling are looking to accelerate their US assault with US acquisitions. Yeah, it's a bold play. Clearly, as you say there, Paul, they're trying to shortcut the route to getting a US banking license. Now, that makes a lot of sense because applying for a US banking license is at best a slow and astoundingly high friction process.

21:23And they can potentially bring innovation to the notoriously backward US retail banking sector. You know, for category creating European fintechs, acquiring a struggling US bank gives them instant infrastructure, licenses, deposits, and potentially credibility through the US brand in one move. I mean, it is a classic market entry via M &A. Definitely a buy versus build approach to potential category domination. Yeah, they could win bigly. And from that, looking at this with a category lens, owning the license allows European fintechs more control of the stack, the brand experience, the regulation, and so on.

22:10And if you like, the minimal viable product is proven over here. So maybe it's time to get busy scaling the category. It's no longer we're a fintech offering banking service. It's more like we are a bank and we're fundamentally different to the fragmented 1950s style experience you've been used to in your small hometown. That shifts the perception and the position in the market fast. Yeah, totally. Plus, let's be honest, there are US banks out there with outdated, inverted commas, digital offerings and balance sheets that are only just surviving. for styling or revolutes, the best thing with them.

22:48And they have got best in class tech and it's proven. That is low hanging fruits. You know, you just go there, you know, in theory, acquire, modernize, scale. Absolutely. Throw away all the checkbooks. And you might start exciting US customers, the ones who've actually got the problems in the category. But these guys have got to get the integration right. The tech is almost the easy part. it's aligning culture and compliance and managing regulatory expectations in a frankly a foreign land that is the real work especially in the u.s where the regulatory climate as we've seen can flip very quickly depending on who's in power and there's always that tendency for u.s management teams to assume that they are the best at everything when demonstrably they're not i mean you know what's with the odd payment slips in restaurants that's what is that about pens papers Have I ever tried to access funds in the US?

23:39Last time I tried to get some funds from my Spanish bank, Santander, I was told at the end of a very long series of phone calls, all I needed to do was visit my closest local branch, all of which were in the East Coast. Not terribly helpful when you're spending a week in California. Yeah, and it's been like that for decades. Absolutely. And it's absolutely true. It's atrocious. But, you know, trying to be balanced, trying to be positive here. Under the Trump administration, of all things, that the signal suggests a more M &A friendly stance, especially for mid-tier and struggling institutions, of which there are many.

24:14So the timing for Starling Revolut and whoever else is considering striking into the US, timing might be in their favour, but it won't last forever. And as we know with Trump, things could change on a whim. So one has to ask oneself, if you thought this through, does making America great again involve the acquisition of US assets by foreign competitors? Well, it's a big prize. There's a real category opportunity here. If Revolute, Starling, Metro, you name it, whoever else wants to come along tandem. If some European fintech pulls this off and they're the first mover, they're not just entering the US market.

24:54They are de facto redefining what a modern digital first global retail bank could look like in the Western world. I don't think US incumbents from what I've seen even today are ready for that. So I do know that the American public who love convenience will like the service levels. Yeah, but I think deeper than that, it's also a signal for a broader wave of cross-border M &A and fintech. We've been talking about global category leadership for years, but this is the execution phase. This could mean the playbook will be updated in real time. Yeah, maybe a word of caution. This is even more so for manufacturers, the Trump administration being one, a very dynamic position from a category point of view.

25:42And it looks like some of those who claimed new categories are beginning to forego the category leadership. I'm thinking of Klarna here. A lot of these so-called neobanks have pioneered new types of lending approval, as we've seen with our friends from Onfido. The digital payments and the smartphone UIs were unseen before the Europeans pioneered it. Now, though, it's the boring parts of US market entry, and they may not be as easy to do as it once seemed with your move fast and break things mantra. Yeah, right. I mean, from a go-to-market and platform strategy view, this really heightens the opportunity for others to help deliver secure, compliant, collaborative systems, especially when you're dealing with cross-border data, regulatory audits, and sensitive workflows.

26:35you know exactly the point is that fintechs need to be able not just to buy banks but to run them across many complex and changes changing this just jurisdictions and did somebody talk about crypto at some point on this yeah i mean like you know it seems like crypto is going a million miles now it has to be part of the mix if they don't get that right now they'll miss an opportunity so yeah i absolutely think crypto is going to play into all of this yeah but i think if this doesn't get blocked and they make the right acquisition decisions this feels like a turning point and we could be watching the beginning of european fintechs not just exporting their tech but exporting their model and owning the regulatory path um so if they get this right they won't just be players in the u.s market they'll be i guess redefining it yeah i mean didn't they say about the americans coming over the service one coming over here they were over here and over sexed Wouldn't it be nice if we could get the Europeans to stop underperforming and perhaps overperforming in the US FinTech?

27:36Yeah, well said. It's category design meets financial engineering. If you're a European FinTech with global ambitions, now could be the time to move. Go for it.

27:50Did you catch Technology Secretary Peter Carle's Mansion House speech the other day? he was practically waving the ai flag from the rooftops uh well i skimmed it uh usual claims the chest thumping 2.9 billion invested i wonder by who 86 000 ai jobs created by who red tape slashed which is pretty unbelievable coming from this lot and smug slogans like innovate not imitate blah blah blah this reminds me of the thousands of uh the mirage of thousands of green jobs which to be fair all of the parties dreamt up ahead of the last election they've all disappeared in our poof failed battery ventures closing wind time wind turbine manufacturers and the perennial inability of this country to move on with major infrastructure projects like for instance maybe a good idea renewing the national grid yeah that would be a good idea um so it just seemed to be classic political vision casting and grabbing other people's efforts as their own but there There was an interesting bit.