The snow is falling heavily in Stockholm, but inside a small, pitch-dark auditorium, the atmosphere is cozy and warm. A buzz of anticipation gives the space the feel of a music club as about 300 people wait for the headline act. When a tall man strides up on stage in a Palm Angels flannel shirt and black lace-up boots, he looks in fact like he might pick up an electric guitar and play for the crowd.

That would be apt: Sebastian Siemiatkowski is a rock star to many of the tech execs and investors attending this daylong conference on startups. The CEO and cofounder of Klarna—the $6.7 billion-valuation, buy-now-pay-later company—helped invent a new industry in his early 20s, built his company to become Europe’s most valuable startup, and more recently made it a player in the biggest market in the world: The U.S.

At this moment, Siemiatkowski does not feel like a star. He admits he is weathering a grueling year. Klarna’s private-market valuation has plunged 85%, hit by rising interest rates, the Ukraine war, and the specter of recession. He’s been forced to lay off more than 700 people, including some friends—about 10% of the company’s workforce. And Klarna recently posted its biggest-ever annual net loss, of $1 billion for 2022. “I’ve been at this for 18 years, right?” he tells the audience, assembled by tech news site Sifted. “I feel sometimes like an old man or woman.” As if to underscore that idea, at one point he stretches his long legs out so far that he topples over, upturning his chair.

In fintech years, Siemiatkowski is indeed old. (In human years, he’s 41.) When he launched his startup in 2005, he was a pioneer. Now he finds himself in an ever-more crowded field as corporate titans seize on the rocketing popularity of BNPL, which lets consumers defer payment on purchases without incurring interest (at least not right away). While estimates of BNPL’s market size vary wildly, GlobalData predicts global BNPL global transactions could rise from about $120 billion in 2021 to $576 billion in 2026.

In the U.S., about 20% of consumers now use BNPL, according to surveys by Morning Consult, a decision intelligence company in Washington, D.C. “It’s carved itself a permanent place in people’s wallets,” says Charlotte Principato, a Morning Consult financial services analyst.

For Siemiatkowski, BNPL’s success is both a blessing and curse. Klarna has grown steadily since its early years, first regionally, then globally. In February, it announced that the U.S. had overtaken Germany as its biggest market by revenue, with 34 million Klarna users in the country—more than one in five of its customers worldwide.

And yet, the next wave of users might be harder for Klarna to win. New competitors include giants like PayPal and Citi. In late March, Apple began offering Apple Pay Later to 500 million Apple Pay subscribers, enabling them to pay in four installments, just like Klarna does, for purchases up to $1,000.

The question for Siemiatkowski is whether his company can maintain its leading position. The CEO is believed to own a little under 10% of Klarna, and to be weighing an IPO (the company will confirm neither detail); in total, Klarna has raised $4.5 billion. As it battles to stay on top, the company is rethinking and expanding its business model—with a recently announced assist from ChatGPT.

“It is such a massive market, there is enough money to make,” Siemiatkowski says at the Stockholm conference. He believes fintech will winnow down to its strongest players—and that Klarna will be among them. “The pie will be smaller, but our slice will be bigger,” he says.

Meeting in the marshmallow room

Step into Klarna’s headquarters in downtown Stockholm, and there is little sense of a company under pressure. The space is awash in the company’s bubblegum-pink brand color, with hyper-modern artwork on the floors and walls. Klarna’s latest brand ambassador, Paris Hilton, gazes down from a large screen, looming over a lilac seat that looks like it’s covered in soft fabric, but turns out to be painted concrete. Pink meeting rooms are named for sweet treats, and Siemiatkowski and I initially settle into the marshmallow room (flanked by brownie and cookie).

The staff (including Siematkowski) works in glass-walled offices, each containing seven or eight people. Siematkowski typically leaves the office around 5 p.m., racing home to his own large, glass-walled residence filled with contemporary art (the Wall Street Journal calls it “an attention-getting home”). There, he has dinner with his wife, whom he met at college, and their three children, age 9, 7 and 5; he reads Famous Fiveadventure stories to the kids at bedtime. “I love reading to my kids,” he says. “It is one of my favorite things.” He works from home at night, with calls to Klarna’s U.S. headquarters in Columbus, Ohio.

Siematkowski may project homey values, but he runs a hard-boiled business in a cut-throat industry. By advancing shoppers very short-term loans, Klarna assumes the financial risks of retail credit, while giving retailers ready access to millions of customers. Shoppers can choose to pay, interest-free, either in four equal installments every two weeks or within 30 days; alternatively, they can pay over the course of two years, with interest rates rising to a steep 29.99%.

Klarna makes most of its money by charging transaction fees to merchants for whose sales consumers use Klarna. There are also fees charged to users for late payments and interest repayments. The company says it has more than 500,000 partner retailers in 45 markets worldwide, along with more than 150 million users, of which more than 25 million are monthly users of Klarna’s app. Gross revenues in 2022 were 19.3 billion Swedish kronor ($1.84 billion), up 21% from 2021.

Last year, Klarna launched a Visa credit card in the U.S. Siemiatkowski believes more and more shoppers will opt to defer payments in the years ahead, calling it “a trillion-dollar market opportunity.”

Shoppers join, retailers follow

Given Siemiatkowski’s childhood, it was a longshot that he would play a leading role in a trillion-dollar industry. His parents left Communist-run Poland the year before he was born, and scraped together a basic living, mostly by his father driving a taxi. “There were weeks we were out of food,” he tells me as we walk through his sumptuous headquarters. “I would eat pancakes every day, because that’s the only thing my mother had: Flour.”

Siemiatkowski describes himself as a classic, driven immigrant kid, cobbling together ideas from age 13. He came of age just as Stockholm was becoming a fertile hotbed of disruptive tech. It was here in the 2000s and 2010s that Spotify revolutionized music streaming, Mojang Studios invented Minecraft, and King Games invented Candy Crush. At 23, while studying at the Stockholm School of Economics, Siemiatkowski and his friend Niklas Adalberth delivered a pitch to angel investors at a student Christmas event, with a new concept: Buy now, pay later.

The idea bombed. “They were all saying, ‘Guys don’t do this, the banks will do this, there’s no way you’re going to succeed,’” Adalberth (who left the company in 2015) later recalled. Siemiatkowski says his parents were vehemently opposed, too, pushing him to get “a nice corporate job” with a steady paycheck. But with a third friend, Victor Jacobsson, the duo raised $60,000, giving themselves six months to succeed or move on.

Naively, the three friends offered tech engineers 37% of their startup, in exchange for building the platform. The techies sold out when Klarna’s valuation hit $10 million—a disastrous error. By 2013, Klarna was valuedat $1 billion, with 10 million users, and in 2015, it reached a $2 billion valuation.

Yet Siemiatkowski knew that for Klarna to reach truly powerful scale, it needed to break into the U.S. In 2015, it was nowhere near ready. The Klarnauts, as the company calls its employees, spent the next few years speeding up payments, designing a broader app and a browser extension, and approaching hundreds of U.S. merchants. Siemiatkowski says most rebuffed them. Afterpay, a Klarna clone founded in Australia in 2014, and San Francisco-based Affirm Holdings had already launched in the U.S. “We came into the biggest market in the world, and were competing with a superfast-moving startup,” he says of Afterpay. “We were behind.”

He decided it would be easier to sign consumers than retailers; retailers would inevitably follow. With investments from BlackRock, Silver Lake, Softbank, and others, Klarna plowed millions into marketing in the U.S., recasting itself as a brand dedicated to that all-American devotion: Shopping. As it had in Sweden, the company sold itself as hip and fun, down to the bubblegum pink—the antithesis of the banks and credit-card companies familiar to U.S. consumers.

Its big American breakthrough came with a viral 2021 Super Bowl ad, showing SNL actress Maya Rudolph, in quadruplicate, riding four horses into a Wild West town to buy cowboy boots (pink, of course)—boots for which customers could “Pay in 4” with Klarna. That June, rapper A$AP Rocky—who Siemiatkowski recruited as an investor—teased his new album in another Klarna ad in which he strode through (fake) New York City streets; users could win the bathrobe and slippers he wore by uploading selfies on Klarna.

By summer’s end, Klarna had 20 million American users. As Siemiatkowski predicted, retailers followed. “We had one metric we showed everyone,” he says. “Who has the most downloads, Afterpay or Klarna? We had two or three times the downloads.” That number shot up last year, making the U.S. Klarna’s biggest market. Klarna’s gross merchandise volumes in the U.S. rose 71% in 2022 over 2021.

The summer of 2021 also brought Klarna’s valuation to its high-water mark: A June funding round valued the company at $45.6 billion, a peak no other European startup had achieved.

The high cost of success

Reaching that peak came at a cost. Siemiatkowski estimates Klarna was burning through $100 million a month to build a U.S. market. “What we describe as losses were investments,” Siemiatkowski tells me. “We were investing very aggressively in the future.” Marketing wasn’t the only mounting expense. Like other BNPL companies, Klarna takes out short-term loans cover customers’ purchases; as interest rates rose through 2022, those loans got more expensive.

With losses mounting, investors pushed for cuts, and some employees paid a personal price.

Last May, Siemiatkowski called an all-hands staff meeting, for which he pre-recorded a video announcing the layoffs of 10% of the Klarnauts. He told employees that business plans for 2022 had been drafted before Russia invaded Ukraine, accelerating the planet’s soaring inflation and sinking markets. “It was a very different world than the one we’re in today,” he said.

To some employees, the message was devoid of empathy; in the U.S. it was delivered by managers who refused to take questions. Worse, just weeks before the Ukraine invasion, Klarna’s board had given Siemiatkowski a 35% pay raise (to 13 million Swedish kronor, or $1.25 million, annually).

For years, Klarna had trumpeted its strong performance, leaving employees unprepared for layoffs. Some employees blamed the cutbacks on Klarna’s heavy spending in the U.S Gergely Orosz, an Amsterdam-based software engineer, spoke to 30 Klarna employees as he covered the layoffs on his widely followed “Pragmatic Engineer” newsletter. “Those laid off in the U.S. did not have their health insurance covered beyond the end of the month,” Orosz wrote.

The string of bad news teed up the company for something every private company dreads: A “down” round. In July, Klarna raised $800 million in a round led by longtime investor Sequoia Capital, for a valuation of only $6.7 billion.

Siemiatkowski tells me he remains anguished by the layoffs. “You have all this amazing positive emotion around, building things, doing things,” he says. “Then suddenly, you need to put a halt to it….I was very sad. Of course I cried.”

Teaming up with ChatGPT

Nearly a year on, the shakeout seems to have signaled a turning point for Klarna. No longer a scrappy startup, the company is now a multinational giant. And its future could partly depend on a technology that is capable of transforming ecommerce at lightning speed: Generative A.I.

Shortly after Siemiatkowski and I met in Stockholm, OpenAI announced it had selected Klarna as one of the first 12 companies to use a ChatGPT plug-in on their platforms—to serve as early case studies in how the technology works.

Siemiatkowski says he believes generative A.I. will dramatically change Klarna, from a platform focused on payment options to a shopping comparison tool knitted into customers’ lives. He claims he predicted such a development as far back as 2015. “We sat down, and said, ‘Look, eventually you will wake up in the morning, and your computer will say, ‘Hey, I’ve analyzed your mortgage while you were sleeping, and realized you could save ten dollars,’” he recalls. Now, he says, A.I. will enable that.

Such an evolution could be crucial to helping Klarna differentiate itself from proliferating rivals. “BNPL players will have to diversify,” says Principato of Morning Consult. Otherwise, she says, “they could get bought by banks for their BNPL tech.”

It’s not hard to imagine Klarna’s ChatGPT plug-in creating eerily accurate profiles of millions of peoples’ tastes and shopping habits; indeed, Klarna has begun asking consumers to opt into data-sharing with merchants, to enable accurate product targeting. “This tech allows us to move and scale at a pace that was unthinkable a few years ago,” Siematkowski says. “I’ve never seen anything like this.”

Neither, it seems, have privacy advocates and governments. Even before generative A.I.’s explosive debut last November, there were mounting concerns among regulators about BNPL’s sharp growth—and the massive amounts of data Klarna and its competitors were harnessing about their users.

“Buy-now-pay-later lenders can gather extraordinarily detailed information about your purchase behavior, in a way traditional cards cannot,” said Rohit Chopra, director of the U.S. Consumer Financial Protection Bureau (CFPB), in a statement last September. Klarna says it collects user data largely for fraud protection and underwriting purposes and does not sell it to third parties.

There’s also a more traditional worry—that BNPL blinds consumers to the debt they’re piling up. A CFPB official tells Fortune that the agency fears BNPL encourages “loan stacking,” in which consumers use several different platforms simultaneously, loading up on debt obligations. “Some are utilizing them so heavily that they may have difficulty making payments on other things, like student loans and auto loans,” the official says.

Siemiatkowski rejects that, saying Klarna’s credit is offered for shorter time periods than credit cards, and that the company will cut off consumers who don’t repay. By contrast, he says, credit-card companies encourage users to accumulate debt, the better to collect high interest.

One way or another, he argues, people will borrow money, either from unscrupulous lenders, or friends, or legitimate companies like Klarna. “First and foremost you have to ask, ‘should credit exist for purchases?’” he says. “My answer is yes.”

Klarna, its founder insists, is simply offering them an unusually seamless, high-tech way to get that credit. And despite his company’s current slump, demand seems to be here to stay.