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Klarna and Stripe, the two highest valued fintechs in the world, have announced a strategic partnership that will bring Klarna’s buy now, pay later (BNPL) product closer to consumers in 20 countries and enable Stripe to offer more competitive solutions to merchants.
The partnership will enable retailers using Stripe’s infrastructure to integrate Klarna’s BNPL payment methods in 20 countries, including the UK, United States and numerous EU countries.
Klarna will use Stripe’s infrastructure to extend its reach, primarily to consumers in the US and Canada.
The partnership will enable retailers with any kind of Stripe integration to accept Klarna, therefore enabling the Swedish company to reach more customers.
Following initial tests of the joint service, both companies decided to strengthen the partnership “even further”, the announcement said. Therefore, Stripe has become Klarna’s preferred payments partner for consumer purchases pre-funded by Klarna in the US and Canada, and the company has shifted more payment processing volume to Stripe in these markets than originally planned.
“Over the past years, Klarna and Stripe redefined the e-commerce experience for millions of consumers and global retailers. Together with Stripe, we will be a true growth partner for our retailers of all sizes, allowing them to maximize their entrepreneurial success through our joint services. By offering convenience, flexibility, and control to even more shoppers, we create a win-win situation for both retailers and consumers alike,” the announcement quoted Koen Köppen, chief technology officer at Klarna, as saying.
Competitive pressure
Adoption of BNPL has skyrocketed over the last couple of years, particularly in Europe, North America and Australia, which has been supported by growing online purchases. Data suggests there is also significant opportunity for further growth.
Reports estimate the value of e-commerce BNPL transactions grew 292 percent between 2018 and 2020, and could reach $258bn in e-commerce spending by 2025. According to the United Nations Conference on Trade and Development (UNCTAD), total e-commerce in 2020 was estimated at $25.6trn. This would suggest that BNPL represents less than 1 percent of e-commerce transactions, highlighting a significant opportunity for further growth.
The partnership with Klarna is a significant move for Stripe as it looks to remain competitive in a market where a BNPL option is increasingly a must-have function for payment facilitators looking to attract new merchant customers.
PayPal already offers its own BNPL service called “Pay in 4” that is available to more than 400m PayPal users.
Meanwhile, Square has announced plans to acquire Australian BNPL provider Afterpay for $29bn. The US payments facilitator said it plans to integrate Afterpay into its existing Seller and Cash App business units to enable “even the smallest of merchants” to offer BNPL at checkout. The acquisition is expected to close in the first quarter of 2022.
According to Stripe, retailers that have used the integrated Klarna-Stripe service have reported an average 27 percent increase in sales.
Regulators catching up
Although BNPL can increase merchants’ sales, regulators around the globe have raised serious concerns about the product that seems to fall outside the traditional supervisory framework. Critics often argue that shoppers are not fully informed of hidden fees, they can easily pile up huge debts and they lack proper credit checks. This is a particular issue for more vulnerable customers who can find themselves in financial difficulties. In addition, BNPL builds on the shopper’s primal instinct to purchase a product even if they cannot afford it at the time of purchase, and can be particularly harmful to Gen Z or Millennials who typically account for a large portion of BNPL users according to some reports.
Legislators have different views on how to address these issues, but seemingly they all agree that regulation needs to be adjusted to bring the booming sector under their supervision.
Last week, the UK’s HM Treasury opened a consultation seeking public input on how to bring the product into the scope of regulation in line with the recommendations of the Woolard Review, which described the potential benefits and harms of BNPL products. Meanwhile, Ireland has also announced plans to give its central bank the power to regulate BNPL activities.
Sweden, Klarna’s home market, was among the first countries to introduce legislation to reduce potential risks associated with the service. The country approved an amendment to its Payment Services Act last year, which requires merchants to place those payment methods on the top of their list that do not put the consumer into debt.
BNPL products largely fall outside the regulatory perimeter in Australia too, despite the notable popularity of the service in the country. In March, the Australian Finance Industry Association (AFIA) released a voluntary code of conduct, signed by eight BNPL providers that cover almost all of the Australian market. The industry lobby group claims the code negates the need for further regulation.
In the United States, BNPL providers face a very complex, multi-layered regulatory landscape. These products are typically regulated by states as consumer loans, but they are also subject to the supervision of federal regulators, such as the Consumer Financial Protection Bureau and the Federal Trade Commission. Nonetheless, Congress has recently shown a rising interest in the regulation of the sector and will discuss related risks and benefits on November 2.
