Why Stripe and CBA see gold in installment payments

Point of sale credit can be an alluring option for consumers who are normally averse to taking on debt. The allure is also enough to draw support from one of Australia’s largest banks and the digital merchant acquiring giant Stripe.

Commonwealth Bank of Australia just invested about $200 million in Klarna, a Swedish company that also counts Visa as an investor. At almost the same time, the New York-based Splitit struck a deal with Stripe, which will act as payment facilitator for Splitit’s merchants.

Stripe, founded in 2009, is a relatively new company compared to most merchant acquirers, though its massive $35 billion valuation provides influence in a realigned industry that places a premium on facilitation, or providing a bundle of services for merchants through a single relationship rather than acting as a payment processor.

Through these separate deals, both Splitit and Klarna get a boost to their merchant acquiring while battling brands such as Affirm and PayPal credit in a fast-evolving slice of the fintech market.

“Stripe provides a critical infrastructure to accelerate our growth globally,” said Brad Paterson, CEO of Splitit. “Nobody can build installment payments by themselves.”

Bloomberg News

Consumers can use their own credit cards to apply for interest-free credit at checkout through Splitit. Merchants pay processing fees, while Splitit schedules installment payments on the consumer's credit card, which are paid to the merchants. Stripe has made several moves to enhance its appeal to merchants. Late in 2019 it moved into merchant credit, and has improved its ability to act as an open banking data steward.

Splitit puts Stripe on both the consumer and merchant credit side, in line with point of sale financing and merchant credit options from Square and PayPal. Splitit improves its onboarding speed and ability to quickly strike in new markets as international e-commerce marketplaces advance.

Splitit's rival Klarna has grown through a series of splashy and large investments that have made it one of Europe’s largest technology companies. Its international ambitions include using new retail concepts to help U.S. retailers recover from a recent slump, and finding high-profile partners such as Amazon to support security and compliance. That’s helped it build a merchant network of more than 170,000 retailers in 60 countries.

In Australia and New Zealand, Klarna and CBA will operate a joint venture with collaboration on the development roadmap and product delivery. It’s Klarna’s first direct venture with a traditional bank.

“The investment from one of the top financial institutions in Asia Pacific is significant for Klarna's success internationally,” said Krista Tedder, head of payments for Javelin Strategy & Research, adding the continued growth and competition from American Express, Mastercard and Visa, which already have a global footprint would limit Klarna's growth without a trusted financial partner.

“Card networks are diversifying their portfolios to meet consumer demand," Tedder said. "Without the investment Klarna would be limited in how far they can expand.”

Klarna will address the demand among CBA’s consumers for added payment options, said Jessica Gleeson, general manager of digital banking at Commonwealth Bank, in an email, adding the bank will supply its merchant relationships and consumer network to Klarna’s payments technology and integrated shopping experience. “By accessing Klarna through [our] banking app, CBA customers can quickly register and begin shopping at any online store,” Gleeson said.

CBA will communicate about Klarna's product through its channels, and consumers will be able to view transaction history if they opt in. Klarna may also open a "concept store" similar to its outlets in New York and other markets.

“Alternative financing for in-store and online shoppers has taken off, and now has become a crowded market,” said Ray Pucci, director of merchant services for Mercator.

Collaborations are driving a lot of the action, as Splitit’s other partners include Shopify, Magento and BlueSnap. And Affirm signed a deal with Walmart as part of Walmart’s e-commerce and credit strategies.

“Other alternative lenders are not standing still as the addressable market remains promising. … Expect to see more partnerships and fight for market share,” Pucci said.