Commonwealth Bank is spending big money to challenge AfterPay and Zip.

In the last six months, the Commonwealth Bank has invested US$400 million (AU$597 million) into Swedish fintech Klarna, making itself the exclusive launch partner for the firm in Australia and New Zealand.

Afterpay is among the greatest success stories in Australian business, rising from nothing just five years ago to be valued at almost $7 billion today.

AfterPay and its only real competitor in Australia, Zip, work on roughly the same model - allowing debit cards to be used as virtual credit cards by providing instalment payments for purchases.

The uptake among younger people – who typically do not have credit cards – has been enormous, with AfterPay now moving out of the online space to be offered in an ever-growing number of physical retail outlets.

A Roy Morgan study last year found 1.95 million Australians used a BNPL service in the 12 months to September 2019, mostly people aged 14-34. 

Understandably, one of Australia’s major banks wants a piece of the buy now, pay later (BNPL) action, and appears to see Klarna as the best way in.

But Sebastian Siemiatkowski, co-founder and CEO of Klarna, says the Swedish fintech is offering more than the other BNPL firms.

He says that while Klarna does the normal BNPL services, its major selling point is its “ubiquity”.

Afterpay and Zip form partnerships with each vendor to provide their payment services at the checkout. Klarna works with any online checkout process that users can access through an in-app browser.

This means a user can set up a BNPL scheme for virtually any product sold online.

“Think of it as a very advanced autofill function,” Mr Siemiatkowski said.

Klarna generates a “one-time virtual Visa card” to pay for the transaction, which it refers to as a “ghost card”.

“For the merchant, it behaves like a standard transaction – but for the customer it gives the optionality to pay flexibly, the way they like, through Klarna,” he said.

Payment options include the fortnightly instalments popular with competitors, but offers services and benefits in exchange for lump sum payments.

The app also offers a wishlist that will notify users when an item is on sale or drops below a certain price.

Klarna is Europe’s most valuable fintech, with a value of US$5.5 billion. It also operates as a fully licensed bank in Europe, but is unlikely to offer that service in Australia. It is speculated that Commonwealth’s big investments are in part designed to dissuade Klarna from becoming a fully-fledged competitor.

The new bid comes as the local BNPL space prepares for more regulation.

The Australian Finance Industry Association (AFIA) has unveiled a voluntary code of practice for BNPL firms, which includes proposed minimum standards, caps on late fees, age limits, and ways to respond to the financial hardship of users.