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Is CommBank the BNPL killer?

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Lurking in the background of the buy now, pay later (BNPL) market is the original BNPL company, Klarna, a Swedish-based private bank that offers online payment solutions.

With its BNPL app launching in Australia in late January, just in time for the lockdowns, Klarna’s local operation is a joint venture with the Commonwealth Bank of Australia (ASX: CBA). CommBank has taken a 5.5% stake in the Klarna and the companies will jointly fund and own (with 50:50 ownership rights) Klarna’s Australian and New Zealand business.

An impressive entry 

Australian Associated Press (AAP) reports that consumers will see Klarna as an option at checkouts as a payment option before the end of the year, and it can already be used for online purchases. In fact, more than 50 retail groups in Australia accept Klarna payments online. According to the AAP article, its Australia and New Zealand boss Fran Ereira says it will definitely be in stores by 2021. 

There have been more than 250,000 downloads of the program since it became available in late January – that’s approximately 50,000 per month. In contrast, Afterpay Ltd (ASX: APT), the undoubted market leader, has had approximately 90,000 downloads for every month to June. Next in line was was Zip Co Ltd (ASX: Z1P), which was downloaded about 80,000 times per month.

For a product with very little marketing so far, I think that’s very impressive from a standing start. In addition, Klarna will be offered to the 7 million users of CommBank’s digital banking services. At the moment Afterpay boasts 3 million Australian users. So while Klarna is playing catch up, the CommBank partnership provides significant competitive advantages.

One of these is the onboarding process. As research for this article, I downloaded and opened an account with Klarna. It asked me if I wanted to link it to the CommBank app, which I did. In less than 2 minutes, I had an account with payment cards already registered, and set up with my fingerprint for security. The company is also working to make it function by swiping your phone, much like payment with a credit card.

What’s more, customers can use the Klarna app with the Apple store and Amazon.com. This is currently not available direct from these companies with Afterpay in Australia. So, while Afterpay recently announced a deal to have its product on all Apple Pay and Google Pay accounts, Klarna is already there. 

The Australian BNPL market

This is undoubtedly going to have a major impact on the Australian BNPL market. In fact, Australia is one of the few sizeable markets where this sort of partnership would work, in my view. As one of the big four banks, CommBank has a massive national network. It is undeniably Australia’s major payments processor already.

In addition, from my perspective there is no consumer loyalty to Afterpay or Zip Co. Why would there be? It is a simple service. If another company can provide it just as easily, then why not use that?

While it is going to take some time, in my opinion Klarna’s impact on Afterpay, Zip Co, Splitit Ltd (ASX: SPT) and Openpay Group Ltd (ASX: OPY) will be gradual and corrosive.

I think the Australian market is already too crowded. While OpenPay and Splitit have slightly different business models, I am unsure whether both of these will survive over the next, say, 3 years. Moreover, there are still others with slight variations on the business model, as well as others preparing to list soon.

Between Klarna, Zip Co, and Afterpay, I cannot really see the room for any others. Earlier in the year I invested in Sezzle Inc (ASX: SZL), and I did so because Sezzle does not trade in Australia, it is just listed here. The company launched in the wide blue ocean of the US$5 trillion retail market, rather than the tight waterways and creeks of Australia and New Zealand (to stretch a metaphor).

With Klarna now starting to post strong signs of initial momentum, that thesis is stronger than ever with me. In addition, the Australian environment, as well as the European environment, is very heavy on regulation. I feel that is going to cramp the progress of Australia-bound BNPL companies. 

Foolish takeaway

I have long been bearish on Afterpay, mainly due to its current market cap of nearly $20 billion. While Afterpay will probably still remain the big dog in the BNPL market, I think the company’s market share will come under threat from the Klarna–Commbank partnership. I think this also applies to Zip Co.  

However, both the large players and Sezzle are building a great customer base in the US, and Afterpay and Zip are also growing in the UK. Results from these markets, and maybe Canada, will be very interesting to watch over the next 18–24 months.

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Returns as of 6th October 2020

Daryl Mather owns shares of Sezzle Inc. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of ZIPCOLTD FPO. The Motley Fool Australia's parent company Motley Fool Holdings Inc. recommends Sezzle Inc. The Motley Fool Australia owns shares of AFTERPAY T FPO. The Motley Fool Australia has recommended Sezzle Inc. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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