Sebastian Siemiatkowski, CEO of Swedish-based Klarna, was last week scathing of Afterpay Ltd's (ASX: APT) merchant fees, referring to them as an extortion scheme. Mr. Siemiatkowski's attack, as reported in the Australian Financial Review (AFR), also included calls for regulators to provide a "cap" on merchant fees. The sentiment was echoed by Matt Comyn, CEO of Commonwealth Bank of Australia (ASX: CBA). This attack follows on from confirmation that United States payments giant, Affirm, intends to enter the Australian buy now, pay later (BNPL) market, while other payments giants like Paypal Holdings Inc (NASDAQ: PYPL) have been entering the US market. The Afterpay share price fell by 3% last week.
CommBank has a 5.5% stake in Klarna and the companies jointly fund and own (with 50:50 ownership rights) Klarna's Australian and New Zealand business.
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The battle at the margins
Afterpay averages a 4% merchant fee per transaction. However, the average merchant cost for credit or debit cards is 1%. Klarna claims its average merchant fees are around 2.1%.
Afterpay co-chief executive, Anthony Eisen, has disputed the claims, stating that Klarna charges similar merchant fees to Afterpay, as well as 20% interest on a range of bank-like credit products. "We know exactly where they are and they are not out of kilter with us, and even if they were – why are more merchants choosing us then in the US and Australia?" he said. Klarna is an unlisted bank based in Sweden. It was the first BNPL operator there, but the platform only represents one of its service offerings.
Klarna has 500 Australian merchants, while Afterpay has 48,000. Moreover, Klarna has 400,000 downloads while Afterpay has 3.5 million active Australian users. As also reported by the AFR, Ord Minnett analyst, Phillip Chippindale, told clients on Wednesday that the Klarna average merchant fee was likely to also be around 4%. Meanwhile, Hayden Capital stated that, in the US, Klarna's merchant fees can be as high as 5.99%.
Mr Eisen concluded:
We have never styled Afterpay as a banking product and as a result we have a more frequent and loyal customer base, and that is what merchants care about because that is what drives their business – it's those customers we can drive into the right channel that is the value we add and that makes the difference.
Defending the Afterpay share price
Afterpay has a history of hitting back against its critics. A recent report from the Australian Securities and Investments Commission (ASIC) criticised the BNPL sector on a number of fronts. Within a day, Afterpay responded, pointing out that consumers benefitted from more choice as competition expands, as opposed to a previously narrow, bank-dominated payments industry.
The Australian market leader went on to laud its built-in consumer protections, juxtaposing them with those of other BNPL providers. These include never selling or enforcing debt. Moreover, Afterpay sees itself as a platform rather than a payments company or credit provider. In the view of the company, it is second only to Alphabet Inc's (NASDAQ: GOOGL) (NASDAQ: GOOG) Google as a referral service for retailers.
Despite a rash of competitors, Afterpay remains the leading BNPL company in Australia, and is growing rapidly in the US and the United Kingdom. At the close of trade on Friday, the Afterpay Share price was at $94.70.
