The world's second-largest clothes retailer is paying SEK 185 million (£15.6 million) for a stake of less than 1 percent in Klarna, which is issuing new shares to H&M, people involved in the transaction told FT.
The deal will start in 14 European countries, starting with the U.K. and Sweden, but has the scope to expand to the U.S. and Asia, according to Klarna, the FT reported.
The deal promises to simplify H&M's returns and delivery processes which has been a source of frustration to many customers as well as combining its in-store, online and mobile payments, the newspaper added.
Klarna Chief Executive Sebastian Siemiatkowski told the Financial Times that the deal would be the company's largest partnership following similar deals with UK retailer Asos and furniture giant Ikea.
Traditional retailers like H&M have been facing increased competition in the online fashion market from e-commerce giants like Amazon.com Inc.
H&M and Klarna were not immediately available for comment.
By Rishika Chatterjee; editor: Sunil Nair.