Klarna Bank AB, one of Europe’s most valuable financial startups, said it struck a deal to buy e-commerce technology firm Hero Towers Ltd., a move that will expand its foothold in online shopping.

London-based Hero connects online shoppers with retail workers via text messages, videos and online chat rooms. It helps retailers who sell major brands such as Nike and Adidas to compete with Amazon.com Inc. by offering better customer service, according to Hero’s founder, Adam Levene.

Klarna will pay about $160 million, according to people familiar with the deal.

Klarna specializes in buy-now-pay-later services, an increasingly popular type of cash advance that lets merchants offer a way for customers to pay for goods and services in installments without paying interest. Klarna makes money by charging the merchants a fee. It competes with traditional credit-card companies.

Valuations of payments companies such as Klarna have soared in the past 12 months as pandemic-induced lockdowns drove a shift to online spending. Klarna processed $53 billion-worth of transactions in 2020, up 46% on the previous year.

A June fundraising round valued Klarna at more than $45 billion, making it worth more than many of Europe’s largest banks, including Barclays PLC and Credit Suisse Group AG .

Klarna received $639 million in the June funding round led by SoftBank Group Corp.’s Vision Fund 2. Other investors include U.S. private equity firm Silver Lake.

Klarna was founded in 2005 and has more than 4,000 employees.

The Stockholm-based financial technology company will introduce Hero to its customer base of 250,000 retailers, enabling their in-store and online sales teams to create digital marketing content and interact online with shoppers.

David Sandstrom, Klarna’s chief marketing officer, said in an interview that the company is buying Hero to expand its services across the whole purchase process, from when customers start browsing to when they pay.

“I foresee buy-now-pay-later becoming more of an infrastructure play going forward and Klarna as a whole becoming much more of a shopping service,” Mr. Sandstrom said. “We are seeing ourselves much more as a retail tech platform.”

The expansion of buy-now-pay-later companies has drawn scrutiny from regulators. The U.K.’s Financial Conduct Authority has said it plans to regulate them, noting that many consumers don’t realize they provide a form of credit. It also says checks done by buy-now-pay-later companies focus on credit risks rather than how affordable it is to the customer.

“ ‘I foresee buy-now-pay-later becoming more of an infrastructure play going forward and Klarna as a whole becoming much more of a shopping service.’ ”

— David Sandstrom, Klarna’s chief marketing officer

Sweden’s financial regulator has said it is investigating whether Klarna broke its duty of client confidentiality in May during an information technology incident in which customers were able to see information about each other.

Mr. Sandstrom said he is confident that Klarna has sufficient security structures and processes.

Mr. Levene founded Hero in 2015 to bring in-person customer service to online shopping.  He and Hero’s approximately 100 employees will join Klarna.

“Amazon is winning on price, on speed and selection and they do an incredible job,” Mr. Levene said. Other retailers have to compete with their “people and their experience and the service,” he said. “That’s really their unique advantage, that’s their strength.”