FILE PHOTO: The logo of Amazon is seen at the company logistics centre in Boves, France, November 5, 2019. REUTERS/Pascal Rossignol

(Reuters) - Amazon Inc's AMZN.O Australia unit has signed up Zip Co Ltd Z1P.AX to offer its buy now, pay later (BNPL) service on the U.S. giant's local retail website, sending shares in Zip soaring by more than 20%.

The deal with the world’s biggest retailer is a massive boost for Sydney-based Zip, a relatively small player in the crowded and fast-growing BNPL sector. Its payment system went live on the Amazon Australia site on Thursday.

As part of the deal, Zip will issue warrants to an affiliate of Amazon for it to buy as much as 14.6 million of its shares, representing around 4.2% of outstanding shares. The warrants may be exercised for seven years from the issue date.

Zip shares jumped as much as 24.1% shortly after the market open to A$4.27, their biggest intraday jump in nearly two years.

Installment-based payment options have become very popular, especially with Millennial and Gen Z shoppers, because they bypass the interest rates and many regulations associated with taking out a credit card. BNPL companies make money from vendor payments and penalty payments when shoppers are late paying back a loan.

Jun Bei Liu, a portfolio manager at Sydney-based Tribeca Investment Partners, said the deal was a win for both Zip and Amazon. BNPL services serve a “very strong purpose, particularly in a slower retail environment” by attracting customers to particular retail sites, she said.

However, the success of the BNPL sector has also brought greater regulatory scrutiny. Last month, the Reserve Bank of Australia said it planned to dig deeper into the sector next year.

Those concerns helped end a steady rise in BNPL company shares. Zip had leaped in value from around A$1 at the start of 2019, peaking at $5.86 last month.

Financial crime watchdog AUSTRAC earlier this year demanded an external auditor report of Afterpay Touch Group APT.AX, which is seen as a bellwether of the sector, for suspected non-compliance with money-laundering and counter-terrorism financing laws.