Point of sale lender Sezzle, Inc. had little to celebrate as 2019 came to a close. On Dec. 30, California’s Dept. of Business Oversight, denied Sezzle a lenders’ license. As a result Sezzle’s stock fell, the Minnesota Star-Tribune (among others) reported.
Referred to as a ‘Fintech’ company Sezzle is based in Australia with a U.S. headquarters in Minnesota. The DBO made its decision to deny Sezzle after following a review of the company’s product and information. This was provided in connection with its application. The DBO in its discernment determined that Sezzle was making unregulated loans to California consumers in violation of California Financing Law.
The DBO licenses and regulates financial services, including state-chartered banks and credit unions, money transmitters, securities broker-dealers, investment advisers, non-bank installment lenders, payday lenders, mortgage lenders and servicers, escrow companies, franchisors and more.
Sezzle said its product provides “interest free on-line financing to consumers.” The lender targets young consumers who are unable to qualify for traditional financing options, like credit cards. Consumers pay Sezzle 25 percent of the purchase price at the time of purchase and the remainder in three equal installments due every two weeks.
Merchants pay Sezzle a cut of each transaction, and consumers pay Sezzle fees if they miss or wish to reschedule payments. Under the guise of purchasing from merchants already-consummated credit sale contracts – which may not be covered by the CFL – Sezzle designed its financing product to evade California and federal law. This is what DBO Commissioner Manuel P. Alvarez and staff committee discerned.
Detailed in a 10-page outline of the denial of application, the DBO noted the most important point in making this decision was the fact that Sezzle did not view their financing approach in contrary to any laws.
Sezzle contended that it’s purchases of credit sale contracts from merchants (a third party) do not constitute loans under California law and, thus, are not subject to the CFL.
In presenting financing more like a product offered by a merchant, it seems Sezzle was seeking a different approach to financing through a slightly different business model.
This is something that other regulators in other states and countries such as Australia, have reviewed with caution. DBO Commissioner Manuel P. Alvarez noted that “Sezzle is one of a number of companies now offering unregulated, point-of-sale financing to Californians.” In the related interpretive opinion, the DBO concludes that point-of-sale financing transactions may be deemed loans when:
- The consumer, merchant, and third-party financer treat the transactions like loans, despite contradictory language in the applicable contracts;
- The relationship between merchant and third-party financer is extensive;
- The role of the third-party financer and all financing terms are not clearly disclosed to the consumer; and The financing transaction is not otherwise regulated.
When approached for comment, media representatives for Sezzle noted. “We’re currently unable to discuss this matter publicly as we’re still in discussions with the DBO in California regarding this matter.”
When asked if Sezzle could appeal the decision, spokesman for the DBO, Mark Leyes said. “Yes. Sezzle has 15 days to request a hearing.