California denies Sezzle and warns other point of sale lenders

Summary

  • California has determined that Sezzle has been illegally providing loans in the state
  • As their service needed a lender’s licence which Sezzle believed it did not need.
  • Sezzle allows online shoppers to pay for their purchases in installments (as an alternative to paying for the purchase with a debit or credit card).

California Decison

  • California’s Department of Business Oversight (the DBO) has denied Sezzle’s application for a lender’s license under the California Financing Law.
  • The DBO is California’s financial services regulator.
  • The DBO denied the application because they determined that Sezzle has illegally been engaged in unlicensed lending in California.

Sezzle

  • Sezzle was founded in 2016 (incorporated in Delaware) and is headquartered in Minneapolis. It has raised over $210m in funding.
  • Sezzle allows consumers to buy products at over 6,800 merchants by paying Sezzle in four interest free installments spread over six weeks (rather than paying the amount to the merchant by debit card or credit card upfront).
  • Sezzle earns revenue in the form of a fee from merchants and late payment/payment rescheduling fees from consumers.

Was Sezzle providing loans?

  • Sezzle did not apply for a lending license in California before this current application (that it filed in September 2019) because it does not consider its current product to be a loan.
  • Sezzle argued that it had actually been purchasing “credit sale contracts from merchants who sell goods to consumers”, which is permitted under California law.
  • The DBO determined that Sezzle’s product were loans because, amongst other reasons:
  • 1) the contract was not between the merchant and consumer (and that contract then sold to Sezzle by the merchant) – but instead the consumer contracted directly with Sezzle and the merchant contracted directly with Sezzle. The user agreement that the consumer enters into with Sezzle (when opening a Sezzle account) can happen before the customer has picked a product or merchant to buy from. There are also a number of clauses in Sezzle’s user agreement which refer to Sezzle providing financing/credit to the user.
  • 2) Sezzle was a key part of the merchant deciding to offer customers an installment plan (they may have not offered this type of payment plan to their customers without Sezzle being involved). Sezzle is also involved with the merchant in other ways (that are not limited to the purchase of credit sale contracts from the merchant) – for example Sezzle helps advertise merchants through Sezzle’s website/app, provides payment processing services and helps with customer dispute resolution.
  • Sezzle can appeal the decision.

California also issues opinion for another POS financing company

  • Separately, the DBO also issued a legal opinion to another unnamed point of sale lender stating that their service would constitute provision of loans.

Other

  • An interesting point mentioned by the DBO was that Sezzle’s product avoided possible consumer protection obligations under the Unruh Act and Truth in Lending Act by limiting the number of installments to four.