“Sezzle is committed to doing what is best for its partners and our consumers will work to resolve this issue quickly to reduce any potential impact.”
Sinking feeling: Sezzle CEO Charlie Youakim and chief revenue officer Paul Paradis in Melbourne last year. Wayne Taylor
Californias Department of Business Oversight also took aim at a second unnamed buy now, pay later operator. The DBO said that following a request for a legal opinion it had determined that the payments company was offering products that met the legal definition of a loan, and would need a licence to continue operating.
Thirty minutes after the announcement that cratered Sezzles share price, Afterpay issued a statement confirming that it had applied for and received the relevant lenders licence from the State of California on November 12 as it weighs up future expansion into other service offerings in the US.
A spokeswoman from the $8 billion Australian buy now, pay later behemoth said it was not the subject of the legal opinion. Afterpay shares rose 4.6 per cent.
Market speculation about who the unnamed buy now, pay later player warned by the Californian regulator is centred on Klarna, a global player which Commonwealth Bank bought a 2.7 per cent stake in for $150 million in August 2018.
Klarna was ascribed a $US5.5 billion valuation following a capital raising in August, putting it on equal footing with Afterpay. Klarna was contacted for comment but was unable to respond by deadline.
The buy now, pay later sector has been under close scrutiny from regulators as the number of Australian users of its products has risen from zero just a few years ago to almost two million in 2019.
The sector has avoided being classified as a provider of credit, and therefore more stringent regulation, because it does not charge customers interest on purchases. Instead, it makes money by charging the vendors that offer its services and slugging customers with late fees.
Shares in Zip Co, another player in the buy now, pay later space, wavered over the course of the day but ended flat.
Sezzle said in a statement that it does not make loans. The company said its retail partners originate the instalment plans, which are then serviced by Sezzle on behalf of the customer. It says its objective is to obtain a Californian loan licence so that it can remove the merchants from the process.
The State of California has taken a different view, saying the contracts have been structured in a deliberate attempt to circumvent the rules.
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, the DBO said.
Following a review of the companys product and information Sezzle provided in connection with its application, the DBO determined Sezzle was making unregulated loans to California consumers in violation of the CFL.
The DBO concluded the purported credit sales made by Sezzles merchant partners were not bona fide but, rather, were structured to evade otherwise applicable consumer protections.
After launching an IPO that priced shares at $1.20, the Minnesota-based company listed on the ASX on July 30. It closed the day at $2.20, delivering investors a stag profit of 83 per cent.
The following day it rallied hard again, reaching a high of $2.96, but since then it has drifted between $2.10 and $2.70. At yesterdays closing price, participants in the IPO remain 37.5 per cent up on their initial investment in just six months.