Sezzle will pursue a national bank charter given new state regulations for buy now, pay later companies, changing direction from its prior plan to become an industrial loan company.

Sezzle has opted to apply to become a national bank chartered by the Office of the Comptroller of the Currency, rather than obtaining an ILC charter, CEO Charlie Youakim said Monday in an interview. 

New BNPL regulations in states such as New York, Illinois and Oregon, plus criticisms from banks and consumer groups about the ILC structure, prompted Sezzle’s change of course, Youakim said. 

The state measures generally impose rules such as dispute resolution processes and consumer refunds, along with registration requirements.

“We’re good with the federal rules,” Youakim said. “What I’m less comfortable with is politicians in different states. Some of these are pretty extreme, some of the politics state by state, so the way to help us avoid that sort of risk is just keep on going forward with our national bank charter.”

In June, Illinois enacted a law to regulate BNPL providers, following a similar law that New York legislators passed last year. These efforts, along with recent BNPL moves in Oregon and elsewhere, have come as federal regulators have reduced their role on industry oversight.

Avoiding ‘the flak’

Sezzle told investors last week that it intends to file its OCC charter application by the end of September. Approvals by the OCC, the Federal Reserve and Federal Deposit Insurance Corp. are expected to take 12 to 18 months, according to Sezzle.

Under the Trump administration, the OCC has seen a surge in the number of nonbank financial technology firms seeking bank charters.

“Let's not deal with the flak,” Youakim said of the company’s thinking about an ILC charter. “Let’s just go straight to the most robust solution, which is a national charter.”

Earlier this year, BNPL rival Affirm Holdings applied in Nevada to operate a bank as an industrial loan company. PayPal Holdings sought a similar license from Utah’s Department of Financial Institutions in December.

The change from an ILC to seeking a bank charter is “a smart move” given the regulatory environment, TD Cowen analyst Hoang Nguyen said Tuesday in an interview.  An OCC charter offers Sezzle “protections to be able to export rates and different product features to all the states without the ability of states to challenge it,” he said. 

Minneapolis-based Sezzle “has carved out a niche segment for itself” with low-income and younger consumers who have thin – or zero – credit histories, Nguyen said. Those groups typically represent a greater credit risk for a lender and face more fees.

“When the business caters to low-income consumers, it usually compensates itself through more fees,” Nguyen said. “It’s the same for credit cards – subprime gets higher rates, more fees. I think Sezzle has a similar playbook.”

Sezzle relies more on customer fees than other BNPL providers, he said, which poses a question of how the company’s fee structure fares under tighter federal regulation.

“The real test will be two years down the road when there’s a change in administration, we could be looking at something different,” Nguyen said. “So that’s the unknown.”

Roller-coaster stock

Company shares have experienced volatility this year, with the stock more than doubling from April through its income report last week. 

Then, Sezzle shares lost more than one-third of their value Friday, after the company topped revenue forecasts for the second quarter, with 52% growth, and raised its sales and net income outlook for the full year, but only modestly.

“The raise just wasn’t enough for some people,” Hal Goetsch, an analyst with B. Riley Securities, said in an interview Monday. “That is just the occupational hazard of covering small-cap stocks and especially stocks involved in areas that are new to the market.”

The stock gained about 101% this year through Wednesday, including Friday’s 34% decline. 

Sezzle was also rocked in April when a former director, Karen Webster, resigned from the board via email, citing “a growing difference in perspective with management around the company’s direction, key decisions, and governance.”

Youakim declined to comment on Webster’s resignation, which Sezzle disclosed in an April 9 securities filing. Webster did not respond to an email seeking comment. 

“I got a few calls from clients the day it happened and then we’ve never talked about it again,” Goetsch said.

Shifts away from shopping

Beyond its preparation for a bank charter application, Sezzle is pushing out two new products, including a new peer-to-peer money transfer service debuting this month called Sezzle Send.

The service allows people to send a payment over five installments, with recipients receiving all of the funds. Recipients without a Sezzle account get an invitation link to sign up within seven days to claim the money.

The transfer is classified as a BNPL loan with tiered service fees for non-subscribers. Recipients can claim the funds in their balance account and spend them or transfer the money to a bank account via ACH for free or to a debit card for a 2.95% fee, a Sezzle spokesperson said.

Sezzle Send will move the company into the same peer-to-peer payments arena as far larger players like PayPal’s Venmo; Block’s Cash App; and Zelle, operated by Early Warning Services. In April, Cash App introduced a pay-over-time borrowing feature for peer-to-peer transfers after they’ve been completed.

“One of the reasons we’re excited for this product is we think it’s a way that we could create more users on the platform,” Youakim said.

In June, Sezzle also debuted a cash advance product, called SezzleCash, that allows people to borrow funds as an installment loan repaid in four or five payments. The average transaction is $165, Sezzle said, with about 10% of new subscribers making the cash advance their first interaction.

Sezzle is also planning to introduce a checking account product but will delay it until the company operates its own bank, Youakim said.