Sezzle shifts strategy, opts for national bank charter over ILC

Sezzle has decided to pursue a national bank charter, a strategic pivot driven by new state regulations targeting buy now, pay later (BNPL) companies. The move replaces its earlier intention to become an industrial loan company (ILC).

CEO Charlie Youakim confirmed in a Monday interview that Sezzle will apply for a charter from the Office of the Comptroller of the Currency (OCC) rather than an ILC charter. The shift comes as states including New York, Illinois, and Oregon have enacted BNPL-specific rules, and as criticisms from banks and consumer groups have mounted against the ILC structure.

These state measures typically impose requirements such as dispute resolution processes, consumer refunds, and registration. Youakim expressed discomfort with the patchwork of state politics: “We’re good with the federal rules. 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 passed by New York legislators last year. Oregon and other states have also taken recent BNPL actions, even as federal regulators have reduced their role in industry oversight.

Avoiding ‘the flak’

Sezzle told investors last week that it intends to file its OCC charter application by the end of September. The company expects approvals from the OCC, the Federal Reserve, and the Federal Deposit Insurance Corp. to take 12 to 18 months.

Under the Trump administration, the OCC has seen a surge in fintechs seeking bank charters. Youakim explained the company’s reasoning: “Let's not deal with the flak. Let’s just go straight to the most robust solution, which is a national charter.”

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

TD Cowen analyst Hoang Nguyen called the shift from ILC to bank charter “a smart move” given the regulatory environment. 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 in a Tuesday interview.

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,” he added. “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, Nguyen noted, which raises questions about how its fee structure would fare 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,” he 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 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.