Weekly Fintech Focus

  • CA DBO settles with point-of-sale financing company, finding that buy-now-pay-later financing offered for retail partners is licensable activity.
  • Square and Nelnet receive approval of their deposit insurance application.

Point-of-Sale Financing Company Is a Lender in California

On March 16, 2020, the California Department of Business Oversight (DBO) announced a settlement with Afterpay US, Inc., a point-of-sale financing company.  The DBO concluded that Afterpay operated as a finance lender without obtaining a required license because the company’s financing arrangements were not bona fide credit sales, but rather were structured to evade consumer protections under the finance lender law.  The company agreed to stop making the loans under its point-of-sale financing offering, to refund $905,000 to California consumers and pay over $90,000 in administrative fees.  The refund amounts represent all the fees collected from over 640,000 California consumers, and they must be issued to the consumers within 45 days.

Under the settlement, Afterpay may only offer point-of-sale financing under the authority of the finance lender/broker license held by its wholly owned subsidiary, Afterpay US Services, LLC.  Afterpay obtained its finance lender license in November 2019 and has obtained consumer lending licenses in at least three other states since then.

Afterpay’s point-of-sale financing offering included offers of 0% interest financing on purchases from Afterpay’s retail partners, payable in 4 equal installments, every two weeks.  Late payments incurred fees of as much as $8. As Afterpay’s offering charged no interest and was payable in only 4 installments, the federal Truth in Lending Act and Regulation Z did not apply.

This is the DBO’s second settlement with a point-of-sale financing company, with the first in January of this year.  We discussed that settlement here.

Square and Nelnet Receive FDIC Approval of Deposit Insurance Application

On March 18, 2020, the Federal Deposit Insurance Corporation (FDIC) approved Square, Inc.’s deposit insurance application for Square Financial Services, Inc.  Among other things, Square will be able to originate commercial loans to merchants that process card transactions through Square’s payment systems upon its bank charter approval from the Utah Department of Financial Institutions.

Similarly, Nelnet, Inc. also received the FDIC’s approval of its deposit insurance application.  It additionally received approval from the Utah Department of Financial Institutions to establish a Utah-chartered industrial bank that will enable Nelnet to provide private student loans.

Deposit insurance applications are evaluated under a seven-part framework that consists of:  (i) financial history and condition; (ii) capital structure; (iii) future earnings prospects; (iv) management’s character and fitness; (v) the Deposit Insurance Fund’s risk stemming from the applicant; (vi) convenience and needs of the community served by the applicant; and (vii) whether the applicant’s corporate powers are consistent with the purposes of the Federal Deposit Insurance Act.

Square Financial Services, Inc. must still wait for approval from the Utah Department of Financial Institutions for their bank charter.