California settles with point-of-sale lender Afterpay

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Afterpay, which offers financing to online shoppers at various U.S. retailers, has agreed to pay approximately $1 million to settle allegations that it made illegal loans in California.

The Australian company committed to refunding $905,000 in fees paid by customers who live in California, and also to pay more than $90,000 in administrative expenses, under a settlement announced Monday.

Anthony Eisen is Afterpay's CEO. He said that his firm plans to start offering in-store point-of-sale financing later this year.
Anthony Eisen is Afterpay's CEO. He said that his firm plans to start offering in-store point-of-sale financing later this year.

California authorities took the position that Afterpay’s business model required a license under a state lending law. Afterpay, which has been operating in the United States for about 18 months ago, did not receive a California license until last November.

Afterpay offers online shoppers 0% interest financing on purchases — payable in four increments, every two weeks, of 25% of the purchase price. U.S. customers who miss a payment may be charged a late fee of as much as $8. The company’s retail partners include Urban Outfitters, Anthropologie, Skechers and many other merchants that target young adults.

The partnering retailers, which typically see higher spending by customers who pay in installments, pay an average of around 4% of the sales revenue they generate to Afterpay.

Afterpay CEO Anthony Eisen said in a recent interview that the company plans to start offering in-store financing in the U.S. later this year.

Under the settlement announced Monday, Melbourne-based Afterpay neither admitted nor denied that it was required to be licensed in California. The company said in a statement that while it does not believe its business required a license from the California Department of Business Oversight, it agreed to conduct its operations under the state license as part of the settlement.

“Afterpay will continue to work closely with the DBO and appreciates the regulatory clarity that this agreement provides,” the statement read.

California officials said that the refunds represent all of the fees that Afterpay has collected from more than 640,000 customers in the state.

Afterpay is one of several companies operating in the nascent consumer finance segment known as “Buy Now, Pay Later,” which falls into something of a gray area for U.S. financial regulators. Firms that offer similar products include Klarna, Quad Pay and Sezzle.

Because these companies do not charge interest, and their customers agree to pay off their obligations in just four installments, their products do not appear to fall within the parameters of the Truth in Lending Act, which requires lenders to provide borrowers with information that could enable comparison shopping.

In January, Sezzle reached a settlement with California officials that is similar to the agreement involving Afterpay. Sezzle agreed to pay a fine and to refund consumers in connection with loans it made without a license.

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