Minnesota financial technology surges as more customers buy now, pay later

Years ago, splitting big purchases like riding lawnmowers and exercise bicycles into palatable, interest-free payments gave rise to the buy-now-pay-later loan.

These days, the industry is seeing customers put grocery orders and even takeout food on reverse layaway plans, as federal regulations on the industry loosen under the Trump administration.

Financial technology companies — or fintechs — that primarily offer the popular short-term loan service blossomed during COVID-19, when shopping moved online. The easy-to-qualify-for loans are becoming a mainstay, especially for younger consumers, as large firms have expanded to allow digital transactions at the cash register.

“It’s definitely a new payment method that’s here to stay,” said Charlie Youakim, CEO of Minneapolis-based Sezzle, which has widened its buy-now-pay-later (BNPL) options like its competitors such as Klarna, Affirm and Afterpay.

Some observers believe the industry has become too wide open and may face a new wave of state regulations.

BNPL loans function somewhat like a traditional credit account, offering a plastic or digital card that can be used at a point of sale with a consumer’s promise to repay the lender. While BNPL loans have no fees or interest if the user pays on time, they do have a specific date on which the debt must be repaid.

Failure to repay on time triggers steep fees and means further loans will not be allowed. BNPL lenders have traditionally done less reporting to credit agencies, but that is changing.

Business is booming. In May, Sezzle raised its year-end net income guidance to $120 million, a nearly 50% increase, as the company expects heightened growth. The company’s first-quarter results showed a 64% boost in the total dollar value of goods financed through the loans, driven by higher uptake in subscriber and on-demand services.

Two years ago, Sezzle launched a new virtual product allowing consumers who use its service to make purchases wherever digital payments are accepted. Though credit and debit still dominate the payments market, Youakim envisions BNPL taking up more space in people’s digital wallets.

About two-thirds of Sezzle’s customers have credit cards but avoid using them, Youakim said. He said most users want the purchasing power of credit without surprise debts that may last several months or longer.

“Credit cards, for a lot of people, don’t feel safe because they just don’t remember they made the purchase,” Youkim said. “We basically don’t allow people to do it, because if you miss a payment, you went too far over your skis, we stop you.”

The product is becoming popular across age and income groups at a time of uncertainty for businesses and consumers. Some recent studies highlight trouble spots among people who use BNPL while their personal savings accounts deplete and credit burdens grow. Users are reporting higher late-payment rates when using BNPL, reaching 41% this year, a LendingTree survey found.

Matt Schulz, LendingTree’s chief consumer finance analyst, tested the breadth of the loans by buying shaving cream, Chinese takeout and a Mother’s Day card. He said the expanding service can be handy in some cases — but it can also be easy to “get yourself in a little bit of a headache.”

“Just because you can buy most anything with these loans doesn’t mean that you should,” Schulz said.

A separate Bankrate survey released last month found nearly half of users ran into a problem when using one of the loans. Gen Z borrowers were most likely to report overspending, a late payment or buyer’s remorse.

Ted Rossman, a senior industry analyst at Bankrate, said the pandemic and worsening inflation were tailwinds for the industry. Another boon: people looking for alternatives to record-high interest rates on credit cards.

Rossman cited two seismic changes: increased point of sale transactions and longer-lasting payment plan options, which often carry interest rates.

“Any of those plans longer than six weeks do often charge interest rates ... often comparable to what a credit card charges, which I find a bit ironic for an industry that’s kind of portrayed itself as the anti-credit card,” Rossman said.

The Trump administration has shown a lighter touch to financial services regulation, reversing the scrutiny the Consumer Financial Protection Bureau paid to BNPL firms under former President Joe Biden.

Much of CFPB’s workforce was also targeted by the controversial cost-cutting Department of Government Efficiency. And in May the agency reversed 67 of its guidance statements, including last year’s rule specifically tailored to the BNPL model.

In May 2024, the agency issued a rule treating BNPL loans like traditional credit cards. An agency report in January said 63% of borrowers had taken out multiple loans at once, nearly two-thirds of product consumers held lower-than-average credit scores and borrowers tended to have higher balances of unsecured debt.

The CFPB was also concerned about the lack of required reporting to main credit agencies, which can cloud assessments of a particular consumer’s capacity to repay debts, said Kristen Larson, a Minnesota attorney who specializes in financial services.

Larson expects state attorneys general and lawmakers may pick up some existing consumer law enforcement and introduce tighter local legislation. In New York, for example, lawmakers this year enacted a licensing framework for BNPL loaners, as well as consumer safeguards aimed at capping total charges, ensuring data privacy and resolving disputes.

However, for the federal regulatory environment, Larson said: “It’s back to being wide open.”