* Sezzle agrees to penalty, and $282,000 refund of loans
* Highlights growing scrutiny of the BNPL sector
* Sezzle to re-study laws in each U.S. state
* Shares jump 26% (Re-writes throughout, adds details of fine by California regulator, Sezzle CEO comments, background)
By Nikhil Nainan
Jan 17 (Reuters) - Sezzle Inc said on Friday that a Californian regulator had approved its application for a lending license, sending its shares sharply higher although the approval came with a fine and a rap on the knuckles over previously charged loan fees.
The license is a big-win for the Minneapolis-based, Australia-listed company as it seeks a foothold in the fast-growing buy-now-pay-later sector that has proven popular with millennials.
"First of all. The sector is growing like mad. The general understanding from retailers is this is a solution that you have to offer to your customers," Sezzle Chief Executive Officer Charlie Youakim told Reuters by phone.
The California Department of Business Oversight (DBO) initially rejected Sezzle's license application last month after calling out the firm for making "illegal unlicensed lending" in the state. It said on Thursday that Sezzle would have to refund $282,000 to Californian consumers and pay a $28,200 penalty.
Youakim said that while what happened in California was surprising, Sezzle had hired a firm to conduct another study of lending laws in all U.S. states it operated in.
"I'm going to be directly involved in any work with regulators going forward," he said.
Sezzle offers customers small, interest-free installment loans. Like other buy-now-pay-later companies, it is coming under the intense gaze of regulators and market observers. Some are questioning the business model and whether such credit should be treated with the same oversight as bank loans.
The license now allows Sezzle to structure their credit offerings directly to consumers, removing merchants from the process.
Shares in the company soared 26% to A$2.23 in Australia on Friday, their highest level since mid-December.
"By moving to a direct lending relationship with the consumer, the merchant is no longer a party to the loan, and if you put yourself in the retailer's shoes, that increases our value to them," Youakim said.
Australia-based BNPL bellwether Afterpay Ltd also has faced regulatory scrutiny but that has not dented investors' growth expectations, with its shares up more than 130% last year.
Sweden's Klarna, a BNPL player and one of Europe's most-valuable fintech firms, is making its debut in Australia this year with the help of Commonwealth Bank of Australia . (Reporting by Nikhil Kurian Nainan and Shriya Ramakrishnan; Editing by Bill Berkrot and Stephen Coates)