State and federal regulators are playing catch-up to the next generation of payday loans, which the fintech industry has built into user-friendly apps and rechristened “earned wage access.”
Consumers might get bombarded about these services via social media ads, or their inboxes might fill up with emails from their payroll provider advertising a way to “get your pay before payday.” It’s a problematic industry that seems to thrive by preying upon economically vulnerable people, claiming to help them access their hard-earned wages ahead of payday while simultaneously feeding that financial insecurity with hidden fees and suggested “tips.”
The consensus among many experts is that these products should be regulated as credit products, and therefore subject to caps on fees charged. But others — including the companies themselves, as well as some surprising politicians — believe these fintech companies can regulate themselves just fine, and would never resort to the predatory practices of payday lending 1.0.
There are a number of products in the so-called “earned wage access” space that promise to help people access their wages ahead of payday. At their worst, these companies mislead consumers, charging hidden fees that rapidly accumulate, according to a federal complaint filed last month against one such app called Dave.
Fun fact: Dave reported record earnings in November, marking the company’s fourth consecutive quarter of “accelerating year-over-year revenue growth,” despite currently being the subject of a joint Justice Department and Federal Trade Commission complaint for deceptive marketing and other predatory behavior.
Andrew Kushner, a senior policy counsel with the Center for Responsible Lending, sees these services as “the next frontier in payday lending,” he told Gazetteer SF. Many of these companies advertise free services, “but then when you get down the transaction pathway, it becomes clear that you have to pay a fee of up to $10 to get instant access to funds,” Kushner said.
Most users pay that expedited fee. Some of the apps also ask customers to leave a “tip,” which 73% of users agreed to do in 2021, according to state regulators. While these services don’t technically charge interest, the fees and tips people pay end up being similar to the average interest charged by licensed payday lenders in California, according to the Center for Responsible Lending.
The Center for Responsible Lending doesn’t endorse any specific companies, but Kushner said some business models are better for consumers. Systems that are integrated into employer payroll systems are less problematic than direct-to-consumer models, he said, because they deduct loan repayments from a worker’s paycheck, rather than from their bank account. That reduces the risk of overdraft fees.
The biggest risk lies in direct-to-consumer apps, which advertise their services as free, but charge for instant transfers — and deduct repayments directly from workers’ bank accounts. Those services are just a high-tech payday loan, according to Kushner.
“For someone who’s having to borrow to get just to pay day, they’re going to have to basically resort to borrowing in the future just to plug the hole from that first advance and that’s what makes the ‘pay per transaction’ without any sort of cost caps version predatory, and I think drives the extremely high usage numbers you see with these products,” he said.
Miranda Margowsky, a spokesperson for the Financial Technology Association, which represents many of these payday loan 2.0 companies, told Gazetteer the services are “a safe and cost-effective way for workers to tap into the expenses they’ve already earned.”
But both our state and federal government seem to disagree that these are “safe.” Dave, the aforementioned direct-to-consumer app that is currently facing legal action from the federal government, allegedly misled consumers through deceptive advertising, charged hidden fees and recurring monthly fees without making it easy to cancel them, and misrepresented just how much of the optional tips went to a charity.
Dave did not respond to Gazetteer’s request for comment, but a blog post on the company’s investor site calls the complaint “a continued example of government overreach and includes numerous allegations that are based on various inaccuracies.” (Dave, according to the post, has since gotten rid of its tips and express fees.)
Next month, the California Department of Financial Protection and Innovation will implement new rules requiring these types of advance-pay loan services to register with the agency, and submit data like fees charged, percentage of advances repaid, and the number of advances made. The agency determined further consumer protections are necessary because these products generally target people living paycheck-to-paycheck, and because the companies had strategies “to make tips almost as certain as required fees,” according to a brief from the agency.
While these new rules are designed to make it easier for regulators to monitor how these services affect customers, Kushner doesn’t think they’re enough. He sees them as a “first step to bring [these services] into the regulatory fold,” but says they ultimately fall short, as they don’t cap fees. The original version of the rules included such caps, but were ultimately taken out after lobbying efforts, he said.
The state Department of Financial Protection and Innovation did not respond to Gazetteer’s request for comment. Kushner, however, said he’s “hopeful” state regulators “will go further to close that regulatory gap.”
In the meantime, Kushner said he and his colleagues at the Center for Responsible Lending will keep pushing for more regulation in an industry that is “built upon a series of regulatory dodges — attempts to come up with quote unquote creative arguments why they don’t fit within the traditional structure of credit regulation.”
He added, “The industry has done a good job of, unfortunately, portraying themselves as a new, innovative tech-based solution to a problem when in fact it is really sort of the same old payday lending but just sort of gussied up with a fintech veneer.”
