In May, a video showing a young woman named Brooklyn wearing heart-shaped glasses implored viewers to tell the California Department of Financial Protection and Innovation how important a company called EarnIn was to her everyday life.
EarnIn is part of a relatively new app-based industry that provides cash advances to people based on their wages or income, often called “access to earned wages.” The company wanted its users to submit stories and comments to the department because it is about to impose new, first-in-the-nation rules in the industry.
EarnIn got their wish: More than 50,000 customers wrote in, said David Durant, EarnIn’s general counsel, before the company decided to “slow down.”
How access to earned wages works
Software or apps from companies like EarnIn provide cash to workers based on how much they’ve earned, before their payday. So, for example, you could receive part of your payment daily instead of all of it every two weeks, minus any fees or other charges. People turn to apps when they need money for some groceries, a bill that’s due, or an emergency car repair before their paycheck hits their bank account.
The industry has two main business models. Some companies, like FlexWage and DailyPay, connect to a company’s payroll system and are more like an employer-provided benefit. Other companies, including EarnIn and Brigit, offer smartphone apps that connect to your bank account, detect past wages, provide a certain amount of cash, and then directly deduct that amount from your bank account on the pay date.
These apps make money in a number of ways, including subscription fees, fees to speed up your money, and tips.
“Basically, they’re just making payday loans,” said Andrew Kushner, policy adviser at the Center for Responsible Lending, direct-to-consumer businesses. “This is what payday lenders do.”
One difference is that California regulates payday loans, but app-based cash advances have been operating in a legal gray area. Consumer groups say these products are risky for workers because they can lead to a loan cycle and have confusing pricing models, which can make it hard to understand how the small fees add up.
“Their business model was basically structured around trying to establish this legal fiction that they’re not actually a lender under California law,” Kushner said. “And one of the things they did to try to maintain that fiction is to say that the product is completely free.”
Most users earn less than $50,000 per year, federal government researchers found when four earned wages access companies provided them with data. About half of users are non-white and more than 60% are women, a consulting firm found when it conducted research on behalf of three companies.
The industry has grown rapidly in recent years. Walmart launched pay advances to its workers in partnership with two fintech companies in 2017, calling it a “financial wellness service.”
When California’s department of financial regulation collected data from various companies in 2021, it found that the fees and tips paid by users added up to costs not far removed from payday loans. That data “really cut through this fiction that companies are driving that [the advances] they are a healthier alternative to payday loans,” Kushner said.
The California department calculated annual percentage rates for the advances, which is a measure used to compare loans based on their cost; It takes into account the fees and interest associated with a loan, the value of the loan, how long you have to pay it back, and annualizes that rate.
So if you paid a little over $9 in fees for a $100 10 day loan, that would equate to an APR of just over 330%, here’s a calculator if you’re curious, which is what the California regulator found that people who use earned salary access advances were generally paying. The department also found that the advances were generally short-term, repaid within 10 days, and for small amounts, typically $40 to $100.
There are some advantages. For one thing, federal government researchers found that cash advances generally cost less than payday loans, which are notorious for their exorbitant interest rates. A survey commissioned by the companies found that without their products, customers said they would consider not paying some of their bills on time or overdrawing their bank accounts, which can result in hefty fees.
But sometimes customers encounter frustrating problems.
EarnIn customers, for example, filed complaints with the Better Business Bureau about the app withdrawing money from their bank accounts before their paychecks arrived, sending their balances below zero and triggering overdraft fees.
In March, a client wrote to the Better Business Bureau: “I’ve contacted EarnIn no less than 6 times about over-adjusting their AI and withdrawing money from my bank account before my payday.” Another customer complained that the app “decided to deduct their balance due an entire day early, causing my account to go negative,” leaving them “without the ability to feed my service animal today.” The company responded on the Better Business Bureau website that when EarnIn debits are the cause of overdraft fees, they refund the customer and said they did so in this case.
DailyPay customers wrote to the Better Business Bureau with complaints about incorrect payment dates, the app sent their bank account to negative, and frustrating hour-long calls with customer service that didn’t resolve their issues. The company responded to each customer, explaining why debits can cause customers’ bank accounts to go negative, and in another case, saying that a “support specialist” had reached out and resolved the issue.
What the proposed earned wage access rules would do
The rules proposed by California regulators would apply to companies that market a service that involves, more or less, providing small advances against an employee’s wages, said Suzanne Martindale, the department’s principal deputy commissioner.
The proposed regulations explain that the department views these products as loans and would require businesses to register with the department or obtain a license. They would also limit any fees, including tips, expedited fees and other fees, to 5% per transaction. So, on that $100 10-day loan, an earned wages access company might charge you at most $5, instead of $9.
“They are basically just doing payday loans. This is what payday lenders do.”
Andrew Kushner, Policy Advisor, Center for Responsible Lending
Individual companies and industry trade groups have pushed back. Angelena Bradfield, head of policy for the Financial Technology Association, said the association does not believe these products are loans: They are based on wages earned, companies cannot take legal action to collect payments, and providers do not charge interest. . Bradfield also said tips and optional fees should not be considered charges.
EarnIn’s Durant said the rules would put pressure on the company to change its business model in ways that reduce customer choice. At this time, a small portion of users leave $0 tips and pay no transaction fees. Other users pay fees and tips; if a customer wants to pay EarnIn a 7% tip, he can, Durant said. If all tips and fees are capped at 5%, then customers are “deprived of the opportunity” to tip more and “then we are deprived of the ability to receive more,” he said.
Kushner, of the Center for Responsible Lending, said the number one benefit of the rules would be lower costs for consumers. The Center and other consumer groups are pressing the department to further tighten the rules.
The rules will be finalized no later than March 2024, according to the department.
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