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The FinTech Industry Wants to Give Desperate Workers an Advance on Their Next Paycheck. It’s a Trap.

Employers love so-called earned-wage access apps. Their employees, not so much.

In a video filmed for his millions of Twitter followers, the celebrity preacher T.D. Jakes, posing in a double-breasted suit with a conspicuous gold watch on his wrist, asks his audience, “Do you realize 78 percent of Americans in this country live paycheck to paycheck?” Then he shares the good news: An app called Earnin can help. “It is possible to stretch your check,” he says, explaining that Earnin advances money to the user from their next paycheck, allowing them to cover unforeseen, urgent expenses. “Car back on the road. Refrigerator working,” he says. “Life goes on.”

It’s as easy as that: a simple, safe alternative to facing an overdraft fee from the bank or resorting to a payday loan.

In July 2019, a month after Jakes posted the video, he appeared onstage at Essence magazine’s first-ever Global Black Economic Forum, hosting a panel that also featured Ram Palaniappan, the Founder of Earnin. Titled “Empowering Our Community to Overcome Multigenerational Financial Inequality,” the session gave Palaniappan an opportunity to portray his app as part of a holistic solution to closing the racial wealth gap. “You’ve got to believe in yourself,” Palaniappan told the audience in New Orleans. “That’s how you get ahead.”

That same year, thousands of Earnin users were formulating a class action suit against the app’s parent company, claiming that Earnin had misled them into unknowingly racking up overdraft fees because it automatically deducted money from their checking accounts regardless of the user’s balance. In their complaint, the plaintiffs argued, “Earnin’s operations, along with its deceptive and incomplete disclosures, means that users like the Plaintiffs end up losing huge portions of their scarce wages to bank fees, which Earnin falsely assures users they will not receive.”

Earnin’s parent company agreed to settle the suit for $12.5 million last year, a high-profile P.R. bruise for the nascent earned-wage access industry. (In the months since, the company says it has completely overhauled its marketing to eliminate any suggestion that Earnin can prevent overdraft fees.) The specter of future litigation hasn’t stopped investors in what has become known as FinTech from doubling down on apps that allow employees to collect money they have already earned and are scheduled to receive in their next paycheck. In addition to services such as Earnin, a number of competitors have begun offering an employer-based model, in which corporations allow earned-wage access companies to have first dibs on employee paychecks. The firm PayActiv has swiftly become a market leader of the latter category, securing $100 million in venture financing last summer and striking deals with Walmart, Wayfair, and 1,500 other companies.

Earnin, PayActiv, and their swarm of competitors—most of them with names that could have only been brainstormed by the cultic ministers of Silicon Valley, like Brigit, Even, and Rain—are all marketed as products that help the consumer get their finances in order. “We’re committed to the cause of the lower-income worker,” says Safwan Shah, the CEO of PayActiv. “People need some kind of financial security. They need dignity, they need savings to be ready for tomorrow.”

The company’s competitors broadcast a similar sentiment in their marketing materials. Even is “a responsible way to pay that benefits everyone,” while DailyPay calls itself “a win-win benefit.” Some ad copy borders on the messianic, with Rain proclaiming on its website, “Our mission is to regrow individual freedom by giving people control over their income and finances. We are killing predatory financial products like payday loans.”

These apps have proliferated partly because, as Alex Horowitz, a Pew researcher who studies consumer finance, puts it, “People who are in the market for wage-access products don’t have great options.” Low-wage workers are typically unable to secure loans from traditional creditors, so when they have a financial emergency, they are in danger from high-cost predatory payday lenders whose interest rates are so exorbitant they that have been banned in 16 states. The fees that earned-wage access apps charge for each transaction are marginal compared to what a user might face from a payday lender or a bank if they overdrew their checking account, making them an appealing alternative.

“If somebody really is substituting wage access for payday loans and overdrafting their bank account, and if they don’t use payday loans anymore and they don’t overdraft anymore, that would be a good news story,” says Horowitz. “But we don’t know if that’s happening.”

What little independent research has been done is not promising. A study from the National Consumer Law Center estimates that a typical PayActiv customer ends up using the app at least once a pay cycle (i.e., once every two weeks), resulting in many employees getting stuck in an endless loop of filling the hole in their paycheck that the previous advance opened up. The company usually charges $1 per transaction, though it also offers a Visa card that can be “reloaded” with payroll advances without a fee.

Rather than channel consumers to a charge card or assess a fee, Earnin solicits “tips.” Each time someone accesses money, they receive a message informing them that another Earnin user “covered” their transaction and prompting them to “pay it forward for someone else.” After they tip, another message pops up telling them how many other users they helped and, “Kindness is contagious!” The not-so-subtle hints are remarkably effective, with some 40 percent of users tipping regularly.

One woman who has used the service since 2015 told me she usually tips $6 or $7 per transaction to ensure users in dire straits don’t lose access. Such altruism is certainly commendable, even if it’s perplexing that voluntary user donations are necessary to support a company that has raised $190 million in venture funding. Lauren Saunders, who authored the National Consumer Law Center study, points out that a user who feels obliged to tip a company $5 to get access to $100 five days before they’d otherwise be paid is effectively paying a 365 percent interest rate for money they’ve already earned.

And that’s assuming the services function as intended. Users frequently complain in online forums about money being automatically deducted from their checking accounts days before it was due to be repaid, as well as overdraft fees being triggered because money the user had been notified was transferred never showed up. A PayActiv user named Amber outlined a typical experience last January: “I get my actual paycheck tomorrow and I am going to be expected to payback money I never received. How is this fair?!”

Consumer advocates are very alarmed by the underlying power imbalance between wage-access providers and the low-income workers they serve, exposing once again Silicon Valley’s penchant for dressing up in utopian visions the dystopian brutality of its desire to make money. “If you think about someone working at Walmart, Target, someone like that,” says Keith Corbett, of the Center for Responsible Lending, “their pay is going to maybe be $150 to $200 for a week. They’re desperate for their money, so they’re willing to give up some. But what they’re going to find is when payday comes, the money is not going to be there. They’re going to be in the same boat. These companies know that.”

The obvious appeal of apps like Earnin is that they can be used by anyone looking for a little fast cash. But the real engine for the growth of the industry is a near-demented corporate fixation on cost reduction. In 2018, just as wage access was beginning to come into vogue, two researchers at the Harvard Kennedy School named Todd Baker and Snigdha Kumar published a paper illuminating just how much employers stood to benefit by offering apps like PayActiv as a perk to their workers. Baker and Kumar found that active users of the service were 19 percent less likely to leave their jobs. Extrapolating that number out, an employer the size of Target could stand to reduce its annual costs by more than $100 million—simply by limiting turnover, which forces corporations to spend money on recruiting and training new employees, as well as the overtime that has to be paid out to anyone who ends up filling in for departed co-workers.

From one vantage, this reduction in employee departures can be chalked up to the job satisfaction that comes with increasing financial flexibility. Stephen Middlebrook, a lawyer who previously worked at the Treasury Department and now advises start-ups, including FinTech companies, highlights how popular earned-wage access has become among hourly workers. “Employees view this as a valuable product,” he says. “This is a benefit they consider when they decide where to go to work. And because of that, it becomes important to employers. It’s something they’re going to basically need some form of to provide to employees to stay competitive in the workforce market.”

At the same time, it’s hard to ignore that employees are being drawn into a situation where they may feel perpetually indebted to their bosses. That danger is even more apparent with companies like Kashable and SalaryFinance, which allow businesses to offer their workers five-figure loans that can be repaid through payroll deductions stretched out over more than a year. These companies do have policies that theoretically reduce the risk of the employee falling fully under the thrall of their boss; the interest rates they charge are comparable to that of a credit card and, if the employee leaves their job, their repayments can transfer from payroll deductions to direct debits from their bank accounts. Nevertheless, the Harvard study found that if a Target-size retailer offered SalaryFinance to its employees, it would generate even more savings than an earned-wage access product might.

“We should be a little skeptical about marrying credit and employment,” says Jim Hawkins, a professor at the University of Houston Law Center. Though he thinks employer-based installment loans (an industry term for the offerings of companies like Kashable) generally offer a better value to consumers than a payday lender would, Hawkins says the practice does risk comparison to the abusive “company store” model, in which nineteenth-century employers paid workers in “scrip” that could only be redeemed at merchants owned by the company. Vertical integration with a digital sheen is likewise evident in the recent move by Uber to offer earned-wage access directly to its drivers in Canada, who are otherwise paid weekly. Now, instead of using an app like Earnin if a bill comes due while they’re waiting on their wages, Uber drivers can pay 50 cents to the company in order to immediately receive the money they’ve earned during a shift.

No matter how nominal the fees, the practice of charging employees to access money they’ve earned is galling to consumer advocates. “It should ideally be free to the employee,” says Lauren Saunders. “If this is something that helps employers … then they should cover the cost.”

What little marketing employer-sponsored apps do to consumers tends to feel perfunctory, revolving around generic stories about how the app helped people achieve “peace of mind.” More attention-grabbing are the slick, documentary-style promotional videos the companies produce to lure employers, like the PayActiv film that features an endorsement from the former director of the Consumer Financial Protection Bureau, Richard Cordray. “It’s revolutionary to think that somehow people could be paid more quickly than every week or every two weeks,” Cordray says amid footage of working-class Black people driving through postindustrial streetscapes and putting on hairnets.

For the H.R. suits who need some numbers to go along with the empowering vibes, PayActiv’s website is chock full of details. There, businesses are assured they can save $50,000 per 100 enrolled employees every year and are invited to browse detailed interviews with personnel managers. In one, Sarah Stephenson, who was the chief human resources officer at the national restaurant operator Craftworks Holdings until 2018, says, “Despite the minimum wage increases that have happened in different parts of the country, the jobs in our restaurants (waiting, cooking, etc.) are oftentimes still not enough to make ends meet, or they make ends meet but don’t allow for any flexibility.”

One might assume that the simple way to resolve the problem Stephenson identifies would be to pay dishwashers and bartenders more money, but savvy administrators know the more profitable answer is to offer employees a novel way to spread what little money they do make more evenly throughout the month. Stretch that paycheck, baby—just don’t pay too much attention to how many holes all that stretching might open up.

The flourishing of earned-wage access has been aided by regulatory uncertainty about whether the product actually constitutes a type of credit lending. If it did, then the industry would be faced with adherence to the 1968 Truth in Lending Act, which would force providers to disclose the costs associated with their apps in the same rigorous way credit card companies do, including by providing annual interest calculations. Many wage-access companies treat TILA as a borderline existential threat—which makes sense, since consumers would surely be less likely to assent to fees if they were made aware of the triple-digit interest rates they might translate to.

The Consumer Financial Protection Bureau threw the industry a life preserver in late November when it issued an advisory opinion stating that earned-wage access shouldn’t be considered credit, so long as its practitioners adhere to a few guidelines—namely that they do not engage in debt collection and never charge fees. At the same time, the CFPB administrators wrote that there “may” be earned-wage access companies that “charge nominal processing fees … that nonetheless do not involve the offering or extension of ‘credit.’” The agency then invited applications from firms that believed they fall into that category for a ruling on their specific business practices.

The twist in the CFPB’s sleight-of-hand trick came a month later, when it released a follow-up opinion offering PayActiv “safe harbor” from liability—never mind that the company not only charges fees but also reserves the right to garnish future paychecks if the one issued immediately after the user’s payroll advance is not large enough to cover the whole deduction. “How is that not credit?” asks Lauren Saunders. “The CFPB’s opinions were on totally shoddy legal ground and totally disingenuous in what they were trying to accomplish. It really was laying the seeds for massive evasions of the Truth in Lending Act.”

Days after the CFPB opinion, PayActiv issued a preening press release touting itself as “the unquestioned compliance gold standard in earned wage access.” When we spoke, Shah read to me from the CFPB decision and dismissed the concerns of analysts like Saunders, calling the notion that his company should be treated as a credit lender “obscene.” “Payday lenders are still there,” he said. “Overdrafts—pick a real enemy!”

Consumer advocates hope that under the Biden administration the CFPB will revisit its eleventh-hour guidance on wage access. In the meantime, what little action has taken place at the state level indicates that oversight from Democrats will not necessarily translate into any of these companies needing to revise their current practices.

So far, California is the only state to have issued any substantial regulatory guidance. That came in late January, when the commissioner of the California Department of Financial Protection and Innovation released memorandums of understanding with five wage-access companies, a group that includes PayActiv and Earnin along with Even, Bridgit, and Branch. Under the agreements, the agency will begin collecting extensive data from each company in order to better monitor their operations. At the same time, the agreements allow each company to continue its current work unimpeded, and all five include language stating that the fees associated with each product “are not considered ‘finance charges’ for purposes of TILA.”

Manuel Alvarez, the commissioner of the California Department of Financial Protection and Innovation, did not give me a straight answer when I asked him whether wage-access companies should be treated as credit lenders. “Let’s keep in mind the higher-order objectives,” Alvarez says. “Protect consumers and foster an environment that fosters responsible innovation. To the extent that these companies are somehow harming consumers, the idea is this data will help us suss that out.” At the same time, Alvarez says, that data could also prove useful in formulating a set of best practices for the industry—something that the state of California has a vested interest in, given that four of the five companies covered by the agreements are based in the Bay Area.

Rather than have a “technical debate about whether a thing is a form of credit,” Alvarez says, “the more productive question is how do we make sure Californians are protected and have redress when they engage in this particular marketplace? How do we make sure that we continue to operate in a way that’s scalable and keeps pace with that evolution in the marketplace?” Going forward, California is in a strong position to come down hard on an earned-wage access company that is taking advantage of its consumers, even as, Alvarez says, “we’re looking to embrace the responsible innovation.”

If earned-wage access is indeed here to stay, it will be up to regulators like Alvarez to determine whether the industry evolves into a genuinely safe way for underpaid workers to stay afloat or just one more method for ruthless companies to separate poor people from what little money they’re able to earn. The former path will require rejecting the industry’s present marketing posture that wage access is best thought of as a replacement for payday lending. Indeed, Keith Corbett says that many wage-access companies have begun using “the same playbook” as their less savory forbears. He notes Earnin’s recruitment of an influential Black faith leader in T.D. Jakes as a spokesman, as well as the rapper Nas’s investment in the company. “It’s exactly the same technique that the payday lenders used,” Corbett says. By associating themselves with Black leaders, wage-access companies are seeking to make themselves seem safe to low-income workers who disproportionately come from Black and brown communities.

It’s not hard to imagine a scenario where a working stiff making minimum wage uses an app like Earnin or PayActiv to advance money in order to pay their rent on time, but doing so means they’re out of options a week later, when their car breaks down or a family member ends up in the hospital. “It’s not just that this product is less expensive than something else,” says Alex Horowitz. “It’s looking at people’s real-world options and seeing whether it helps them.”

Especially for the employer-sponsored apps, the priority seems like it’s less on helping working people achieve stability than on helping their bosses keep costs as low as possible. Earned-wage access may provide some short-term benefits for users, but it does nothing to address the fundamental problem: They don’t make enough money.