Fintech Loans: Breakthrough in Payday Lending or Just Another Way to Bilk Consumers?

Technology Policy Brief #91 | By: Mindy Spatt | June 2, 2023

Photo taken from: money.com

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Summary

The dramatic growth of Earned Wage Access apps is sending off alarm bells among consumer advocates.  Just a handful of employer-sponsored programs facilitated more than $9.5 billion in loans in 2020, about a 200% increase from 2018, with consumers borrowing before payday and agreeing to automatic repayment through their paycheck or bank account.

The majority of consumers using Earned Wage Access apps are college educated and middle class.  The majority are also women, who are targeted in deceptive ads offering fast cash for free that don’t disclose all the fees the user will have to pay. 

Analysis

‘Fintech” payday loans are the Internet’s answer to traditional payday loans and, consumer advocates claim, can be just as nefarious.  According to one provider, Earnin.com, Earned Wage Advances work two ways.

In employer-based models, the employer partners with a “provider” and the advance is repaid by taking the money directly out of the employees’ paycheck, with fees paid by either the employer or employee or both.

A direct-to-consumer model is available to people with regular direct deposit income, including gig workers.  According to Earin, “Consumers can pay for this product through a subscription fee, a per-transaction fee, or a voluntary tip amount. However, most EWA providers offer customers a no-fee version of their service.”

A no fee version sounds great, especially considering the high interest rates traditional payday loans are notorious for.  The Consumer Financial Protection Bureau warns that “A typical two-week payday loan with a $15 per $100 fee equates to an annual percentage rate (APR) of almost 400 percent,” compared to credit card APRs that are usually from 12 to 30 percent.

But the loans or “advances” offered by Earned Wage Access companies, even when advertised as free, mostly aren’t.  Advocates including the National Center for Consumer Law claim users are pressured to pay voluntary tips and are penalized if they fail to pony up, in contravention of truth in lending laws. 

In fact, some state regulators have demanded a stop to the deceptive advertising, including the Connecticut Department of Banking, the California Department of Financial Protection and Innovation (DFPI) and the Office of the Attorney General of the District of Columbia, where Fintech company SoLo Funds were ordered to stop offering loans with a concealed APR of over 500%. The Connecticut Banking Commissioner found that although SoLo claimed tips were optional, every single customer in Connecticut had paid one.  That’s similar to the results of California’s investigation, which found that the majority of consumers paid tips, with companies that requested them getting paid 73% of the time.

The glaring problems with this approach are not only that it bypasses truth in lending requirements, but also that it prevents comparison shopping and subjects consumers to a great deal of pressure.  Creditkarma.com lauds the website Dave as being ‘the best for low fees”, because “The Dave app doesn’t charge interest. Instead, it has a $1 membership fee.”  However, the tip request, which is repeated numerous times, can be as high as 15%, with the default for a $100 loan set at $6.00. 

In a paper urging closer scrutiny and regulation of the industry, Georgetown Law Professor Nakita Q. Cuttino points out that loan markets with ineffective price disclosures are associated with an increase in loan costs as compared to markets with clear price disclosures, and that the earned wage market is “riddled with a variety of pricing models.”

She proposes a federal-regulatory framework that would incorporate some of the consumer protections available for other types of loans such as uniform price disclosures, ability-to-repay rules and a right-to-rescind assignment. 

Some of those concerns are addressed by rules proposed in California, which would regulate app-based advances as loans and cap the interest rates and fees they could charge at the same levels as other financial products.  In a recent report on the rules in the Los Angeles Times by Aaron Glantz and Monica Campbell for the Fuller Project, the reporters found numerous examples of advertising by Fintech companies claiming funds are available with no fees or interest, in minutes, most of them featuring women of color expressing great relief at being able to rely on the app for fast cash.

California’s DFPI found that half of EWA users are non-white and predominantly (63 percent) women. A majority are employed full-time at companies with more than 250 employees and are between 25-40 years old.   Yet they are living paycheck to paycheck, and being sucked into loans that hide their full costs, which can add up to the same 400 percent APR payday lenders charge.   

Engagement Resources:

• Earned Wage Advances and Other Fintech Payday Loans: Consumers Shouldn’t Pay to Be Paid, National Consumer Law Center, April 2023.
• The Rise of “Fringetech”: Regulatory Risks in Earned-Wage Access Nakita Q. Cuttino, 2021.
• California DFPI Should Prevent Fintech Predatory Lending, Expand Protections in Earned Wage Advance Proposal