In May, a video featuring a young woman named Brooklyn in heart-shaped glasses implored viewers to tell the California Department of Financial Protection and Innovation how important a company named EarnIn was to their day-to-day life.
EarnIn is part of a relatively new app-based industry that provides cash advances to people based on their wages or income, often calling itself 鈥渆arned wage access.鈥� The company wanted its users to send stories and comments to the department because California is poised to impose new first-in-the-nation rules on the industry.
EarnIn got its wish: More than 50,000 customers wrote in, said David Durant, general counsel at EarnIn, before the company decided to 鈥渟low down the encouragement.鈥�
How earned wage access works
Software or apps from companies like EarnIn provide cash to workers based on how much they鈥檝e earned, in advance of their payday. So, for example, you could get some of your pay daily rather than all of it every two weeks, minus fees or other charges. People turn to the apps when they need money for some groceries, a bill that鈥檚 due, or an emergency car repair before their wages land in their bank account.
Consumer advocates say some of these apps are essentially high-tech payday loans, and can lock workers into a cycle of debt and reborrowing. State regulators collected data from earned wage access companies and found that the fees and tips customers pay add up to costs similar to those of payday loans.
The industry has two main business models. Some companies, such as FlexWage and DailyPay, plug into a company鈥檚 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 some amount of cash, and then directly deduct that amount from your bank account on the repayment date.
These apps make money in a variety of ways, including subscription fees, fees to speed the arrival of your money and tips.
鈥淭hey鈥檙e basically just making payday loans,鈥� said Andrew Kushner, policy counsel at the Center for Responsible Lending, of the direct-to-consumer companies. 鈥淭his is what payday lenders do.鈥�
One difference is that California regulates payday loans, but app-based cash advances have been operating in a legal gray area. these products have confusing pricing models, which can make it difficult to understand how small fees add up.
鈥淭heir business model was basically structured around trying to establish this legal fiction that they are not actually lenders under California law,鈥� Kushner said. 鈥淎nd one of the things they did to try to maintain that fiction is they would say the product is completely free.鈥�
The majority of users earn less than $50,000 per year, when four earned wage access companies gave them data. About half of users are non-white and more than 60% are women, a consulting company found when it .
The industry has . Walmart in partnership with two financial tech companies in 2017, .鈥�
When California鈥檚 financial regulation department , it found that the fees and tips users paid accumulated to costs not far from payday loans. That data 鈥渄id really pierce this fiction that the companies are pushing that [the advances] are a healthier alternative to payday loans,鈥� said Kushner.
The California department calculated annual percentage rates for the advances, which is a measure used to compare loans based on what they 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 bit over $9 in fees for a 10-day loan of $100, that would amount to an APR of just over 330% 鈥� 鈥� which is what California鈥檚 regulator found that people using earned wage access advances were generally paying. The department also found that the advances were generally short term, repaid within 10 days, and for small sums, typically $40-$100.
There are some upsides. For one thing, the federal that advances generally cost less than payday loans, which are known for their exorbitant interest rates. A found that without their products, customers said they would consider not paying some of their bills on time, or overdrafting their bank accounts, which can incur steep fees.
But sometimes customers encounter frustrating issues.
EarnIn customers, for example, filed complaints with the Better Business Bureau about the app withdrawing money from their bank accounts before their paychecks had actually landed, sending their balances below zero and triggering overdraft fees.
In March, one customer wrote to the Better Business Bureau: 鈥淚 have contacted EarnIn on no less than 6 occasions about their AI over-adjusting and taking money from my bank account prior to my payday.鈥� Another customer complained that the app 鈥渄ecided to deduct their balance owed an entire day early causing my account to go into the negative,鈥� leaving them 鈥渨ithout the ability to feed my service animal today.鈥� The company responded on the Better Business Bureau website that when EarnIn鈥檚 debits are the cause of overdraft fees, they reimburse the customer, and said they did so in this case.
Customers of DailyPay wrote in to the Better Business Bureau with complaints about incorrect pay dates, issues with their DailyPay pay balance going into the negative, and frustrating hour-long calls with customer service that don鈥檛 resolve their issues. The company replied to each customer, explaining how app balances can go into the negative, and in another case, saying that a 鈥渟upport specialist鈥� had reached out and resolved the issue.
鈥淲e never touch their bank account, checking account, saving account; we don鈥檛 touch any of their personal accounts,鈥� said David Schwarz, head of communications for Daily Pay. Instances of pay balances going into the negative are rare, he said.
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 鈥� more or less 鈥� providing small advances against an employee鈥檚 wages, said Suzanne Martindale, a senior deputy commissioner at the department.
The proposed regulations explain that the department considers these products to be loans and would require companies to register with the department or obtain a license. They would also cap any charges 鈥� which include tips, fees to speed up payments, and other charges 鈥� at 5% per transaction. So on that 10-day loan of $100, an earned wage access company could charge you at most $5, instead of $9.
鈥淭hey鈥檙e basically just making payday loans. This is what payday lenders do.ANDREW KUSHNER, POLICY COUNSEL, 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 doesn鈥檛 believe these products are loans: they鈥檙e based on earned wages, companies can鈥檛 take legal action to collect payments, and providers don鈥檛 charge interest. Bradfield also said that tips and optional fees shouldn鈥檛 be considered charges.
Durant, at EarnIn, said that the rules would put pressure on the company to change its business model in ways that reduce customers鈥� options. Right now, a small portion of users leave $0 tips and pay no transaction fees. Other users pay fees and tip; if a customer wants to pay EarnIn a 7% tip, they can, Durant said. If all tips and fees are capped at 5%, then customers are 鈥渄eprived of the opportunity鈥� to tip more, and 鈥渨e鈥檙e then deprived of the ability to receive more,鈥� he said.
Kushner, with 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 .
The rules will be finalized no later than March 2024, according to the department.
is a nonprofit, nonpartisan media venture explaining California policies and politics.