Paid access applications are subject to regulatory testing

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WASHINGTON – A growing industry of financial apps that allow workers to access their wages earlier is under scrutiny by regulators to prove they are different from payday lenders.

Several startups have launched services to provide workers with small payments, ranging from pocket change to several hundred dollars, to be repaid on the next payday. Tapping into the thirst for quick cash of millions of Americans who live paycheck to paycheck, the companies behind the services have touted them as cheaper and safer alternatives to short-term loans, such as than payday loans and bank overdrafts.

Last month, regulators in New York and 10 other states said they were investigating whether certain payday loan companies had violated payday loan laws. In California, state lawmakers are debating a law that aims to lay the legal foundation for the industry and provide protections for consumers, the first such attempt in the country.

The actions taken by state officials come as the industry grows. Leslie Parrish, analyst for research firm Aite Group, said the industry is “poised for exponential growth.” Aite Group estimated that app companies processed 18.6 million anticipated payroll transactions in the United States, valued at over $ 3.15 billion in 2018.

“This investigation will help determine whether these payday advance practices are usurious and harm consumers,” said Linda Lacewell, New York’s leading financial regulator. She added that some of the companies “appear to charge usurious or illegal interest rates disguised as tips, monthly subscriptions” and other fees.

Industry executives and some consumer advocates say the services have the potential to help low- and moderate-income workers by providing low-cost tools, though they disagree on how businesses should be structured and regulated.

“It did not solve the problem of income inequality,” said Todd Baker, senior researcher at Columbia Business School. “What it does is replace, at minimal cost, the $ 30, $ 40 that people are paying today for a single overdraft or a $ 200 payday loan.”

Financial Health Network, a research organization funded in part by financial companies, estimated that financially troubled consumers spent $ 173 billion in fees and interest in 2016 on services that often come at high costs, including 24.5 billion. billion dollars in bank overdraft fees and $ 6 billion in payday loans.

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Payroll advance apps come in different business designs from companies such as Earnin, PayActiv, Inc. and Even Responsible Finance, Inc. Some work directly with consumers while others work with large employers such as Walmart. Inc.

and Uber Technologies Inc.

Companies claim that services only advance workers part of the wages they have already earned. This, they say, sets them apart from payday lenders and other consumer lenders and keeps them outside of existing payday lending laws and regulations.

“In the United States, we have this pay cycle that withholds people’s pay,” said Ram Palaniappan, managing director of Earnin. “What we have been able to do is give people access to their salary as they earn it.”

Earnin CEO Ram Palaniappan said he welcomed questions from regulators.


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Earnin tracks users’ work and payroll schedules using timesheets or location services and will deposit up to $ 500 per pay period into their bank accounts. Rather than charging a fee for its service, Earnin is asking users to consider voluntary tips of up to $ 14.

Earnin received a subpoena from New York regulators in March, industry experts said. Several other payday loan companies, including PayActiv and Even, have also received letters from regulators, experts said.

“It’s a new model. We welcome their questions, ”said Mr. Palaniappan.

California’s proposed legislation is sponsored by PayActiv and has the backing of other industry players who see the law as a way to sanction their business model as non-lenders while setting standards to prevent abusive practices. .

“We welcome the attention of regulators on this issue because I believe it will prevent the industry from regressing to the same average as payday lenders,” said Jon Schlossberg, managing director of Even, which offers a financial planning that includes instant access to wages earned by employers.

PayActiv chief executive Safwan Shah said he looked forward to the state’s investigations bringing clarity to the market.

Some consumer advocates believe the California bill allows providers to directly access consumers’ bank accounts, which could lead to overdraft fees and insufficient fees charged by banks.

“Our biggest concern is that it authorizes a new category of payday loans that do not have to comply with interest rate limits,” said Lauren Saunders, associate director at the National Consumer Law Center.

Paid access apps, especially those that deal directly with consumers, have similarities to payday loans, including a basic feature where consumers receive payment in exchange for information about their bank account, from from which payments are then automatically collected.

Unlike payday lenders, however, paid service providers have no recourse, which means that if their customers don’t return the money, businesses can’t sue them and sue for collection. Payments also cannot be renewed for additional fees, a feature that makes payday loans expensive for many consumers.

Many families in Tchula, Mississippi are struggling to make ends meet with a patchwork of jobs and high-interest loans. Community leaders and the city’s only bank are trying to help, but the cycle of desperation is not easy to break.

Write to Yuka Hayashi at yuka.hayashi@wsj.com

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