In a sparkling TV advertising for Earnin, an app that gives users early access to money from their next paychecks, a mother who plays with her baby laughs as she talks about her experience with the app, because in her own words, “babies don’t wait for payday ”.
At another point in the same ad, a man smiles as he talks about how he used the Earnin app to buy movie tickets for a date with money he wouldn’t normally have access to before. on payday.
A year after the pandemic turned life as we all knew it, many Americans are struggling to find professional traction. According to the Bureau of Labor Statistics, America’s unemployment rate fell from 3.5% or 5.7 million people in February 2020 to 6.2% or 10 million people in February 2021. This figure has reached a level record 14.7% or 23.1 million people in April 2020.
People need money and financial stability more than ever. The companies behind earned income access apps like Earnin offer the illusion of both things, but at a questionable price.
Apps such as Earnin – others include PayActiv, Dave, Brigit, and Rain – fall into a category called “Access to Earned Pay”. They allow people to receive money from an upcoming paycheck in exchange for fees or tips (which, according to apps, are voluntary).
For people who have no other options to pay for an unforeseen expense, using an earned salary app to get funds earlier can be a temporary solution. According to a January 2020 survey of PayActiv users, most users use cash advances for emergency expenses, food, utilities, and rent. And the use of these applications has sharp during the pandemic.
The apps say that because they don’t charge interest, they’re not payday loans (and haven’t been regulated as payday loans yet). But some advocates say that while earned wage access apps may look different from payday loans in the past, their effects on consumers remain the same.
Wells Fargo financial advisor Leona Charles has over a decade of business experience and is concerned about what paycheck advance apps like Earnin may mean to the financial habits of her users.
She thinks payday advance apps only keep people mired in debt. Having access to paycheck funds sooner, she said, can only guarantee that people will run out of cash even faster.
To be successful in the marketplace, Charles explains, the companies that produce these apps rely on poor user financial management.
“From a capitalist point of view, the responsibility of the business is to continue to encourage financial mismanagement,” she said.
Earnin CEO Ram Palaniappan disagrees, saying users of his apps are disciplined with their budgets and financially responsible overall. In a survey Earnin took of its users, 84% said the app helped reduce financial stress, while 49% said since they started using Earnin, they can finally afford an emergency expense of $ 400.
Their biggest problems stem from the fact that users need money before their paychecks arrive, and this is where Earnin provides assistance.
“The problem for them is that invoices, subscriptions, etc. are due earlier than their payroll cycle, which can lead to high bank and overdraft fees,” says Palaniappan. “Earnin helps people looking for solutions with no mandatory fees meet their financial needs quickly and develop positive financial habits.”
Palaniappan said a frequent tangible example of Earnin’s ability to help those in need is how Earnin helps people buy gasoline to get to work. By helping people pay for gasoline to get to work, they are able to save money and avoid the additional stress that could come from being absent from work.
“When you live paycheck to paycheck, a small amount of money can have a big impact when it’s available when people need it most,” he said.
Palaniappan claims that Earnin tries to help its users with financial management, with features like Balance Shield, which alerts users when they have low bank balances to avoid overdraft fees, and Tip Yourself, which allows users to automate their savings.
Another concern of consumer advocates regarding earned wage access applications is their pricing structure.
Earned paycheck apps technically differ from payday loans, in that rather than paying interest on money, users pay an optional fee or “tip” after each transaction. As illustrated in a Nerdwallet Example of a $ 2 tip on a $ 20 transaction, a $ 2 tip can be the equivalent of a 260% APR, making these transactions more expensive in the long run than users might have thought at the beginning.
In an instance, a former Earnin user and student in Statesboro, Ga., paid a $ 5 tip for every $ 100 up front, an APR of 130%.
“Using the word ‘tip’ instead of usury, interest rate, or fees is just semantics,” Missouri State Senator Jill Schupp said. told NBC News.
Tipping is technically optional, but not tipping has consequences. Another user shared that when she didn’t tip after a transaction, Earnin reduces the amount of money it could borrow in future transactions. In 2020, Earnin agreed to settle a class action after it caused 250,000 workers to be affected by the withdrawal and other charges.
Lawmakers in some states have launched legislation to regulate earned salary applications. In Nevada, for example, lawmakers are seeking to require entities like Earnin to be licensed by the state’s financial institutions division.
Even though payday advance applications ultimately face the kind of regulation that has begun to reshape the payday lending industry, bigger changes are needed for America to fulfill the promise of a fairer country that offers upward mobility for everyone.
Michael Butler is originally from Augusta, Georgia, and has written for publications like WHYY, Okayplayer, and Remezcla. Michael is currently a business and technical reporter for Technical.ly Philadelphia and a member of the Report For America corps.