Loan Sharks on the Digital Market

Financial apps are taking advantage of millions through fees and hidden charges

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Daniela Noonan

Young employees are one of the most vulnerable populations in the workforce. Their inexperience can make them easy targets for companies and bosses to exploit. According to a Griffin University research study, a majority of workers under 18 have experienced exploitation or harassment on the job. This exploitation comes in more ways than assigning extra hours or having workers break OSHA laws. It also comes with scamming them out of a paycheck.

 

Pay-ahead apps allow people to access their paycheck before payday. Of course with a small “tip” that pays for the app usage. In theory, millions of workers can access their money in case of an emergency without taking out a loan or turning to alternative sources. While it can be a lifeline it is raising questions about the benefits of using these apps. According to a New York Times article, Some customers have sued, regulators across the country are looking into their practices, and consumer advocates fear that the apps are glossy packaging for the kind of lending that can leave users stuck in an expensive cycle of debt.” Some of these apps are facing a consequence of their unlawful actions. According to the lawyers and settlements news site, Earnin agreed to pay 12.4 million dollars in retribution for misleading consumers on overdraft and banking fees. According to their class-action lawsuit filed in the US District Court Northern District of California, thousands of customers were “deceived into signing up for Earnin’s app-based payday loan services—and paying “tips” to Earnin for such loans—by the company’s misrepresentations and omissions, in marketing materials, regarding the true operation and risks of the service. These risks include the real and repeated risk of multiple insufficient funds fees or overdraft fees imposed by banks as a result of automated Earnin transfers from consumers’ checking accounts.”

 

So what are these apps and where do you find them? Well, they are available in two ways. The first (apps like Dave and Earnin) are free and public but require timesheet and transaction information. The others, (like PayActiv, DailyPay, and Rain) are offered through employers and businesses. According to Aite Group, an economic research organization, these apps are increasing in popularity, in 2019 workers tapped their paychecks through workplace providers an estimated 37 million times, gaining access to more than $6 billion,  nearly double the amount in 2018. 

 

With so many users and an increasing platform, how could so many be struggling on such a popular app? Well, they’re taking money out of their paycheck faster than it can be restored. According to an NBC news article, “But critics say that the company is effectively acting as a payday lender — providing small short-term loans at the equivalent of a high-interest rate — while avoiding conventional lending regulations designed to protect consumers from getting in over their heads.”

 

These small “tips” that they require are just another word for an interest rate. So in addition to your own money being taken out of your paycheck, it is an interest fee too. And if it is an especially high amount, say a hurricane or flood demolished your house, the interest rate increases on that too. So what should’ve been a $300 reduction can branch into the 400s. It might not be a problem once or twice a year but the trouble starts when your paycheck comes, and there’s not enough money for the month. Then all the usual expenses can’t be paid off causing users to then pull more money out of their next paycheck, creating a cycle of debt.

 

According to democratic state senator of Missouri Jill Schupp, these interest rates are hiding behind the language of “tip” to avoid legal repercussions. “To use the word ‘tip’ instead of a usury charge, an interest rate, or a fee, it’s just semantics,” Schupp said. “It’s the same thing at the end of the day.”

 

So how are these businesses getting away with predatory lending hiding behind a colorful marketing campaign guaranteeing employees ownership over their own money? A new amendment passed in 2017 which took away more protection for consumers and employees.

 

According to consumer finance, The Bureau of Consumer Financial Protection is issuing its final rule to amend its regulations governing payday, vehicle title, and certain high-cost installment loans. This affects how these pay-ahead apps can function because their practice is no longer considered abusive for loaners to charge high interest rates or require multiple installments to pay back. So these pay-ahead apps are relatively new and marketing in a smart, yet sinister way.

 

Advertising to certain populations to spread awareness of a topic or product is one of the most effective ways to get a product out there. Pay ahead apps use the same strategies to target younger populations. According to an NBC news article, Earnit and Chime have been advertising on apps like Snapchat and Hulu, most frequented by young adults and teens. These same populations are the newest to the workforce and most easily exploited. It is no accident that these apps are marketing to the same populations that are most at risk. With amended legislation and a risky financial model, these apps should be treated with caution and seen as what they are, loans.

 

Pay-ahead apps can be beneficial for the average employee, allowing people to access their own money in case of an emergency. While it can keep people from turning to predatory loans from a bank or credit union, it still requires a fee for its service. The app’s intentions should also be called into question because of their targeted marketing to teens and young adults, ones that are already at a higher risk of exploitation in their jobs. The best way to protect yourself and others is through education of the risk and benefits of apps like these and how to use them safely.