New earned wage access schemes are worsening the affordability crisis

• Key insight: A new, slick breed of payday loan app is working to extract profits from people struggling with the affordability crisis.
• What's at stake: Lending through apps instead of storefronts facilitates far heavier repeat use and manipulative "dark patterns" that multiply fees.
• Supporting data: According to a lawsuit filed by the state of New York, one in five borrowers using the payday loan app MoneyLion regularly incur fees and tips totaling $57 a month.
  

A new, slick breed of payday loan app is working to extract profits from people struggling with the affordability crisis. The potential profits are apparent from the huge sums these new payday lenders spend lobbying Congress and states to convince lawmakers that loans are not loans. But many companies offering so-called earned wage access have the same basic business model as traditional payday lenders: putting people in a debt trap with depleted paychecks, a vicious cycle of re-borrowing and mounting costs. 

These new payday lenders are luring cash-strapped workers into a downward spiral of payday loans. They shouldn't lure lawmakers into preempting or eviscerating state rate caps or Military Lending Act protections for service members. Even traditional payday lenders could walk through the loopholes by rebranding themselves as "earned wage access" providers.

In fact, these apps are payday loans on steroids. Lending through apps instead of storefronts facilitates far heavier repeat use and manipulative "dark patterns" that multiply fees. A variety of data from researchers, regulators and the industry itself shows that while promoted as "no interest," 90% of loans have fees. These apps drive workers into paying fees by making free options slow, inconvenient and difficult to access. 

One lender, DailyPay, promotes "tremendous benefits to the employer … all for a price tag of $0 to the business." But it boasts to investors about the $300+ a year it extracts from low-wage workers. One worker paid almost $1,400 on 450 loans over two years. And, according to a lawsuit filed by the state of New York, 80% of DailyPay's most recent revenue comes from workers who took out over 100 loans a year. Worse, nearly half of all fees are paid by workers who, on average, take out a loan every other day.

According to a separate lawsuit filed by the state of New York, one in five borrowers using another payday loan app, MoneyLion, regularly incur fees and tips totaling $57 a month. The complaint also claims that MoneyLion limits the size of individual loans, forcing workers to take out multiple loans within minutes of each other, with multiple fees, to get instant access to advertised amounts. 

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A third lender, EarnIn, required users trying to get an advance without a fee to make 14 additional clicks and suffer through 17 messages about why they needed to tip. The costs paid to individual lenders are only part of the picture, as loan stacking from multiple apps, along with increased use of traditional payday loans, is common.

And it's not just the fees from the apps. Overdraft fees increase after people start using the apps. One study found that half of users had no overdraft fees in the three months before starting to use the apps, but an average of 2.3 and as many as 35 in the following three months. At $35 apiece, that could be $322 a year in overdraft fees alone. A study EarnIn  sponsored found that nonsufficient funds, or NSF, fees also increase at a rate of one fee for every 13 loans. For those taking out 100 loans a year, that could be $269 a year in NSF fees.

Yet Congress is considering a bill from Representative Bryan Steil, R-Wis., that would preempt any state law capping interest rates or fees for these payday loan apps. It would also exempt them from the Military Lending Act's 36% rate cap and other protections for service members. If this bill passes, service members will suffer. Unfortunately, state lawmakers are considering similar bills. 

The industry bills would also allow regular payday lenders to exploit broad loopholes in state    and federal lending laws. They can require authorization to debit bank accounts or payrolls – a powerful repayment method that secures a 97% to 99% collection rate for apps that  disingenuously claim people have no obligation to repay.

The only way to limit exploding costs on payday loan apps is obvious: firm limits on costs – annual percentage rate limits or comprehensive monthly fee caps as in many state laws and the Military Lending Act. The argument that these earned wage payday loans are not loans has already been rejected by eight out of the eight courts it has been raised in. 

The disclosures and vague, weak protections in these bills do nothing to prevent unaffordable fees. With no cost limits, the sky is the limit.