- Startups are cropping up around the US offering workers access to earned wages before payday.
- While the limits, fees, and eligibility vary, they all offer no-interest payroll advances based on hours worked.
- As alternatives to payday loans, some of the startups go directly to consumers, while others partner with employers.
- In August 2019, the New York State Department of Financial Services announced it was leading a multi-state investigation into payroll advance companies.
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Startups are cropping up offering alternatives to payday lending and raising millions in VC funding in the process. These fintechs stress the importance of giving consumers access to earned wages, and issue payroll advances without charging interest.
Some of these payroll offerings are marketed directly to consumers, promising to help avoid overdraft fees or FOMO. Others partner with employers that offer earned wage access as an employee benefit.
The products, all dealing in earned wage availability, have varying limits, fee structures, and eligibility contingencies. Some offer no-interest and no-fee payroll advances and encourage optional contributions from consumers, sometimes called “tips.”
Without a stated interest rate, these startups aren’t regulated like lenders.
But in August 2019, the New York State Department of Financial Services announced it was leading a multi-state investigation into payroll advance companies. The probe, which a DFS spokesperson told Business Insider is still ongoing, is investigating whether players in the payroll advance industry are collecting unlawful interest rates disguised as tips or membership fees, among other predatory practices often associated with payday loans.
The traditional payday loan setup — where consumers can use a future paycheck to collateralize a loan today — is known for high interest rates, opaque fee structures, and tendency to trap consumers in cycles of expensive debt.
To be sure, there is consumer demand for cash advances ahead of payday, which usually falls every two weeks. Things come up, and for those living paycheck to paycheck, a high-rate and easy-to-get payday loan could be their only source of credit.
But regulators like the Consumer Financial Protection Bureau (CFPB) have proposed rules to protect consumers from predatory payday loans.
In 2017, the CFPB released the Payday Lending Rule, which, among other things, would require payday lenders to determine whether a borrower could feasibly pay off their loan prior to lending.
The rule was initially meant to be effective and enforceable in August 2019. Last year, the CFPB delayed the compliance date to November 2020, citing concerns from the industry over feasibility of adopting the rule.
Here are five key payroll-advance startups that are pitching themselves as an alternative to payday lending.
DailyPay offers earned wage access through employers to increase employee retention
DailyPay is a B2B payroll-advance product, working directly with employers to offer employees the ability to draw on their earned wages. DailyPay integrates with a company’s payroll system so it can track the number of hours worked in a given pay period, which turn into an employee’s eligible balance for withdrawal.
DailyPay provides the cash, and then deducts the accessed wages from an employee’s next paycheck. There’s no interest, but DailyPay charges a flat fee every time an employee draws on their balance ($1.25 for next-day, $2.99 for instant transfers) which can be paid by employers, employees, or some combination.
The startup has raised $22 million to date from investors including Frontier Venture Capital, RPM Ventures, and FinSight Ventures.
Earnin’s earned wage product is free, but encourages its app users to ‘pay it forward’
Earnin’ is a direct-to-consumer payroll advance startup that gives users access to cash in between paychecks for no fees or interest. The amount a user can draw prior to payday is limited to the number of hours worked. Earnin’ tracks this via timesheets submitted by the user, or GPS tracking on a user’s phone.
The Earnin’ app lets users draw up to $500 per pay period (new users start at a limit of $100 pay period) prior to receiving their paycheck. Earnin’ links into users’ bank accounts to verify direct deposit amounts and pay schedules. It debits the amount borrowed in a pay period from a user’s next direct deposit.
Charging no fees or interest rates, the company calls itself “community-supported.” Users are encouraged — but not required — to “pay it forward” and provide “tips” for the cash advances.
Earnin’ has raised $190 million to date from investors including Andreessen Horowitz, DST Global, and Matrix Partners.
Even offers access to some of your earned wages, a savings product, and budgeting functionality
Even works with employers to give employees access to up to 50% of earned wages, charging no interest. It also offers a savings product where employees can set aside a portion of their paychecks to be allocated into a savings account managed by Even.
Even’s app features budgeting functionality and can incorporate recurring bills into bank account balance projections. Employers have the option to subsidize the cost of the service, which is an $8 per month membership fee.
Even has raised over $50 million from investors including Khosla Ventures, Qualcomm Ventures, and Silicon Valley Bank.
MoneyLion will front you the cash so you don’t have to deal with FOMO
MoneyLion’s Instacash product offers its banking customers instant access to up to $50 at 0% APR. MoneyLion is a membership-based fintech, and while there’s a free membership tier for banking, the Instacash product is available for $9.99 per month.
If users set up direct deposits to their MoneyLion checking account, they can borrow up to $250 and don’t have to pay the monthly membership fee.
In addition to no-fee checking and high-yield savings, MoneyLion offers loans and is launching a stock-trading platform that will include the option to buy and sell fractional shares.
MoneyLion, which says it has over five million customers, raised more than $200 million from investors including Edison Partners, DHVC, and Greenspring Associates.
PayActiv offers earned wage access in addition to pre-paid card products for those without bank accounts
PayActiv partners directly with employers to offer no-interest payroll advance. There is a $5 fee for each pay period the service is used. Employers can subsidize the fee, or the cost can be pushed to employees that are using the service.
Depending on the number of hours worked, employees can draw up to $500 per pay period interest-free. Users can also spend PayActiv balances directly with Uber and Amazon.
In addition to the payroll advance, PayActiv offers employees the ability to use a prepaid debit card to access wages.
PayActiv counts Chuck E. Cheese, Walmart, and Wendy’s as customers. Similar to DailyPay, PayActiv pitches its product as an employee retention tool.
PayActive’s investors include Acorn Pacific Ventures, Generation Partners, and SoftBank. It’s raised over $33 million to date.
Read more:Neobanks like Chime are attracting billions in VC cash, but unlike most retail banks they don’t do any lending. Here’s how they’ve built a business on referrals and debit card swipes.