Qwatasia has a full-time job as a fraud analyst in Dallas, where she works the third shift—5 p.m. to 2 a.m.—Monday through Friday. But she finds it difficult to live on her salary. Sometimes, she’s short on rent as she waits for her next paycheck to hit.
Qwatasia got a flat tire a few months ago. In the past, she might have put the $187 she needed to fix it on a credit card reserved for emergencies. But this time, she had another option: a cash advance from Dave, a banking app developed by a Silicon Valley startup that endears itself to users with help from its cartoon mascot, a bespectacled bear.
“Dave helped me out, because I could set a date when I would pay him back,” Qwatasia tells me—then corrects herself. “Pay the app back.” She adds, “I’m the type of person who doesn’t like to ask family. You’ve got to stand on your own two feet.”
Qwatasia is hardly alone. Millions of Americans have become regular users of products offering to help them bridge the gap between urgent expenses and biweekly paydays under the guise of encouraging financial independence. These so-called early wage access startups have collectively raised more than $1 billion in venture backing in recent years, winning the support of elite VCs as well as celebrity investors such as Mark Cuban and Nas. By giving users advance access to their paychecks—in exchange for a tip or fee, or bundled into a subscription—they’re positioning themselves as an alternative to payday lenders (with their high APRs) and banks (with their onerous overdraft fees).
While a prior generation of fintech companies tended to focus on affluent consumers—people a lot like the VCs hearing those founders’ pitches—today’s entrants are more likely to target the types of consumers who would have delivered lunch to those pitch meetings. Dave, which has raised $76 million in venture capital, helps users avoid overdraft fees with cash advances of up to $75 per pay period. Earnin, which has raised $190 million, gives users early access to as much as $100 from their paychecks in a given day. Other companies, such as DailyPay and Even, partner with employers to provide payroll advance as an HR benefit. In a few cases, early wage access providers also aspire to offer checking and savings accounts.
These startups are responding to a genuine problem: In 2019, according to the Financial Health Network, interest and fees cost financially underserved U.S. consumers close to $200 billion. But while these companies look friendlier than the incumbents they aim to disrupt, their incentive structure is the same: Most of these advance-pay startups make money when working people chronically struggle to make ends meet. Despite their talk of fairness and community, they show no signs of dismantling a system rigged against their customers.
Earnin is on a mission to restore worker rights that date to ancient times, at least according to founder and CEO Ram Palaniappan. “The Bible says that employees need to be paid before sunset,” he says. Indeed, early wage access startups were initially met with something akin to devotional praise. When Earnin, then called Activehours, first launched in 2014, one publication declared that it was disrupting the “very concept of payday.”
Earnin and its ilk landed in app stores around the same time that previously pioneering digital lenders were losing momentum. Startups like Lending Club, founded in 2006, had successfully introduced online personal loans to people with good credit scores, but struggled to expand into complementary products. At the top of the market, companies focused on student loan refinancing were duking it out to win over future millionaires.
Founders of advance-pay startups realized that the Great Recession’s ripple effects had created an opportunity to serve the growing number of Americans living paycheck to paycheck. “Tens of millions of Americans who had access to credit in 2007 don’t have it 10 years later,” says David Scharf, a managing director at JMP Securities. “Prior to the recession, they may have had two credit cards. Now they have one with a lower line. This more restrained lending is one of the reasons this recovery is so prolonged, yet also so muted.”
Early wage access startups appear to offer a mission-driven way to meet this consumer demand for credit, even as they deliver the kind of sticky business model that appeals to investors (users tend to open these apps regularly, presenting developers with opportunities to sell additional services). Companies in this category have commissioned research showing that their users are less stressed, less likely to quit their jobs, and more engaged and productive. The startups also wrap their services in consumer-friendly language, by using the term “advance” rather than “loan”; requesting “tips” instead of charging “interest”; and talking of advances being “restored,” not “repaid.”
Regulators in 11 states have taken a more skeptical view. They announced a joint investigation into the payroll-advance category last August, questioning whether these companies’ tips—which users must opt out of—are usurious interest rates in disguise. If an Earnin user were to tip $9 for a $100 cash advance, as the app had been suggesting in some cases, the effective APR for the advance could be over 400%, depending on proximity to payday. Regulators also want Earnin to explain why it made larger loans available to more generous tippers—undermining the idea of a tip as voluntary. (Dave, which combines tips and subscription fees, also received a letter of inquiry from regulators, as did a handful of other apps.) Earnin users, meanwhile, have complained that the company sometimes triggers overdraft fees by automatically withdrawing repayment from users’ accounts, restarting the very downward cycle they were trying to escape. Two class action lawsuits against Earnin are pending.
Palaniappan calls Earnin’s tipping model a “pay it forward” innovation, rather than a legal loophole. “[Users] clearly understand how it works,” he says. Nonetheless, he is taking a page from the Uber and Airbnb playbooks and recruiting “Earnin Advocates” willing to speak with elected officials about the benefits of the “community.” The company also supports legislation in California that would ease restrictions on its business model.
As payroll-advance apps gain traction, employers are taking note. They’re seeking out startups like Even, which works directly with companies to offer their workers access to its advance-pay and budgeting and saving features for a flat $8-a-month subscription per employee. One of its largest partners is Walmart, which offers its 1.5 million U.S.-based workers subsidized access to Even. On the back end, another startup, PayActiv, helps process Even’s transactions.
Even and PayActiv are part of a group of early wage access companies that integrate with employers’ payroll systems. They’ve found traction in industries such as retail, hospitality, and telemarketing, where they’re able to throw low-paid workers an emergency lifeline that’s superior to payday lending. But they’re nevertheless arming employers with a lever for increasing retention without increasing pay or benefits. Early access to your paycheck comes in handy, for example, when your employer downgrades its healthcare plan to a high-deductible one, as many have in recent years.
“If you’re living paycheck to paycheck and all of a sudden your paycheck comes every day, that doesn’t solve the problem,” admits Jon Schlossberg, CEO of Even. “It just speeds up the cycle on which you get stressed about money.” It’s a situation that workers at Walmart, which currently pays a starting rate of $11 an hour, may find familiar.
In the meantime, Dave and Earnin are also getting closer to employers, particularly those that fashion themselves as “platforms” and have suspect track records on matters of pay and worker protection. Earnin has a partnership with Uber that encourages drivers to link their Uber accounts to the service and get wages whenever they need them. Last year, Dave unveiled a feature called Side Hustle, which connects users with companies including Instacart, Lyft, and Rover. The more Dave users turn to the app for gig work, the more the company earns in referral revenue. So far, 600,000 of Dave’s 5.5 million users have completed Side Hustle applications.
Silicon Valley popularized the idea that we should “always be hustlin’ ” in pursuit of our dreams. American workers facing a less prosperous future than their parents’ generation have gotten the message—or at least a version of it. “If you really want the extra income, you’re going to take on any [job] suggestion. That’s the definition of being a hustler,” says Naiyesha, a Dave user who walks dogs and is a licensed massage therapist in addition to her full-time job as a personal assistant. “You can never have too many incomes.”
How banks and regulators created an environment where startups thrive and people with limited funds struggle
1. Debit Cards
Throughout the 1990s, banks push the use of debit cards for payments.
Consequence: Consumers start getting hit with more overdraft fees as they mix cash, check, and debit card payments and lose clarity around when transactions will clear.
Today: Startups including Chime and Dave have become unicorns by helping consumers monitor their overdraft risk and providing solutions.
2. Access to Credit
Post–financial crisis, banks tighten lending standards in an effort to stanch the flow of mortgage losses.
Consequence: Millions of Americans see their credit limits lowered or their cards canceled.
Today: Americans are utilizing startups like Acorns for debit cards that offer credit-card-style rewards, companies like Upstart for online loans, and apps like Brigit for cash advances.
3. Deposit Advance
In 2013, the Treasury sounds the alarm on deposit advances: short-term, high-cost loans in which banks automatically deduct repayment as soon as funds are available.
Consequence: Most banks drop deposit advances as a product, eliminating a popular form of short-term credit and a payday-lending alternative.
Today: Earnin and DailyPay offer deposit advances under the label of “early wage access.”
4. Payday Lending
The Consumer Financial Protection Bureau plans to remove a rule that requires payday lenders to assess a person’s ability to repay before issuing a loan.
Consequence: The CFPB’s more lenient approach to payday lending suggests it will adopt a similar approach to early wage access.
Tomorrow: Payroll-advance regulation will likely play out at the state level, where regulators police financial services more aggressively.
A version of this article appeared in the March/April 2020 issue of Fast Company magazine.