How a Silicon Valley startup is trying to rebrand payday loans

Once every few weeks, Myra Haq withdraws $100 or so from Earnin, an app that lets people borrow small sums of money. “I started using Earnin when I was a minimum wage intern so I could pay for [things like] the bus to work and food,” Haq said. Now that she’s no longer an intern making minimum wage — she currently works as a nanny, handles a children’s clothing company’s social media accounts, and sells clothing online — she still occasionally finds herself needing extra cash for doctor appointments or other unplanned expenses, and that’s where Earnin comes in.

Earnin knows how much Haq makes and how often she works; it figures out the latter by tracking her location to see when she is or isn’t at work, though Earnin doesn’t share this location data with third parties. The app lets her withdraw up to $100 a day, and never more than what she actually makes in a pay period, and then withdraws the money from her checking account once her direct deposit hits. Instead of charging her a fee or an interest rate for the loan, Earnin simply asks her to leave a “tip,” which can be used to cover the cost of transferring the funds, as well as additional operational costs.

The app bills itself as a way for people to “get paid the minute you leave work with no loans, fees, or hidden costs.” Haq sees it as a payday loan, albeit a “more ethical one.”

Payday loans, sometimes called cash advances, are short-term loans marketed to people who need cash quickly. Unsurprisingly, payday lenders typically target low-income people — a 2013 Pew report found that 58 percent of people who use payday loans have trouble meeting monthly expenses at least half the time and usually borrow to deal with “persistent cash shortfalls rather than temporary emergencies.” The loans generally carry higher interest rates than long-term advances or credit cards, and are often criticized for being predatory.

Earnin positions itself differently. For starters, it doesn’t characterize its advances as a loan. “Earnin is facilitating an advance on your paycheck,” a spokesperson told me. The company was founded by Ram Palaniappan in 2013. Palaniappan, who has a background in fintech, told me he came up with the idea while working at a different company where he often fronted employees the money they needed to cover expenses before payday after hearing them complain about overdraft fees. “It didn’t make any sense, because I thought I was paying everybody well,” Palaniappan said, but then he realized the problem was that employees “needed money the next day and could not wait until the following Friday.”

“When I left the company, the people I was doing this for wanted to know if I would still do it for them,” Palaniappan said. “That’s when I realized that if I didn’t try to make it into a product, I would feel bad about myself.”

Today, Earnin has raised more than $190 million in venture funding from a number of investors, including Andreessen Horowitz and Spark Capital. It has more than 100 employees and, according to Palaniappan, is used by workers at more than 50,000 companies. Through a spokesperson, the company declined to share active user numbers but said it often ranks among the top 10 apps in the financial space of Apple’s App Store, where it has garnered more than 60,000 reviews.

Palaniappan describes Earnin as a way of creating a more equitable financial system for the millions of people on the lowest rungs of the economic ladder. “Four out of five people in the US live paycheck to paycheck,” he told me. “Half the country can’t [come up with] $400 in an emergency.” An easy way to solve this problem, Palaniappan says, is by giving people access to their money as soon as they’ve earned it. If someone makes $15 an hour and works an eight-hour day, he thinks that person should have access to the $120 they made, minus taxes, as soon as the workday is over. The issue doesn’t seem to be how much people make, but how soon they get that money.

When I asked Palaniappan if he thinks these problems could be solved by paying workers more, he agreed that it’s “always better for people to have larger paychecks,” but stressed that there’s a “timing issue” with when they get paid as well. “Bills don’t show up on payday,” he said; they’re often due before the direct deposit hits. Palaniappan said Earnin is addressing this problem with a financial calendar that helps people keep track of when their paychecks are coming in and when their bills are due, which he said can help users with budgeting. Another feature, Balance Shield, helps prevent overdraft fees by alerting users when their checking account balance falls below a certain threshold and, if they want, automatically transferring money to them via Earnin.

But is a lack of immediate access to their paychecks really the reason so many Americans are struggling to get by? If a minimum wage worker got their pay at the end of the day instead of two weeks later, would they still live paycheck to paycheck?

It’s no surprise that millennials, the demographic Earnin markets itself to, are in dire financial straits — but the reasons for the generation’s economic precarity are more complex than payday not always aligning with when the bills are due. In 2018, real average wages had about the same purchasing power as in 1978, according to Pew. And according to a 2018 report on how millennials compare to previous generations, the average millennial household had a net worth of $92,000 in 2016, which is nearly less than 40 percent of the average net worth Gen X households had in 2001. Put simply, wages have barely been able to keep up with inflation, especially for low-income people.

A growing number of millennials work on a freelance basis or in the gig economy, which means they’re on the hook for benefits that would otherwise be provided by their employers, like health insurance or retirement plans. Between 2003 and 2015, the proportion of income that millennials earned from contract work increased from 57 percent to 72 percent, according to data from Deloitte. Student loans are yet another monthly expense: The average American household with student debt owes almost $48,000, and experts believe that student loan debt has held millennials back from major life milestones like marriage, homeownership, and having children. Generally speaking, millennials are more educated, less wealthy, and more indebted than previous generations, and these inequities are compounded along racial and gender lines.

Giving people access to their money faster won’t help solve the root causes of economic insecurity, but, Palaniappan says, it’s a start. And it’s just one part of Earnin’s big-picture plan. On Wednesday, Earnin launched HealthAid, a service that will give users access to patient advocates who will help them negotiate down their medical bills, set up payment plans, or secure financial aid. Like Earnin, HealthAid will function on a tip system.

For Palaniappan, it’s another way to introduce a degree of parity to a vastly unequal economic system. “Health care is more expensive for our customers,” he said. “They don’t have the best insurance. Quite often, their medical bills are largely unexpected.” On top of that, he added, hourly workers lose even more money when they get sick since they have to take time off work.

HealthAid, he explained, is a way of helping people navigate complex health care billing systems. “The way it works is really simple: You upload your medical bills through the app; then we have a team of people who will try to negotiate the price down with the provider,” he said. “They will try to get you a payment plan and they will also try to match you up with financial aid.” According to Palaniappan, 90 percent of bills users submitted during HealthAid’s pilot phase were reduced or otherwise addressed in some way.

“If you’re in our customer demographic,” he said — i.e., people who live paycheck to paycheck and therefore can’t afford to set aside a few hundred dollars for an emergency, much less a few thousand for medical expenses — “you don’t get the best insurance plans and you probably have a high deductible, let’s say $10,000 or so. So even though you’re insured, the insurance isn’t affordable to you.”

HealthAid is primarily intended to help people who have health insurance but can’t afford to meet their deductibles, a sizable percentage of the US population. According to the LA Times, 39 percent of large employers offer only high-deductible plans, and half of all people who receive health insurance from their work have a deductible of at least $1,000. In other words, even people who have health insurance are struggling to afford their medical bills.

Earnin’s latest venture seems useful — noble, even. It’s hard to criticize a venture-backed company using its resources to lower people’s astronomical medical bills, even if it’s doing little to address the root causes of poverty or medical debt. And Earnin is by no means the only fintech startup that bills itself as a way to help put low-income people on a path towards financial stability. There’s Fresh EBT, which helps people manage their food stamps; Domusoand Till, two companies that front people money for big expenses like security deposits; andEven, a “financial wellness platform” that charges users a monthly fee to balance their budgets.

Like Earnin, Even has an advanced payment feature called Instapay, though it makes its money by charging users a monthly fee instead of through a voluntary tip system. In 2017, Evenpartnered with Walmart to offer its services to the company’s hourly and salaried employees. Earnin is similarly integrated with several companies’ payment systems, though Palaniappan stressed that it continues to be a direct-to-consumer product. “The problem with relying on integrations is that it lets you cover the larger companies and leaves out every small business,” he said. “If you have a coffee shop in rural America or with five people, you would never let them get the benefit if you try to rely on integrations.” That’s why the company relies on a tip system, he explained: so users can pay for the service when they can afford it and aren’t penalized when they can’t.

According to Palaniappan, users do tip when they have the means to do so, even though it’s not required. In some cases, they even tip extra to cover the cost of someone else’s transaction; Earnin claims this has happened more than 10 million times. It may seem counterintuitive to give a company money when they aren’t asking for it, but Haq, the semi-frequent Earnin user, said she feels it’s the right thing to do since Earnin is providing her with a service and she wants to keep them in business.

But Earnin has recently come under fire for its “tipping” policy. In March, the company

wassubpoenaed by the New York Department of Financial Services after the New York Post reported that the app’s tip amounts effectively translate to high APR rates. According to the Post, users who don’t leave a tip have their Earnin withdrawals capped at $100, while those who do leave tips are able to take out more money. (Earnin declined to comment on the subpoena on the record.)

Lauren Saunders, the associate director of the National Consumer Law Center, told me there are few distinctions between what Earnin is doing and a more traditional payday loan. “There is no single definition of a payday loan. People think of payday loans and short-term balloon payment loans as [having] high interest rates, and this is simply a short-term loan,” she said. “There is no set interest rate, but the purportedly voluntary tips that people want to leave don’t seem so voluntary if you want to borrow more than $100.”

Even though the tips are voluntary, Saunders said, there are a number of risks associated with Earnin and similar apps. “You turn over your bank account login and password, and that’s very risky. Even if they don’t do anything wrong with it, how secure is that data if there’s a breach?” she said. “You’re giving them the right to take money out of your account, supposedly on your payday, and sometimes they get it wrong.” (Palaniappan said Earnin refunds users’ bank fees if a mistake on its end results in an overdraft.)

And even though Earnin doesn’t consider itself a loan provider, the transactions the app enables are loans. Earnin isn’t exactly getting people their paychecks earlier than their employer would: Doing so would require Earnin to have access to companies’ payroll systems. Instead, it’s giving people money from its coffers and taking back that money on an agreed-upon date. In other words, it’s loaning it out.

For customers like Myra Haq, though, Earnin is a necessary service, even if she isn’t entirely comfortable with handing over her bank information and other sensitive data to a VC-backed startup. “I’m a little uncomfortable with it, but I’m not uncomfortable [enough] with it to not use it,” she said. “I think it takes a degree of privilege to be able to keep all your information private.”

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