A New Kind of Payday Loan

The California Department of Financial Protection and Innovation (DFPI) signed memorandums of understanding (MOUs) with five earned wage access companies, the department reports.

The companies provide early access to consumer paychecks by way of an advance on expected pay. Companies such as Earnin and Even are two of the five players in this space. The other three involved in the California MOUs are Brigit, Payactiv, and Branch.

These companies use access to data on an individual’s pay to provide access to money ahead of the formal payday. The transaction takes place via an app. There is typically a small fee for the service, also deducted from the user’s paycheck when payday actually arrives.

According to the California’s DFPI:

The MOUs pave a path so earned wage access companies can continue operating in California, in advance of possible registration under the California Consumer Financial Protection Law, which took effect this year and defines the companies as newly covered financial services. The companies, which give consumers advances on earnings before pay days, have agreed to deliver quarterly reports beginning April 2021 on several metrics intended to provide the department with a better understanding of the products and services being offered and the risk and benefits to California consumers.

Also referred to as on-demand pay, earned wage access companies give employees access to wages they have earned but haven’t yet received through their employer payroll, a service that providers say can help employees pay their bills on time or cover unexpected expenses without overdraft charges or credit card fees, and can be an alternative to payday lending.

“These first of their kind agreements reflect the type of balanced approach and oversight we strive to provide that encourages responsible innovation,” said DFPI Commissioner Manuel P. Alvarez. “Smart regulation should be data-driven and requires a tailored, collaborative approach. We are grateful for our early dialogue with these fintech companies and expect more MOUs to be signed in the coming weeks.”

The services are essentially a different kind of payday loan, and consumer advocates suggest the products should be regulated in a fashion similar to other credit products.

In fact, the National Consumer Law Center (NCLC) explains that many of these services are essentially loans and operate on some of the same exorbitant interest rates as payday loans. As the NCLC notes:

What laws apply can be complicated, but conceptually any service that advances wages and expects to be repaid later should be viewed as a loan. The mere fact that a worker has unpaid wages (as many payday borrowers do) or that repayment is by payroll deduction does not mean that an advance is not a loan. A $100 advance taken out five days before payday with a $5 fee or “tip” is equivalent to an annual percentage rate of 365%.

Lauren Saunders of NCLC adds:

Photo by Sharon McCutcheon on Unsplash

For more on consumer protection issues, follow Andy Spears

Writer and policy advocate living in Nashville, TN

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