SAN DIEGO — Are they valuable tools for financial security or just a high-tech version of payday loans?
Millions of Americans in need of quick cash now have a smartphone app that lets them get a portion of their paycheck early.
However, payday advances can come with hefty fees, which can trap some users into a cycle of debt.
California is currently considering new regulations to oversee the “access to earned wages” or “income-based advances” industry.
A quick, brick-free way to get an advance on your next paycheck for people on social media who need an immediate loan to cover everything from rent to bills to groceries. You may have seen ads pop up offering . – and a mortar payday lender, but available through an app on your phone instead.
These “earned wage access” apps, also known as “cash advance apps,” provided an estimated $9.5 billion to advance customers in 2020 alone, and are continuing to grow, according to the U.S. Treasury Department.
They find the money the user needs upfront and pay it back on payday.
Some employers, such as Walmart and Amazon, offer this service to their employees, while others offer “wage access” directly to consumers.
“People are paying a lot of money to use these apps,” said Andrew, senior policy adviser at the Center for Responsible Lending, a consumer protection advocacy group that supports California’s current efforts to regulate this growing industry. Kushner says. “It doesn’t necessarily seem like much at first glance.”
Currently, the industry operates in a legal gray area with little federal oversight.
“California regulators have found that people are paying more than 300% annual interest to take advantage of these advances, which is extremely high,” Kushner told CBS 8.
Technically, these apps do not charge traditional interest rates like payday loans, but instead charge workers in other ways, such as monthly fees, instant access or same-day deposit fees, and fees for each bank transfer. You can earn money by doing so. , there is also an optional “tip” paid after each transaction, which some users say they feel pressured to pay.
“We see these products as payday loans with a fintech veneer,” he added.
However, not everyone sees it that way.
“It certainly helps reduce financial stress,” said Angelena Bradfield, director of policy and government relations at the Financial Technology Association, which represents the industry.
These apps help users manage their money in a more responsible way because they leverage the wages they earn, she said.
“This allows them to manage their finances in a more sustainable way,” she told CBS 8.
He also said that while the industry “welcomes regulation”, calling these products “loans” was problematic.
“Our view is that they are not loans,” Bradfield added. “The fact that there are no mandatory fees, interest charges, late fees…customers have no legal obligation to repay.”
But consumer advocates have blasted the idea that funds provided through these apps are not loans.
“What you have is an agreement to take money from someone and then pay that money back later,” Kushner said. “That’s a debt.”
“This is a payday loan that you can get through your mobile phone rather than going to an over-the-counter lender,” he added.
Kushner also said these apps can send users into a spiral of debt.
“People tend to get stuck in cycles where they’re forced to refinance, they’re forced to pay fees, they’re forced to tip in order to continue using these products,” he said.
If ultimately approved, California’s proposed regulations would require these companies to register with the state.
It would also classify these “income-based” advances as loans under the California Finance Law (CFL), cap the interest they can charge, and consider fees such as “same-day fees” and tips.
The industry does not agree on this definition.
“We don’t consider these to be loans,” Bradfield said. “There’s no loan aspect to them.”
But consumer advocates counter that these proposed regulations are important.
“The most vulnerable and the people who need cash to survive are being robbed of illegal fees,” Kushner said.
The state is expected to make a final decision on the proposal by next March.