Regulators Taking Close Look At Payroll-Advance Apps

payroll fraud

Regulators are taking a closer look at financial apps that allow workers to access their pay early.

The apps claim they are more affordable — and safer — alternatives for Americans who live paycheck to paycheck, according to The Wall Street Journal. But regulators from New York and 10 other states aren’t convinced. Last month, they started investigating whether some of these firms violated payday-lending laws, sending out letters to payroll-advance apps, including Earnin, PayActiv and Even Responsible Finance.

“This investigation will help determine whether these payroll-advance practices are usurious and harming consumers,” said New York’s chief financial regulator, Linda Lacewell, adding that some companies “appear to collect usurious or otherwise unlawful interest rates disguised as tips, monthly memberships” and other fees.

While industry executives and consumer advocates admit the apps can possibly help lower- and moderate-income workers, there is debate over how they should operate and be regulated.

“It hasn’t solved the income inequality problem,” said Todd Baker, a senior fellow at Columbia Business School. “What it does is replace, for a nominal cost, the $30, $40 people pay today for a single overdraft or a $200 payday loan.”

According to data from Financial Health Network, consumers spent $173 billion in fees and interest in 2016 in services, including $24.5 billion in bank overdraft fees and $6 billion in payday loans.

But Ram Palaniappan, chief executive of Earnin, argued the apps can help American workers strapped for cash.

“In the U.S., we have this pay cycle that holds back people’s pay,” he said. “What we have been able to do is to give people access to their pay as they earn it.”

As for the subpoena from regulators, Palaniappan explained “it’s a new model. We welcome their questions.”

Added Jon Schlossberg, chief executive of Even: “We welcome the regulators’ attention on this issue because I believe it will prevent the industry from regressing toward the same mean as payday lenders.”

PayActiv Chief Executive Safwan Shah said he looks forward to the investigations bringing clarity to the market.