Perhaps you’ve seen the commercial for a Silicon Valley company called Earnin, in which a young woman with an enviably full life — a radio show, DJ gigs, guitar playing — relates that she’s having a hard time getting by.

Luckily, Earnin is there for her. The company provides advances on the woman’s paycheck at no cost. Problem solved.

Earnin is basically a payday lender that doesn’t charge fees and doesn’t charge exorbitant interest. It doesn’t charge anything.

Tips, however, are appreciated.


Perhaps you’re as baffled as me about how Earnin makes money.

For answers, I turned to Ram Palaniappan, Earnin’s chief executive. It wasn’t the most illuminating exchange.

Palaniappan told me the Palo Alto company’s business model is based on the idea of paying it forward. That is, users pay a tip so that other users can take advantage of the service, and then they pay a tip, and so on.

“You want a society where people like to pay it forward,” he said. “It should not be a surprise that people help other people. We just put that on a platform.”


What he’s describing, of course, is the honor system.

“We think people are generally honorable,” Palaniappan insisted. “And the honor system generally works.”

Make no mistake, I’m totally on board with his idea that there must be a better way to assist people facing money troubles. Earnin seems like a massive improvement on traditional payday lenders, which trap consumers in endless cycles of debt.

That being said — and go ahead, call me a cynic — I just don’t buy the honor system as a viable long-term business model.


Many consumers, especially those with limited incomes, likely will balk at voluntarily paying for something that they don’t have to.

I asked how many users Earnin has. Palaniappan declined to say, except to note that the company’s app has been downloaded more than 10 million times, which doesn’t mean this many people are using it.

I asked how many users actually tip the company for its services. He declined to say.

I asked how much the average tip is. Palaniappan said only that it’s “less than a typical ATM fee.”


I asked if privately held Earnin is profitable.

Palaniappan wouldn’t say.

What’s known for sure is that Earnin has raised at least $190 million from investors. It has more than 250 employees. It used to be called ActiveHours but, according to the company’s site, “the name Earnin more clearly expresses that we’re helping people get the money they’ve earned.”

What’s also known is that Earnin reportedly is being investigated by the New York Department of Financial Services over concerns that the no-fees, tips-only model is just a dodge to evade state lending laws.


“This is a loan,” said Lauren Saunders, associate director of the National Consumer Law Center. “It should be regulated like a loan.”

She warned that Earnin’s feel-good talk of paying it forward shouldn’t distract from what’s really happening.

“They’re giving people money and they’re expecting you to pay it back,” Saunders said. “This isn’t some nonprofit. This is a for-profit venture funded by big money from Wall Street, and these big companies are looking to make their money back.”

Here’s how Earnin’s pay advances work: Using your upcoming paycheck as collateral, you can borrow up to $100 the first time you use the app. After more usage, your withdrawal limit could increase to $500.


To qualify, you need to demonstrate to Earnin that you have a steady job. This can be done by giving the company access to your employer’s online payroll system or by using GPS technology to prove that you’re at the office on a regular basis.

You have to provide your direct-deposit checking account number so Earnin can monitor your transactions and send you the money you request.

The company automatically deducts how much it fronts you when your next paycheck is deposited.

The selling point, at least in the TV commercial, is that this is your money, you earned it, so help yourself. The reality is that it’s a payday loan.


With traditional payday loans, you pay a fee that often translates to an annual percentage rate of more than 400%. If you can’t repay the payday loan and fee, it rolls over to a new loan and fee.

Earnin loans don’t roll over. But if you tip, say, $5 for a $100 advance that’s due in two weeks, that equates to an APR of more than 100%. A $1 tip is still the equivalent of more than 26% in annual interest.

And even though there’s no rollover, the fact that you needed a cash advance indicates you’re likely living paycheck to paycheck. Earnin doesn’t remedy that.

If anything, it exacerbates the problem by allowing you to keep dipping into future earnings, which can keep you perpetually cash-strapped.


Palaniappan said the size of your tip, or lack thereof, won’t affect your personal limit. But he acknowledged that if all Earnin users skimp on tips, that could affect everyone’s withdrawal limit.

Which is to say, if cash-poor borrowers aren’t sufficiently generous, everyone suffers.

Earnin says online that the nearly $200 million in funds raised from venture capitalists “go into making our product bigger and better, so we can help even more people access their wages.”

“It is our customers, however, that we truly rely on to keep the app going,” it says. “Earnin is 95% community-supported and mainly operates on the tips we receive from customers.”


Still, roughly $200 million in venture-capital funding isn’t chump change. It indicates that smart people in a position to know about a start-up company’s plans feel confident they’ll score big bucks down the road.

If so, what do they see in Earnin’s tips-only business model that I don’t?

I reached out to some of Earnin’s top investors, including tech-industry heavyweight Andreesen Horowitz and Santa Monica’s March Capital Partners. They either didn’t respond or weren’t available for comment in time for this column.

As best as I can tell, Earnin is really doing what it says it’s doing. If you’re cool with giving the company lots of confidential information in return for access to a little flash money, maybe it’s for you.


But be careful. Payday loans, regardless of how they’re packaged, are not good for your financial health and should be used only sparingly.

Earnin recently introduced a new service: helping people negotiate lower medical bills. This is a difficult and time-consuming task that professional patient advocates charge fees for.

As with the cash advances, Earnin says it only wants a tip for its experts’ time.

Earnin may find that the honor system actually works and the company’s success is assured.


My guess is that at some point, the tips-only model goes adios and regular fees for an established user base of possibly millions of people will enter the picture.

Think ATMs. When banks first introduced the technology, they charged few if any fees for their use. They wanted people to become comfortable with self-service. These days, ATM fees can top $4 per out-of-network transaction.

For the moment, Earnin’s message is, “Don’t worry, be happy.”

“If people have a great experience, they tip,” said R.J. Bardsley, a company spokesman. “This feels like something that’s right for our time.”


It also feels like something that’s too good to be true.

Remember MoviePass? That was the company that had the right-for-our-time idea of charging people less than $10 a month to go to as many movies as they wanted.

Genius — except for the small matter of turning a profit.

MoviePass went out of business a couple of months ago.