As early wage access programs such as Even, PayActiv, FlexWage, ZayZoon and DailyPay gain traction, some other apps are copying their style while using a more traditional payday-loan model — sparking attention from law enforcement agencies in the process.

That's what happened to Earnin, which is often referred to and bills itself as an early wage access provider, which give employees access to their paychecks before they are deposited. The New York State Department of Financial Services launched an investigation of the firm over concerns it may be skirting state lending laws by, among other things, requiring tips from users in lieu of disclosing fees.

Though Earnin looks and sounds like an early wage access provider, however, its business model is different. And most of the other early wage access providers don't do the things Earnin is accused of doing. (Neither the company nor the New York DFS wanted to comment for this story.)

“Earnin is not in the same category as PayActiv, DailyPay and FlexWage,” said Lauren Saunders, associate director of the National Consumer Law Center. “True early wage access providers are companies that have agreements with the employer and are integrated with payroll and are not making loans and seeking repayment from the customer. Earnin seems to be trying to look like they’re giving you your pay, but they have no relationship with the employer and in my mind it’s a payday loan.”



The situation raises questions, however, about whether consumers can tell the difference — and what kinds of regulations govern apps such as this.





Earnin’s alleged infractions

According to Earnin’s app, it charges neither fees nor interest.

“No one should ever have to get a payday advance, payday loan, cash loan, cash advance, or a paycheck advance to access money that already belongs to them,” the firm behind the app says on its website. “Earnin is creating a new way to get your paycheck with no fees, no interest, and no hidden costs. So, how do we keep things running? Our users support the community by tipping what they think is fair and paying it forward to other people.”

But users who don’t leave a tip appear to have their credit restricted. And some of the the suggested tips equate to a 730% APR — nearly 30 times higher than New York’s 25% cap.

According to the New York Post, which broke the story, Linda Lacewell, acting superintendent of the NYDFS, subpoenaed Earnin last week for the names of its New York customers and the size and number of their transactions. It also ordered the company to convert the “tip” amounts it has requested for advances to annual percentage rates.

In Saunders’ view, the most damaging thing about Earnin is its claims to have no loan, no fees, and no hidden cost. “That seems deceptive to me,” she said.

The enforced tipping also appears to be a questionable practice.

“A loan is a loan,” said Aaron Klein, a fellow at the Brookings Institution. “You can’t disguise an interest payment origination fee as a tip to get around usury caps.”

Tips are generally viewed as optional, he said.

“If I order food at a restaurant and I don’t like the service and I don’t leave a tip, that doesn’t mean I didn’t get the food,” Klein said. “If you condition access to the product on the basis of something that’s supposed to be a voluntary contribution, it ceases to be voluntary. State regulators need to aggressively police products to make sure they’re compliant.”

Some financial products, such as the Aspiration bank account, legitimately operate on a pay-what-you-want basis, he noted.

“If something really is voluntary, that’s a very different model,” he said. “Whether or not Earnin’s tips are voluntary or de facto mandatory, that’s for the lawyers and the DFS to investigate and I’m glad they are investigating.”

Is it a fee or an APR?

One thing the wage-advance programs have in common with Earnin is they do charge fees that, if they were converted to APRs the way the DFS is telling Earnin to do, would appear high. (The same could be said of banks’ overdraft fees.)

Jon Schlossberg, CEO and founder of Even, which offers early wage access in its financial wellness app to Walmart and other companies’ employees, is uncomfortable with the idea of equating fees with APRs.

“That way of analyzing the cost of a very short-term credit product is not a great way to understand the cost,” he said. “Annualization of the interest rate is irrelevant when there is no compounding interest.” Early wage access advances don’t roll over.

Data that Schlossberg has seen suggests that Earnin users often spend more than $60 a month for their short-term loans.

“We don’t need to make this about APR to understand that this is a service that is not fairly priced,” he said.

Even charges a flat fee for its app and loses money when customers use InstaPay, because there’s a cost to providing the service, Schlossberg said.

Saunders said that though early wage access providers charge relatively low fees (PayActiv, for instance, charges $5 per pay period in which an advance is obtained), for minimum wage and perhaps part-time workers, even small fees can represent hours of work.

Even and PayActiv also try to help people wean themselves off any dependency on wage advances with financial health and literacy tools. FlexWage seems to be moving in this direction, too: on Tuesday, it acquired a mobile financial wellness service provider called Sum180.

Schlossberg, Klein and Saunders all would like to see regulators set ground rules for pay advance providers.

“I do wish there was regulation on access to pay, because clearly without it, companies are not doing the right thing,” Schlossberg said.

Editor at Large Penny Crosman welcomes feedback at penny.crosman@sourcemedia.com.