Cash-strapped consumers are paying large hidden costs, such as a 56% hike in checking account overdraft fees when they take out cash using an earned wage advance app.
That revelation stems from a fresh Center for Responsible Lending (CRL) analysis. In its “Not Free: The Large Hidden Costs of Small-Dollar Loans Made Through Cash Advance Apps” report, the CRL examined transactions tied to five companies: Brigit, Cleo, Dave, EarnIn, and FloatMe. A nonprofit research and policy group, CRL examined the activity of regular app users.
Per a news release, the CRL surmised its new data revealed consumers withdrawing small loans from cash advance apps paid “triple-digit annual interest rates, experienced high levels of repeat reborrowing, and incurred more bank overdraft fees after using the product.”
Earned Wage Access (EWA) is a financial product that allows individuals and families to voluntarily access wages for the hours they have already worked before their payday, per the American Fintech Council (AFC). It is a trade group representing all major EWA providers, including the few mentioned in the CRL report.
For its part, the CRL states that cash advance apps are credit products that must be regulated as such. It adds that fintech cash advances involve an agreement to receive money now and pay it back in the future, making them loans.
Generally, people can access the apps on a smartphone, connecting to their bank account, or through a benefit offered by their employer. The apps, often run by fintech firms and non-bank lenders, can levy fees for financial services, including cash advances.
The CRL report included several top findings. One was that consumers pulled advances repeatedly, and multiple lenders were used frequently. It stated some 75% took out at least one advance on the same day or day after making a repayment.
Lucia Constantine, the report’s lead author and a CRL researcher, told BLACK ENTERPRISE that the statistic is troubling because it shows consumers are being pulled into a cycle of reborrowing, eroding their financial stability.
Another point mentioned was consumers who removed small amounts of cash did so at a big expense. The average APR for an advance repaid in 7 to 14 days was 367%, almost as high as the APR on a typical payday loan which is 400%.
The analysis concluded “many low- to moderate-income people are already struggling to meet their expenses and repaying advances makes it harder to catch up or save.”
Constantine says earned wage access is another high-cost credit option in the financial marketplace. She stressed it does not represent a solution to the income insufficiently faced by the American worker.
The EWA concept has grown in popularity. Based on this report, people collected 55.8 million paycheck advances worth $9.5 billion in 2020, up from 18.6 million advances worth $3.2 billion in 2018.
Further, the CRL stated its report comes as policymakers in states like Maryland and in the U.S. Congress act to exempt advance apps from consumer protection laws. The U.S. House of Representatives’ Financial Services Committee is anticipated to vote April 17 on legislation that would obscure the cost of fintech cash advances by exempting these loans from the Truth in Lending Act, according to CRL.
“This report provides significant data indicating that cash advance apps are putting financially strapped consumers in an even worse position,” Constantine stated.
She added, “This research joins a growing body of evidence showing cash advance apps harm consumers in ways like payday loans. It is alarming that some policymakers are ignoring the evidence, taking legal protections away from consumers, and exposing them to harms from advance apps.”
Phil Goldfeder, CEO of the American Fintech Council, responded to the CRL report via email. He also stressed that EWA products are not loans and should not be regulated as such.
“The recently issued report by the Center for Responsible Lending (CRL) demonstrates a complete misunderstanding and mischaracterization of the Earned Wage Access (EWA) industry. The views and recommendations promulgated by CRL are fruit from a poisoned tree, and not in the best interest of consumers. “
He added, “Therefore, the findings should be viewed with caution by policymakers, regulators, and other researchers. It is my sincere hope that AFC can work constructively with real consumer advocates to ensure the development of sound and data-driven policy recommendations that benefit consumers.”
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