Payday Loan Trap Being Set for Gig Workers?

If you take a look on Snapchat and Hulu you’ll see ads where gig workers are taking their girlfriend to a movie, changing a baby’s diaper, buying a sister a last minute wedding gift. These ads are ran by the Earnin app, which lets you “stop waiting for payday.” Sound familiar?

Earnin offers gig workers such as Uber drivers, DoorDash deliverers, the Wag walker a portion of their hourly or contractor earnings almost immediately. Similar to any payday loan service, the idea is to cash out for hours worked before your check clears, and Earnin pays itself back when you receive your direct deposit. Assuming all of this goes according to plan it may be a beneficial service some may think but many find kinks in the service and the difficulties faced by people who use it.

TheBlessedDriver, a YouTuber who vlogs about the gig economy, explained in a recent video that because Grubhub has eliminated its daily pay options, she uses Earnin to get paid every day, up to $500 a week. Similar to services like DoorDash, Grubhub hires gig workers to deliver food that customers order online from a variety of restaurants. Grubhub pays its delivery drivers on Thursdays; DoorDash charges $1.99 to get paid same-day. This is why a service like Earnin holds such appeal: If you’re working on demand, why not get paid on demand?

But, TheBlessedDriver cautions, after you get money from Earnin, you could end up with an overdraft charge if there’s a gap between when you’re supposed to get your money and when Earnin debits your account. It happens all the time.

People who use payday loan services to float them to their next paycheck may naturally find themselves closer to the financial hell versus those that do not. The Better Business Bureau (BBB) said last year that it had received a “pattern of complaints” about Earnin, “concerning consumers alleging having their bank account debited prior to their payday or having unauthorized debits made on their accounts resulting in multiple overdraft fees.”

Earnin prides itself on helping users avoid overdraft fees which essentially work as very high interest rate, short-term loans by giving them access to money they’ve already earned. In fact, one of the main complaints with the payday loan industry, which Earnin is trying to eliminate the need for, is how they can wreck their borrowers’ bank accounts by making excessive debit requests, wracking up more fees.

The company seems to downplay the fees. Although, People who use payday loan services to float them to their next paycheck may naturally find themselves closer to the financial abyss than others. Earnin does have a feature to make payments faster, and another called Balance Shield that automatically transfers money into your account if it dips below $100.

Earnin, formerly Activehours, was first launched in 2014 by a former executive at the debit card company RushCard. It’s backed by a bevy of high-profile venture capital firms, including Andreessen Horowitz, and it’s one of many new entrants that are trying to turn gig paydays into an opportunity for a new breed of company.

Earnin and other apps like it are supposed to help workers who have access to steady pay, either through a salaried job or work as an independent contractor for on-demand services. Users may have trouble accessing money they need through traditional means and want to avoid payday lending services, with their sky-high interest rates and balloon payments.

One example is a student who used the app after he saw an ad for it on Hulu. He needed help paying a bill resulting from an urgent care visit and a prescription. He got an advance for $100 and gave a “tip” of $1. The company, which does not charge interest or fees, instead asks for voluntary “tips” from its users to sustain its business.

All told, it took him around five hours from downloading the app to getting money in the bank. When his next paycheck came, $101 was debited automatically. He stated it couldn’t have been simpler.

Another gig driver found out about the service through an Instagram ad. She using Earnin last summer and was “iffy” at first, she’s been able to get up to $150 every pay period – a bit less than half of her total pay. She described it as “super easy and convenient.”

Earnin is not a solution for the truly unbanked and underbanked. The money is deposited in a traditional bank account that’s already receiving someone’s pay. But there may be millions of people who fall between the cracks of sudden expenses and regular, insufficient paychecks. After all, only around 40 percent of U.S. adults could cover a $400 emergency expense, according to data from the Federal Reserve. And only some workers can use Earnin: You need a checking account that receives direct deposits, and you need to be able to submit a timesheet as an hourly worker. If you work for a salary, you must submit your fixed work location.

If you get in the habit of taking these advances you’re not addressing the problems that are causing you to have these shortfalls in the first place.
To access what Earnin calls “Automagic Earnings” for salaried employees, you need to turn on GPS tracking in your app, so it can trace your travel from home to work.

There are special options for rideshare and other gig economy workers, including an integration specifically for Uber drivers that was launched in 2016. Since then, however, Uber has introduced its own instant-pay option that allows drivers to access their earnings five times a day. The feature was “extremely popular,”

An Earnin spokesman said that the partnership is still active, “and we have a lot of Uber drivers who use Earnin to access their wages,” but he wouldn’t share specific figures.

What would be ideal for all workers, consumer advocates argue, would be workers having either wages high enough or expenses low enough that they don’t have to rely on services like Earnin in the first place.

Loans or advances, merely paper over a problem.

Other consumer advocates have expressed concern about the tipping model, worrying that the service could transition into a lending product, where even small fees or charges could turn it into a high-interest-rate loan. As early as 2014, the National Consumer Law Center put forward this exact concern to the New York Times, pointing out that even payday lenders sometimes make their first loan free.

While users who pay a small portion of their advance back as a tip, larger, more persistent tips could end up being what’s effectively a high-interest-rate loan. NerdWallet calculates, “A $2 tip on a $20 withdrawal due in two weeks is an annual percentage rate of 260 percent.” But if people use the service more infrequently and get higher amounts advanced to them, the equivalent rate is lower.

Demand remains high for the app and it seems to be a great solution for some but things could change. It’s much better than the process of getting a payday installment loan,