Payday loans have, so far, provided an expensive solution to cash flow. If you’re one of the 90 million Americans living paycheck to paycheck, whether it’s a monthly or bimonthly paycheck, an unexpected expense can murder your budget.
You could take out a risky and shady payday loan and end up stuck shelling out big bucks to cover outrageous interest rates and hidden fees. Or, you could dip into your savings. Or, you could put that unexpected expense on a credit card and pay it off over the next month or the next several months.
That’s where a new generation of payday advance apps enters the picture. Instead of taking out a payday loan, dipping into your savings, or putting it on a card, you can use an app to withdraw a short-term “loan” against your next paycheck.
Of course, your employer must first sign up for one of the half-dozen payday advance services on the market today. Once your employer is signed up, you can take out a portion of your next paycheck whenever you like, although how much and how often depends on your employer.
Some employers cap the percentage of your paycheck and the number of times you can withdraw against it per pay cycle.
It’s a payday loan in all but name, but without the high interest rates and fees. The typical fee to withdraw against your next paycheck is $5. There are no interest charges because the amount is automatically deducted from your next paycheck.
Currently there are about a half-dozen payday advance apps available in the United States, and these have real potential to deliver short-term loans at a low price, making borrowing from loan sharks unnecessary in most cases.
Apps like PayActiv, which won Best of Show at FinovateSpring 2016, along with FlexWage, ActiveHours and Clearbanc, all have power to transform the lending industry.
Even controversial billionaire Peter Thiel is on board, as a driving force behind Even, a payday advance app. Even’s founder, Joss Schlossberg, told Fortune that the startup’s goal is to solve the problem of income variability.
While some employers have embraced the new apps, regulators have barely even noticed their existence yet. The Consumer Financial Protection Bureau (CFPB) is still working on a new rule to regulate the shady payday lenders that operate online and in the few remaining states where the practice is illegal.
Nobody knows how the CFPB will take to the new payday advance apps, which bill themselves as a solution to the paycheck to paycheck problem, partly because almost nobody uses them yet.
Millions of Americans take out payday loans and pay the price every year, which makes them a big issue for the CFPB. But the payday advance apps are relatively recent and the number of employers signed on is small, for now.
PayActiv’s Safwan Shah told Bloomberg News that the startup has held more than a dozen meetings with members of the CFPB’s Project Catalyst, which encourages consumer-friendly financial innovations, to keep them updated, and hopefully avoid any knee-jerk regulatory moves that could kill the trend in its tracks.
