Silicon Valley-based financial services start-up Earnin has potentially clashed with New York state regulators with its payday advance product for consumers. The New York Department of Financial Services took an interest in the matter after reports were published in the New York Post who questioned whether the company’s “twist” on financial services might actually be a smart way to get around state regulations that seek to limit short-term lenders.
“There is a strong incentive, given the breadth of loan regulation, to design products that appear to fall outside the lending category,” Anne Fleming, professor at Georgetown University Law Center and author of the book ” City of debtors: a century of marginal finance ”, declared the To post.
Designed to focus on millennials and presented as a community of dedicated pay-forward users, the app allows users to withdraw up to $ 1,000 in cash advances during a payout period. Once Earnin users enter their data, bank account numbers, and login, they can request cash advances in increments of up to $ 100. Users also have the option of paying a tip with their loan – $ 9 to $ 14 is the tip suggested by the service, and that’s how the business makes their money. Users can ignore the tip, but these borrowers run the risk of having their credit capped at $ 100 per borrowing period. Among its more unusual features, the app also requires access to borrowers’ GPS data, perhaps to find out if they are going to work.
The apps have been popular with consumers, with 10 million downloads so far in the six years it has been in the market. About half of these took place last year. Investors love the company too – in December, the company announced $ 125 million in funding from Andreessen Horowitz, DST Global and Spark Capital. He does not disclose his valuation, but most sources believe he has or near unicorn status with a $ 1 billion valuation.
But despite all the fans, concerns emerge, especially regarding this advice. New York is one of 15 states where payday loans have been banned and interest rates capped at 25%. The complaint about Earnin, in a nutshell, is that his tip requests are essentially a way to reintroduce outrageous fees and interest rates into the segment simply by calling them something else.
Linda Lacewell, acting superintendent of the New York Department of Financial Services, has subpoenaed the company in late March for 21 different categories of documents, a source told New York Post.
Among the data requested in the survey: New York customers of Earnin as well as the size and number of their transactions. Regulators also asked the company to convert the “tip” amounts it charged for the advances into annual percentage rates, or APRs – and assume the charges count as interest, the source said. The DFS also wants to see any documents Earnin has shared with venture capitalists as well as any research “to encourage consumers to voluntarily leave tips,” the person said.
A spokesperson for Earnin did not immediately respond to the media’s request for comment.
Earnin CEO Ram Palaniappan has in the past denied that the company was a payday lender, according to the newspaper.
Consumers are complaining about Earnin, according to the report, but most of them aren’t linked to fees or concerns that the company is a secret payday lender. The main complaints seem to be technical – and that software glitches and spotty customer service have left them mired in debt. One of those clients, AJ Smith, told the To post he was happy to use the service and paid a $ 9 fee until a $ 100 advance he had taken to go shopping at Walmart was not paid into his account on time. This, he said, sparked a cascading rush of overdrafts in his bank account that left him both financially and “dependent” on future advances of Earnin as he attempts to resolve issues.
But whether interest rates are the consumers’ problem or not, this issue is what regulators seem most concerned about investigating at this point. Earnin’s parent company, Activehours, has until April 16 to respond, according to sources speaking to the newspaper.
——————————
NEW PYMNTS DATA: TODAY’S SELF-SERVICE PURCHASE JOURNEY – SEPTEMBER 2021
On: Eighty percent of consumers want to use non-traditional payment options like self-service, but only 35 percent were able to use them for their most recent purchases. Today’s Self-Service Shopping Journey, a PYMNTS and Toshiba Collaboration, analyzes more than 2,500 responses to find out how merchants can address availability and perception issues to meet demand for self-service kiosks.
