Tech companies want to replace payday loan stores
Fancy meal delivery, fancy dating sites, fancy city buses – sometimes it seems like the tech industry only wants to innovate for the rich. But one increase in smartphone ownership across the spectrum of wealth is stimulating new start-ups that are newly focused on the much less well off.
Digital financial services companies offers you to manage your money and lend you more when you need it. Some are linked to the growing precariousness of the sharing economy, while others are designed for salaried workers. All are aimed at low-income workers who work hour to hour or in concert. It’s a growing cottage industry that could theoretically give the poor more equitable financial services or simply double the predatory lending models that have already proliferated in poor communities across the country.
From tagged food at the corner market to rental furniture with an option to buy, being poor is expensive. Deemed too risky by the banks and with little access to capital forces, low-income workers are forced to resort to all kinds of less than ideal financial services. In banks, they pay high account and overdraft fees, if they are even allowed to keep accounts with low balances. When they find themselves on bank blacklists for small debts, they are forced to cash checks and payday loan showcases, with over 90 million more unbanked Americans.
These start-ups are smarter moneylenders with slightly better interest rates and a larger pool of consumer data to draw on, data that could in some cases push digital lenders to charge customers more. rather than less.
A payday loan borrower will pay, on average, $ 459 in fees on a $ 300 loan over five months, and the average unbanked household pays over $ 2,400 annually for storefront financial services. About one in four American households use these services, but the payday loan market is disproportionately made up of people of color without a college degree who earn less than $ 40,000 and rent their homes. The business is so dirty it’s illegal in 14 states.
Enter: disturbance. Digital microfinance was a product of the first technology boom, but it has come of age in the new on-demand, application-powered service economy. If taxis were the dirty, greedy and poorly regulated beast of the industry until the start-ups that run racing came to save us, surely the tech must have some innovative ideas about undercutting and serving greedy financial institutions.
Active hours and SimpleFi offer payday loans against verified hours worked, with no financial burden for the unbanked customer. SimpleFi makes money by contracting with a shortlist of participating companies, which allows it to issue small, interest-free loans to qualified employees. ActiveHours charges no interest but charges a tip, which the company claims to be a sustainable business model. But the rest of us can logically assume that it might not work so well if customers can’t or aren’t willing to pay.
ZestFinance and LendUp offer payday loans independent of the credit applicant’s employer, based on the data they collect from each client. ZestFinance rates on small loans can reach 390% APR– on par with payday showcases – while LendUp’s rates are comparatively low but still mind-blowing 145%. (A similar but older competitor, Think Finance, is currently sued by the attorney general of Pennsylvania, where payday loans are illegal – the company allegedly used Native American tribes as a cover to distribute high-interest loans.)
Same offers short-term, interest-free loans for self-employed with unpredictable wages, but it does require customers to have an independent bank account and allow Even full access to it, from which the app tracks and budgets revenue. At $ 3 per week (down from an introductory rate of $ 5), it’s more expensive than a low-balance bank account, but cheaper than a store loan.
Some of these companies are doomed to be successful by diverting customers from financial services to storefront. Some of these customers are required to save money. But there is no real innovation here. Billed as alternatives, these start-ups are smarter loan sharks with slightly better interest rates and a larger pool of consumer data to draw on, data that could in some cases push digital lenders to make customers pay more, rather than less.
In theory, employers could co-sign their workers’ loans, and workers could be so grateful that they would be willing to tip for these services. In theory, cheaper competition could push the non-bank sector to offer fairer prices to all customers. In theory, small loans could help the working poor pay unforeseen costs, possibly preventing them from taking on more debt.
But no app can temper capitalism, close the massive and ever-growing wealth gap, or make living in poverty much more convenient. The structural dynamics of inequalities are too complex. At the end of the day, debt rebranding isn’t the kind of disruption we really need.
The crooked valley is an illustrated series exploring the systems of privilege and inequality that perpetuate the technological culture of bad ideas.