By Allison Colton
Having instant access to your paycheck sounds great, right? Go to work. Clock in, clock out. Get paid. Instant-pay mobile applications make this speedy payday approach a reality. These services allow employees to access their daily income almost immediately, instead of waiting for their bi-weekly paycheck. Additionally, they can allow an employee to better budget their expenses and may provide an individual with the crucial, flexible opportunity to pay unforeseen expenses.
The regulation of traditional payday loans stems from concerns about the never-ending reliance that they create for their users. For example, many of these services charge extreme interest rates. Therefore, by the end of the two-week pay period, an individual might have $150 taken out of their paycheck after their original $100 payday loan. Further, some payday loan services do not require an individual to have good credit, and, thus, may attract beneficiaries who are unable to afford the loan from the get-go. Many payday loan vendors target, and operate in, low-income communities; specifically setting borrower’s up to default on their payday loans.
In an attempt to circumvent these problems, instant-pay apps do not provide “loans,” but instead only provide users access to wages they have already earned, not wages they anticipate they will earn. To accomplish this, many apps require electronic proof of an individual’s timesheet. Further, some applications only allow the user to access half of their pay from that day, while others provide users access to 100% of their wages from any given day. These services differ from traditional payday loans because they do not include high-interest rates and the instant-pay company is repaid directly from the user’s preauthorized bank account, not from the user’s employer. While these instant-pay apps and services seemingly avoid the risks that payday loans present, they are similar in nature and come with their own set of concerns. However, some mediums charge the user different fees depending on how quickly they would like to access their earnings and employers a monthly service fee per employee. Additionally, while traditional payday loans charge set fees, instant-pay services provide users the opportunity to voluntarily “tip” the service instead of imposing said set fees.
Although some apps have established safeguard mechanisms, there are questions about whether these same apps provide individuals the incentive to overspend and thus not be able to cover basic expenses such as rent. Additionally, while they do offer individuals immediate financial aid, some question whether this ability to spend wages early will cause those same individuals to blow through their wages and need payday loans anyways. This concern is enhanced by the fact that these services are particularly appealing to those living from paycheck to paycheck. While the services do not change how much an individual makes in any given pay period, they do not provide solutions for long-term financial instability and challenges.
While instant-pay services differ from traditional payday loans, their similarities call for similar regulations. While the Consumer Financial Protection Bureau (CFPB) has established payday loan regulations, there is a lack of regulation surrounding instant-pay services. Traditional payday loans are subject to regulations such as Truth in Lending disclosures. Further, the CFPB has regulations in place that address a payday loan user’s “ability-to-repay” – requiring payday loan vendors to look at an individual’s financial security and means to repay various types of loans before they borrow the money. These regulations are designed to protect the low-income communities who frequently rely on, and become trapped by, payday loan lenders. Since the instant-pay services are not offered through the user’s employer, but instead directly to the employee. Thus, the services simply appear to be “early wage access products” and not “payday loans.”
However, the two approaches essentially provide the same service – providing individuals with earned money before they are set to receive their paycheck from their employer. Given their similarities, and the numerous consumer protection concerns, the CFPB should develop and impose regulations on instant-pay services akin to those already applicable to payday loans.
Additionally, there are significant policy rationales for regulating instant-pay services. These services are frequently used by individuals who live paycheck-to-paycheck. While they may not fall under the textbook definition of “low-income,” they too face financial instability that can be further hindered by instant-paycheck services. Thus, the CFPB, instant-pay providers and payday loan vendors should be concerned about how all of these services interact and affect one another.
Student Bio: Allison Colton is currently a second-year law student at Suffolk University Law School and a staff member on The Journal of High Technology Law. She is pursuing a career in environmental and energy law. Allison holds a B.S. in Animal Ecology and a B.A. in Political Science from Iowa State University.
Disclaimer: The views expressed in this blog are the views of the author alone and do not represent the views of JHTL or Suffolk University Law School.