Technology Could Save Millions of Americans from Predatory Payday Loans
Aug 5, 2016
Despite promises from Congress to reform the notorious payday loan industry, it’s unlikely that anything will happen during an election year. NBC News noted that there are more payday lenders in the U.S. than McDonald’s, evident in the signs visible at just about every strip mall. The fees involved can lead to interest and borrowing rates that soar over 300 percent for whom the Pew Trust estimates are the 12 million Americans spending $7 billion on these payday loans.
The growing outcry to reform this industry is loud, but regulators and politicians haven’t listened.
Until there is a change in how these companies are regulated, technology is offering more alternatives for those who find themselves suddenly cash-strapped. And they could have a role in closing the financial literacy gap that keeps many Americans mired in poverty. These options, some of which are still under development, include:
- ActiveHours: This app allows hourly workers to access wages that they have already earned. Founded by an entrepreneur who developed one of the first paycheck debit card services in the U.S., the company can front payday loans and makes money from contributions paid by its members. Users of ActiveHours are not charged a percentage rate, nor do they pay a set fee – instead, the service allows them to contribute what they want in return for that quick loan.
- Digit: Think of this app as nickel-and-diming you, only those small amounts are put into a separate account for a rainy-day fund. Depending on your spending history, Digit’s algorithms will take a small amount, as small as $1 and as large as $150, out of your checking account and move it into a separate savings account. The company claims it has a no-overdraft guarantee and makes its money by pocketing the interest out of your savings account.
- Even: With employees including alumni of Google and Facebook, this financial app works with hourly wage and tip earners to guarantee a steady, streamlined income. The app’s algorithms look at past deposit and debit history to ensure those payments on the first and 15th of the month are consistent. When paychecks fall short, Even adds money to make up the difference. In the case of a large paycheck, the app suggests how much to save and deposits it into a separate checking account. The caveat: Users must have a bank or credit union account, and the company says it will not be able to work with freelancers until later this year. After a free trial, the service costs $3 a week.
- LendStreet: This company promises to work with consumers who have huge debts financed at high interest rates. Payments are tailored so that they are affordable, and at the same time, this steady stream of income allows LendStreet to solicit investors for these loans. Participating investors can purchase a share of individual loans, enlarging LendStreet’s pool of available funds while offering investors a decent rate of return.
Critics will respond that these services do not solve the problems of the unbanked or underbanked, which the Corporation for Enterprise Development (CFED) estimates to be 8 and 18 percent of the population, respectively. The CFED has engaged in strategies to change that, from children’s savings account programs to the advocacy of programs that can teach people to save and eventually purchase their first home.
Consumers should also consider community banks and credit unions, which often have lower fees and thresholds necessary to open an account. Many of these financial institutions are waiving fees with the expectation that the paycheck-to-paycheck customer of today will eventually be the mortgage payer and retirement saver of tomorrow. Consumers who have ties to a university, large company or government agency – as in, a relative – could be eligible to open an account at a credit union. The rise of online banking and smartphone apps also makes it more affordable for these companies to take in less affluent customers. And for that sudden emergency, many credit unions offer their members access to small payday alternative loans (PALs), a much more affordable alternative to the more predatory payday loans.
Once the dust settles from this election, Congress could also take action and boost the number of banked consumers by once again launching the U.S. Postal Savings system. First established in 1910, this program’s popularity surged during the Great Depression, but was eventually phased out by the end of the 1960s. Post office savings accounts are still the norm in many countries, where consumers can not only deposit money, but can also pay bills. The USPS could also leverage technology so that most banking can be done online or on a smartphone app – preventing longer lines at post offices while transforming these locations into a national banking system for millions of Americans. Such a system would be a cost-effective way to boost national savings, rejuvenate the Postal Service’s sagging fortunes, and make the financial system more inclusive and less punishing for younger and poorer workers.