SAN DIEGO — Are they a valuable tool for financial security, or just a high-tech version of a payday loan?
Millions of Americans, desperate for immediate cash, are now using smartphone apps that give them access to part of their paycheck early.
However, that payday advance can come with sizeable fees, trapping some users into a cycle of debt.
California is now considering new regulations to provide oversight of the "earned wage access" or "income-based advance" industry.
You may have seen the ads popping up on social media, offering a quick way to get an advance on your upcoming paycheck, aimed at people in need of an immediate loan to help cover anything from rent to bills to groceries, accessible not through a brick-and-mortar payday lender, but instead through an app on their cell phone.
These "earned wage access" apps, sometimes referred to as 'cash advance apps,' have advanced customers an estimated $9.5 billion in 2020 alone, according to the U.S. Treasury Department, and is continuing to expand.
They spot users the money they need upfront, which is then repaid on pay day.
While some employers, including Walmart and Amazon, offer this service to their workers, other companies offer "wage access'' directly to consumers.
"People are paying quite a lot to use these apps," said Andrew Kushner, senior policy counsel for the Center for Responsible Lending, a consumer protection advocacy group that supports California's current move to regulate this growing industry. "It doesn't necessarily look like a lot at first glance."
Currently, this industry operates in a grey area legally, with little federal oversight.
"The California state regulator found that folks are paying over 300 percent APR to get access, to take these advances out, which is extremely expensive," Kushner told CBS 8.
Technically, these apps do not charge traditional interest like a payday loan, but instead can make money by charging workers in other ways, such as a monthly membership fee, a fee for instant access or same-day deposit, or a fee per bank transfer, as well as an optional 'tip' after each transaction, which some users say they feel pressured to pay.
"We look at these products as a payday loan with a fintech (financial technology) veneer," he added.
Not everyone views it that way, though.
"It does help to alleviate financial stress," said Angelena Bradfield, head of policy and government relations for the Financial Technology Association, which represents this industry.
She said these apps help users control their money in a more responsible way, because they're tapping into their own earned wages.
"This really allows for them to manage their finances in sort of a more sustained way," she told CBS 8.
She also said that the industry "welcomes regulation," but takes issue with calling these products a "loan".
"it is our view that they are not loans," Bradfield added. "The fact that there are no mandatory fees, no interest fees, no late fees... customers. have no legal obligation to re-pay."
However, consumer advocates blast the idea that the funds provided through these apps are not loans.
"What you have is an agreement to receive money from someone, and to pay that money back later," Kushner said. "That's a loan."
"It's a payday loan that you get through your cell phone rather than going to a storefront lender," he added.
Kushner also said that these apps can trap users in a debt spiral.
"Folks very easily find themselves in a cycle where they are forced to re-borrow, forced to pay these fees, or pressured to tip to keep getting access to these products," he said.
If ultimately, approved, California's proposed regulations would require these companies to register with the state.
They would also categorize these 'income-based' advances as loans under the California Financing Law (CFL), capping the interest that could be charged, and would consider fees like the 'same day fees' and tips as charges.
The industry does not agree with this definition.
"We believe that these are not loans," Bradfield said "They do not have the aspects of a loan."
Consumer advocates, though, counter that these proposed regulations are critical.
"People in the most vulnerable situations who need cash to make ends meet are being gouged with unlawful fees," Kushner said.
The state is expected to make a final decision on this proposal by March of next year.