So-called earned wage access programs offer workers the option to receive some of their wages outside of the two-week pay cycle that is common in many industries. © Getty Images/iStockphoto

The pandemic has unleashed a boom in US fintech start-ups offering workers early access to their wages, even as questions mount about the impact their business models have on consumers.

So-called earned wage access programs vary in nature, but usually offer workers the option to receive some of their wages outside of the two-week pay cycle that is common in many industries.

Some companies, such as DailyPay and PayActiv, offer the service through employers, which can choose to pay some or all of the fees charged to employees.

Others, such as Dave and Earnin, make interest-free advances directly through a mobile app but ask for optional “tips” on each transaction. These tips can translate to high annual percentage rates, raising concerns that the apps could be worse for consumers than the payday lenders they aim to replace.

Even so, earned wage services have taken off as hourly workers seek quick cash during the pandemic, fuelling an explosion of apps that have either opened for business or raised new cash in the past few months.

On a recent earnings call, Visa chief executive Alfred Kelly said demand for earned wage access from supermarket, quick-serve restaurant, healthcare and hospitality workers had more than doubled in the first quarter compared to the same period last year. The company’s Visa Direct system handles transfers for DailyPay and other earned wage access providers.

For the companies, the business opportunity is a captive base of customers depositing paychecks directly into their apps, allowing them to sell additional products such as financial advice and other banking services.

But they could soon face stumbling blocks. In August of last year, the New York state financial regulator said it would lead a multistage investigation into payroll advance apps, singling out those that “appear to collect usurious or otherwise unlawful interest rates in the guise of ‘tips,’ monthly membership and/or exorbitant additional fees”.

A Biden presidency could also breathe new life into the Consumer Financial Protection Bureau, the government agency that oversees payday lending rules. Dave and Earnin, which have faced the brunt of the pressure, both maintain they are not equivalent to payday lenders.

One start-up, New York-based Clair, is aiming to avoid any regulatory grey areas. The company says it charges no fees to employees for either wage advances or routine debit account functions, breaking from competing employer-sponsored offerings.

This month, Clair announced a $4.5m round of seed funding led by Upfront Ventures, and chief executive Nico Simko said it had signed up a “very large workforce management company”.

Mr Simko said the company makes money from interchange fees from Clair-branded debit cards, along with other financial services it plans to sell. It finances the payday advances through external lines of credit.

Aditi Maliwal, a partner at Upfront who led the investment in Clair, said she was attracted to its focus on large human resource software companies that manage employee attendance records.

“The goal is that there will be plenty of users who will view Clair as their main bank account, primarily by the virtue of their pay cheque . . . coming into that account,” Ms Maliwal said.

Some fintech investors still have questions about whether any of the apps can make money as standalone businesses or are destined to be acquired — or copied — by larger companies. Other companies are moving into their territory, such as the human resources start-up Gusto, which debuted a “cashout” service in September.

Additionally, many of the apps give up a slice of revenues to so-called partner banks that manage customer deposits, an arrangement that critics argue is unsustainable.

“The gatekeepers to the financial system charge you a toll that’s just too high for it to really work,” said one fintech investor.

Quick Fire Q&A

Company name: Finix

When founded: 2015

Where based: San Francisco

CEO: Richie Serna

What do you sell, and who do you sell it to: Finix is a payments infrastructure provider for software-as-a-service companies and fintechs that facilitate payments and disbursements.

How did you get started: We combined a fintech’s engineering power with an established financial institution’s payments expertise to provide seamless payments infrastructure.

Amount of money raised so far: $96m

Valuation at latest fundraising: N/A

Major shareholders: Employees, Bain Capital Ventures, Homebrew, Inspired Capital, and Lightspeed Venture Partners.

There are lots of fintechs out there — what makes you special: We help companies monetise payments by cutting out the middleman.

Further fintech fascination

Follow the money: Ant Group is set to raise $34bn in its initial public offering, which is on track to be the biggest ever market listing, reports the Financial Times. The IPO, expected to take place on November 5, could value the company at about $313bn which is roughly equal to US bank JPMorgan Chase.

Follow the money (2): US motor insurer Root is targeting a valuation of up to $6.34bn in its forthcoming IPO, reports TechCrunch. The flotation follows the successful IPO of fellow insurtech Lemonade earlier this year. Root could raise up to $1bn from the IPO and concurrent share placings.

Crypto chronicles: PayPal is set to allow US customers to buy, sell and hold cryptocurrencies, says the Financial Times. The payments company has been granted a conditional “Bitlicense” by the New York State Department of Financial Services. FT Alphaville takes a sceptical look at the news, asking whether the fees PayPal is planning to charge will put people off.

Wirecard fallout: The Financial Times has taken a look at what Wirecard said to investors, and when, as they were awaiting the outcome of a special audit by KPMG in April. The FT also reports that Wirecard’s North American business has been bought by Syncapay, a US holding company that specialises in payments. Wirecard North America will change its name to North Lane Technologies.

AOB: Newfront, a technology driven insurance broker, has raised $100m in total and is now worth $500m, reports The Insurer; Mastercard is to launch a trial in Asia of a biometric card that uses a fingerprint to authorise transactions, according to Finextra; UK fintech PrimaryBid has raised $50m from investors including London Stock Exchange Group and Omers Ventures, says Sky News.

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