Fancy meal delivery, fancy dating sites, fancy city buses—sometimes it seems like the tech industry only wants to innovate for the rich. But an increase in smartphone ownership across the wealth spectrum is spurring new start-ups that are newly focused on the far less well-to-do.
Digital financial services companies offer to manage your money and loan you more when you need it. Some are pegged to the sharing economy’s growing precariat, while others are designed for employed wage workers. All are targeted at low-income workers working hour to hour or gig to gig. It’s a growing cottage industry that could theoretically empower the poor with more equitable financial services—or simply double down on predatory lending models that have already proliferated in poor communities across the country.
From marked-up food at the corner market to rent-to-own furniture, being poor is expensive. Deemed too risky by banks and with little access to capital forces, low-income earners are forced into all manner of less-than-ideal financial services. At banks, they pay high account and overdraft fees, if they’re even allowed to keep accounts with low balances at all. When they find themselves on bank blacklists over small debts, they’re forced into check cashing and payday loaning storefronts, along with more than 90 million other unbanked Americans.
These start-ups are slicker payday loan sharks with marginally better interest rates and a greater pool of consumer data to draw upon—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 five-month loan, and the average unbanked household pays more than $2,400 each year for storefront financial services. Approximately one in four American households use these services, but the market for payday loans is disproportionately made up of people of color without college degrees earning less than $40,000 and renting their homes. The business is so dirty it’s illegal in 14 states.
Enter: disruption. Digital micro-finance was a product of the first tech boom, but it has come of age in the new on-demand, app-powered service economy. If taxis were the dirty, greedy, improperly regulated industry beast until ride-hailing start-ups came along to save us, surely tech must have some innovative ideas about under-cutting and out-servicing greedy financial institutions as well.
ActiveHours and SimpleFi offer payday loans against verified hours worked, with no financial burden on the unbanked customer. SimpleFi makes its money by contracting with a short list of participating companies, so it’s able to issue small, interest-free loans to qualified employees. ActiveHours doesn’t charge any interest but asks for a tip, which the company claims is a sustainable business model. But the rest of us can logically presume that it might not work out so well if customers can't or aren’t willing to pay up.
ZestFinance and LendUp offer payday loans independent of a loan-seeker’s employer, based on the data they collect from each customer. ZestFinance’s rates on small loans can reach 390 percent APR—on par with payday storefronts—while LendUp’s rates are a comparably low but still wallet-busting 145 percent. (A similar but older competitor, Think Finance, is currently being sued by the attorney general in Pennsylvania, where payday lending is illegal—the company was allegedly using Native American tribes as a cover to dole out high-interest loans.)
Even offers short-term, interest-free loans for freelance workers with unpredictable paydays, but it requires customers to have an independent bank account and allow Even full access to it, from which the app tracks and budgets income. At $3 per week (down from a launch rate of $5), it’s more expensive than a low-balance bank account, but cheaper than a storefront loan.
Some of these companies are bound to succeed by drawing customers away from storefront financial services. Some of those customers are bound to save some money. But there is no real innovation here. Billed as alternatives, these start-ups are slicker payday loan sharks with marginally better interest rates and a greater pool of consumer data to draw upon—data that could in some cases push digital lenders to charge customers more, rather than less.
In theory, employers could co-sign their workers’ loans, and workers might be so appreciative that they’d be willing to tip for these services. In theory, cheaper competition could push the unbanking industry to offer more equitable rates to all customers. In theory, small loans could help the working poor pay for unexpected costs, perhaps preventing them from taking on bigger debt loads.
But no app can temper capitalism, bridge the massive-and-still-growing wealth gap, or make living in poverty substantively more convenient. The structural dynamics of inequality are too complex. Ultimately, re-branding debt is not the kind of disruption we really need.
The Crooked Valley is an illustrated series exploring the systems of privilege and inequality that perpetuate tech's culture of bad ideas.