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MARCH/APRIL 2020BIG IDEAQwatasia is hardly alone. Millions of
Americans have become regular users
of products offering to help them bridge
the gap between urgent expenses and
biweekly paydays under the guise of en-
couraging financial independence. These
so-called early wage access startups have
collectively raised more than $1 billion in
venture backing in recent years, winning
the support of elite VCs as well as celebrity
investors such as Mark Cuban and Nas.
By giving users advance access to their
paychecks—in exchange for a tip or fee,
or bundled into a subscription—they’re
positioning themselves as an alternative to
payday lenders (with their high APRs) and
banks (with their onerous overdraft fees).
While a prior generation of fintech
companies tended to focus on affluent
consumers— people a lot like the VCs hearing
those founders’ pitches—today’s entrants are
more likely to target the types of consumers
Earnin is on a mission to restore worker rights that date to ancient times, at least
according to founder and CEO Ram Palaniappan. “The Bible says that employees need to
be paid before sunset,” he says. Indeed, early wage access startups were initially met with
something akin to devotional praise. When Earnin, then called Activehours, first launched
in 2014, one publication declared that it was disrupting the “very concept of payday.”
Earnin and its ilk landed in app stores around the same time that previously pioneer-
ing digital lenders were losing momentum. Startups like Lending Club, founded in 2006,
had successfully introduced online personal loans to people with good credit scores, but
struggled to expand into complementary products. At the top of the market, companies
focused on student loan refinancing were duking it out to win over future millionaires.
Founders of advance-pay startups realized that the Great Recession’s ripple effects had
created an opportunity to serve the growing number of Americans living paycheck to pay-
check. “Tens of millions of Americans who had access to credit in 2007 don’t have it 10 years
later,” says David Scharf, a managing director at JMP Securities. “Prior to the recession, they
may have had two credit cards. Now they have one with a lower line. This more restrained
lending is one of the reasons this recovery is so prolonged, yet also so muted.”
Early wage access startups appear to offer a mission-driven way to meet this consumer
demand for credit, even as they deliver the kind of sticky business model that appeals to
investors (users tend to open these apps regularly, presenting developers with opportuni-
ties to sell additional services). Companies in this category have commissioned research
showing that their users are less stressed, less likely to quit their jobs, and more engaged
and productive. The startups also wrap their services in consumer-friendly language, byRULING CLASS
How banks and regulators
created an environment where
startups thrive and people
with limited funds strugglewho would have delivered lunch to those
pitch meetings. Dave, which has raised $
million in venture capital, helps users avoid
overdraft fees with cash advances of up to
$75 per pay period. Earnin, which has raised
$190 million, gives users early access to as
much as $100 from their paychecks in a given
day. Other companies, such as DailyPay and
Even, partner with employers to provide
payroll advance as an HR benefit. In a few
cases, early wage access providers also as-
pire to offer checking and savings accounts.
These startups are responding to a genuine
problem: In 2019, according to the Financial
Health Network, interest and fees cost finan-
cially underserved U.S. consumers close to
$200 billion. But while these companies look
friendlier than the incumbents they aim to
disrupt, their incentive structure is the same:
Most of these advance-pay startups make
money when working people chronically
struggle to make ends meet. Despite their
talk of fairness and community, they show
no signs of dismantling a system rigged
against their customers.
Debit Cards
Throughout the
1990s, banks push
the use of debit
cards for payments.TODAY
Startups including Chime
and Dave have become
unicorns by helping consum-
ers monitor their overdraft risk
and providing solutions.CONSEQUENCE
Consumers start getting
hit with more overdraft fees
as they mix cash, check,
and debit card payments
and lose clarity around when
transactions will clear.Access to Credit
Post–financial crisis,
banks tighten lending
standards in an effort to
stanch the flow of
mortgage losses.CONSEQUENCE
Millions of Americans see
their credit limits lowered or
their cards canceled.TODAY
Americans are utilizing
startups like Acorns for debit
cards that offer credit-
card-style rewards, compa-
nies like Upstart for online
loans, and apps like Brigit
for cash advances.
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