Payday loans but with 'tips' instead of 'interest'

March 22, 2019 (1660 words) :: Fintech startup 'Earnin' may be a glorified payday lender, but it's managed to evade regulation by collecting tips instead of interest. This is ... not good.
Tags: startups, financialisation

This post is day 81 of a personal challenge to write every day in 2019. See the other fragments, or sign up for my weekly newsletter.

As you may know, I’m working on a book titled Abolish Silicon Valley, out next year. As I’ve tried to explain in a previous fragment, the point of this title (and the political message in the book) is to suggest that the problems with Silicon Valley are 1) bad and 2) structural. Just as it is with the movements to abolish borders, or prisons, abolishing Silicon Valley entails restructuring society such that the worst excesses of the modern-day tech industry are not possible.

And that’s not to say that absolutely everything about Silicon Valley is bad! Still, I’d argue that whatever positive innovations have come out of actually existing Silicon Valley could have also occurred under a better industrial model for developing technology. An analogy to prison abolition can be useful here: you can believe that prisons are bad while also recognising that Gramsci and Nelson Mandela wrote important things while in prison. Giving prisoners time and space to write political treatises is not the primary purpose of prison; at best, it’s an unexpected side effect, and sometimes it’s actively prevented (contemporary American prisons have made it difficult to even get books, for instance). “They help people write” is not a good argument in favour of prisons, just as “the guy who made the Enron documentary got to make another documentary” is not a good argument in favour of Theranos.

Similarly, the structural purpose of Silicon Valley (as a metonym for profit-driven tech companies in general) is to facilitate decent returns to capital. Actual technical innovation or truly helping people - those are side effects, at best. They do occur sometimes, but they don’t need to occur for a tech company to raise money or turn a profit. The Silicon Valley optimisation function doesn’t care about that. All that really matters is whether you can cobble together enough existing technology in order to tap a financial well in the current socioeconomic landscape, even if that landscape is rotting. Monetising the rot is a lot more lucrative, and more immediately gratifying, than trying to figure out how to fix it.

A few weeks ago, I wrote about a payday loan startup called Even. At the time, I assumed that was the worst payday loan startup I’d ever come across, and so didn’t plan on writing anything else on this topic. I guess the lesson is: when it comes to Silicon Valley, always assume there’s something worse.

Enter Earnin:

Earnin is Reinventing Payday The headline is real, from the company’s press page; the caption is all me.

(There’s a good critique of Earnin in this New York Post article, which I found through Matt Levine’s Bloomberg opinion column from today. If you’re interested in finance from a critical perspective, you really should sign up for his newsletter.)

Now, Earnin is similar to Even in that it purports to address the scourge of Americans living paycheck-to-paycheck by giving users access to small funds via an app. The crucial difference is that with, Earnin, these are technically not loans. As in, Earnin says they’re not loans - the website states “no loans, fees, or hidden costs” - and therefore there’s no interest, either.

Does this mean you get money for free via this app? Well, not quite. You have to pay back the amount eventually, and you’re encouraged to add a tip, with the suggested amount being $9 on a $100 loan. As Matt Levine writes:

You don’t have to pay interest, but you should. (Also it is not “interest” but a “tip,” which is genius: a $9 interest payment on a $100 one-week loan “would amount to a 469 percent APR,” an obviously usurious annual percentage rate, but a $9 tip on a $100 transaction is only 9 percent, which feels positively stingy.) There are apparently some enforcement mechanisms—the article suggests that if you don’t “tip” you’ll have a low borrowing limit and reduced convenience—but surely the main way that Earnin gets people to pay is by asking them to. If you’re supposed to pay for a service, mostly, you do.

This is so predatory it’s almost genius: taking advantage of people’s social attitudes around tipping (which usually goes to service workers, i.e. labour, who tend not to make that much money to begin with) in order to funnel money towards capital, so that investors and founders and early employees can eventually become obscenely rich through the increased valuation of this startup.

What’s really interesting about Earnin is that because it doesn’t call its product a loan, it waives its rights to collect on this pseudo-loan, because it’s not technically debt owed to Earnin. (Though it’s not really that different, in the end - it may not affect your credit report, but Earnin still reserves the right to sue you if you are deemed to have violated their ToS.) They’re basically just counting on users being culturally conditioned to pay back this pseudo-debt, because these users understand that it is meant as debt even it is not described as debt. And not paying your debts is typically seen as a really bad thing.

In the New York Post article linked above, Earnin is described (by critics) to be operating in a regulatory grey area. But I mean, this isn’t really a criticism so much as an accurate description of the entirety of Earnin’s business model; regulatory arbitrage is how so many successful tech startups rise to fame. More from Levine:

If you worked at a bank, and you came up with an idea to give people high-interest cash advances, and your legal team came back to you and said “how can we make sure that these loans are enforceable and that we can collect our principal and interest,” and you said “we won’t, we’re just going to skip all of that, there’ll be no binding contract and people who don’t want to pay won’t have to,” you would definitely not get approval to do that. But Earnin recently “raised $125 million from Silicon Valley venture capitalists,” and for all I know the model might even work. Traditional finance operates by being very very sure of what your legal rights are, which is why we are always talking around here about hedge funds battling over CDS documents. But the tech industry has made a lot of billionaires by understanding people’s actual behavior, and if you notice that people pay back their loans even if they don’t have to then maybe there is money to be made there.

In other words: if you come up with a way to do something (in this case, payday loans) that everyone knows is exploitative (to the point where it’s been banned in 15 states) in a way that’s novel enough to evade existing regulations, then you can make a lot of money. Sure, these regulations may have been put in place to protect people from predatory financial institutions, but respecting that intent would prevent you from raising $125 million from top-tier VCs like a16z and maybe even venturing into unicorn territory. And you know, one startup founder’s megalomaniacal pursuit of Silicon Valley glory should be the thing our economic system optimises for.

I don’t know what’s going to happen with this startup. Maybe it’ll go bust because regulators catch on to the fact that this company is functionally a payday lender, no matter how much it likes to pretend it’s not. Maybe it’ll surpass the billion-dollar-valuation mark before that happens.

It’s all pretty depressing, really. I am tired of living in a world where this shit keeps happening and there’s basically nothing I can do about it. The problem isn’t isolated to individual companies or startup founders - the problem is the system that would fund payday loan startups rather than literally just paying people more and having a better welfare system so no one has to resort to payday loans in the first place. The problem is the system that can produce endless millions to throw at startups whose pitch decks say little more than “our mobile app lets us monetise the rot” while completely ignoring people who are dying from the rot (because keeping them alive isn’t profitable enough, I guess).

It sucks. I hate it. And as much as I think that Earnin’s CEO is a massive tool (he claims Earnin is like a “Jedi bringing balance to the universe”), I can’t really blame him, either. This 5-year-old startup is not responsible for the last few decades of assaults on worker rights and corresponding wage stagnation and precarity; Earnin did not create the background conditions that are the real problem, here. But don’t be fooled into thinking that Earnin’s main goal is to fix these conditions, either. Its goal is growth above all else, which means getting tons of people hooked on their payday loans, even if it makes their lives worse (through glitches or even deliberately predatory behaviour). Not only are they profiting from the current subpar conditions (and remember: all this profit is extracted from people who are already financially insecure), but their business model is diametrically opposed to having a healthy socioeconomic system where nobody needs payday loans.

If I had $125 million to invest in helping American workers who live paycheck to paycheck, I would put that money into: 1) union-related activities; 2) organising campaigns and strike funds for workers who don’t yet have unions; 3) politicians who credibly represent their working-class constituents; 4) organisations that advance an anti-capitalist vision of political education and organising; and 5) non-profits that provide shelter or food or other essential goods to those in need, in places where the state should be stepping in, but has failed to do so. You’re probably not going to make a profit from any of this, but you know, maybe generating profit is not the win-win that Silicon Valley likes to pretend it is.

« See the full list of fragments