Payday lending services are among the worst of the bad actors in the financial services industry in the U.S. today, charging people who have the least means and greatest needs the most usurious fees for their services.
Regulators have been trying to rein in the industry since their explosion in the late 90s with varying degrees of success. But now a new startup may have come up with a way to disrupt the business entirely.
While some analysts argue that payday lenders are the least bad option, compared with bouncing a check or foregoing basic services, a new startup is launching today which obviates the need for either choice. Cash-strapped borrowers can use the new service from the startup Activehours, which launches today, as an alternative to the glorified loan sharks in the payday lending business.
The Palo Alto, Calif.-based company has come up with a radical new way to charge for its mobile payment service that flips the lending model on its head.
Activehours is selling a service that lets its customers get paid for the hours they work, without charging any interest on the payments that its clients receive. Users simply take a picture of their time sheet and specify how much money they would like to get paid from their earnings up to that point in the pay cycle.
The service means hourly workers can get paid as they go, enabling them to spend their wages however and whenever they see fit. Activehours only receives a service charge which is determined by the user themselves. The company has no set fees, nor does it charge interest on the money it disburses to customers.
Financing for the new payment service was led by Ribbit Capital, an investment firm specializing in financial services investments, and the early stage venture firm Felicis Ventures. Both the company and its investors were mum on how much Activehours raised in its seed round.
While most folks in the tech industry have probably never used a payday lending service roughly 12 million borrowers in the U.S. take out loans from these lending operations — often at interest rates of up to 600% (which is scandalous).
It’s not far off to say that these lenders can be little more than a scourge on the communities they “service”. A 2013 study from The Pew Charitable Trust outlines the dilemma borrowers face.
Average borrowers end up indebted for five months, paying $520 in finance charges for loans averaging $375 largely because they see their only choices as making a lump-sum repayment retiring their entire debt, which they cannot afford, or paying fees to continuously pay back and re-borrow the loan, which they can afford but which does not reduce what they owe. Once they have borrowed, neither choice is viable, leaving them indebted far beyond their next payday.
The company was founded by Ram Palaniappan, who previously worked at the Russell Simmons (yes, that Russell Simmons), Accel Partners, and Carlyle Group-backed company — RushCard, which was the first prepaid card to target the hourly wage worker in the U.S.
“What we liked about Activehours was it was the first time that someone says people should be paid however they want,” says Meyer “Micky” Malka, Ribbit Capital’s founder and a longtime investor and entrepreneur in the financial services industry. “If a guy wants to get paid after two days of work, or five days of work, or seven days of work, he should just get paid.”
For Malka, there were four things that set Activehours apart from other startups the firm considered backing. The company was entirely focused on a mobile application, it provided flexibility for users in how much of their paycheck they wanted to receive, and users are responsible for determining how much they’re willing to pay for the service.
“Every year, more than $1 trillion of hourly pay is held back for two weeks because of the way pay cycles work today. Yet, more than half of hourly workers in the U.S. live paycheck-to-paycheck or borrow money to stay afloat,” said Ram Palaniappan, Activehours founder in a statement. “It doesn’t make sense to incur overdraft fees or take out payday loans when your workplace owes you money. If you work everyday, why can’t you get your pay every day?”
Photo via Flickr user Taber Andrew Bain