Podcast: The Debiting Problem

DailyPay recently launched a new monthly podcast, called The Source, which endeavors to keep businesses updated on regulations and issues affecting the on-demand pay industry. During each episode, we conduct interviews with individuals who are well-informed on a particular topic in an effort to keep our listening audience abreast of regulatory changes affecting the industry.

In Episode 1, The Debiting Problem, which aired on October 2, 2019, Jason Lee, CEO of DailyPay, discusses recent California legislation and an investigation launched by the New York Department of Financial Services to uncover neo-payday lenders who are operating as early access to pay vendors.

The following questions and answers resulted from this podcast:

Q: Last month, the California State Legislature moved to stop California Senate Bill 472 (“SB 472”) from going to a floor vote in the current legislative session. SB 472 was originally proposed to provide statutory clarity that payments made in connection with earned pay were not consumer loans. What happened?

A:  This bill was, from the beginning, frankly an opportunity for vendors to codify certain of their business practices – including consumer debiting. The bill provided a way in for otherwise non-compliant vendors to try and legitimize their business practices in an effort to create a new scope of regulation for these products. And SB 472 would have been the first bill to actually crystallize debiting loopholes. By stopping SB 472 from moving forward, the California legislature has correctly identified, as have New York and 11 other states, that debiting is predatory and that it needs to be stopped, not codified.

What’s also noteworthy is that through this action, the California legislature seems to be validating the true distinction between daily pay vendors and neo-payday lenders.

Q: Let’s expand on the troubling features, like debiting, that vendors utilize that raised red flags to the legislature? What can we conclude about the legislature’s priorities by analyzing what happened here? 

A: Vendor debiting can lead to dangerous outcomes and potentially cause much more harm to users than even traditional payday lenders. Employees should never have to pay a vendor back for their own money. This is, frankly, a very common feature of payback with respect to a loan.

The second area the California legislature looks to be wary about is the reliance upon wage deductions for vendors offering early access to pay products.

In voting against SB 472, the California legislature has determined that it is unlawful, uncompliant, and harmful to consumers to deduct advance amounts directly from an employee’s paycheck.

Q: The California legislature seems to be drawing a line between true daily pay vendors and neo-payday lenders. What are some common features of neo-payday lenders? How can companies identify traits of these payday lenders in disguise? 

A: Neo-payday lenders have non-transparent fee structures that rely on consumer debiting. One such provider requests a “tip” from its clients, the higher the “tip,” the more money they make available for transfer. Users who don’t leave a tip may have their credit restricted; however, suggested tips can equal up to a 730% APR — almost 30 times higher than New York’s 25% cap, according to American Banker.

Q:  The New York Department of Financial Services launched an inquiry a few months ago into allegations of unlawful online lending, usurious or otherwise unlawful interest rates in the guise of “tips,” monthly membership and/or exorbitant additional fees, and improper overdraft charges on vulnerable low-income consumers. How does the result in California shed some light on the DFS investigation in NY?

A: It seems clear, based on their priorities, that the DFS is trying to weed out neo-payday lenders here who are operating as early access to pay vendors. You’ll notice that many of their priorities overlap with what we went through as common features of neo-payday lenders.

New York and the 11 other states leading this investigation have shown that they have recognized that neo-payday lending needs to be stopped, not codified. And frankly, any provider of access to early pay should be supportive of this. DailyPay most certainly is.

Q:  As this industry continues to evolve and change, what does it seem like regulators are saying about how to structure these products correctly?

A: These products should include, most importantly, NO DEBITING. Vendors who debit are lenders.

They should also make sure they have NO hidden tips or fees, NO interest, and NO wage discounting. These aren’t high bars to meet, and frankly, any program that doesn’t offer these is out of compliance.

Q: If early wages aren’t being regulated, does that mean that the entire industry is at risk? Wouldn’t it be good to have concrete regulation in this space? 

A: While legislative clarity can be beneficial, SB 472 would have been ultimately harmful to consumers. By validating harmful practices, like debiting, and by thus grouping the daily pay industry with the neo-payday lending industry, SB 472 would have allowed numerous loopholes for neo-payday lenders.

Q: What if a vendor integrates directly with employers, but utilizes consumer debiting for payback? Is that ok? 

A: No – consumer debiting is never a part of a fully compliant daily pay offering. Consumer debiting is specifically a feature of loans. No consumer should ever have to pay a vendor back to access their own money – it’s their money. A properly structured benefit does not rely on consumer debiting for payback – whether they integrate directly with employers or not.