AJ Smith knows all about folks owing money. After all, he’s a debt collector in Las Vegas, the gambling capital of the world.
So last March, when Smith downloaded Earnin, an app that fronts workers part of their paychecks early, he didn’t think anything of it. It was cash he’d already earned, the company said it prevented overdrafts, and any fees were optional: The app called them “tips.”
“It was just a way to get a couple of dollars here and there,” said Smith, who would tip as much as $9 for one-week, $100 loans.
Pretty soon, however, things went wrong. Last August, a $100 advance that Smith requested to shop at Walmart, which usually hit his bank account immediately, took more than two weeks to arrive.
That sparked one overdraft charge from his bank, then another. It was only weeks later, after Smith complained on Twitter and Facebook, that Earnin sent him the $100 — and by then it was too late. Smith, who lives on a budget of $2,400 a month, was $350 in the hole just from overdrafts.
Now, Smith says he’s stuck in the same rut as cash-strapped borrowers who take out payday loans and other controversial high-interest, small-dollar advances — the kind of borrowers from whom Smith routinely collects.
“Stupid me, I’m still using the app because it messed me up with my paychecks now,” Smith told The Post. “I’m not addicted, but just dependent on it now to get the money out before payday.”
Earnin’s mobile app — which lets users take out as much as $1,000 in advances in a pay period — is surging in popularity. More than 10 million people have downloaded the app since it was first made available in 2013 — and more than half of those downloads were in the past year alone, according to Apptopia.
In December, the company raised $125 million from Silicon Valley venture capitalists including Andreessen Horowitz, DST Global and Spark Capital. Earnin doesn’t disclose its valuation, but The New York Times recently put it on a list of “potential unicorns,” meaning its value could exceed $1 billion.
Earnin bills itself as a high-minded, millennial-friendly “community” of users who “pay it forward” with so-called tips that help cover costs for other, more cash-strapped borrowers. But its app also requires access to the GPS function of its users’ phones to track their locations — perhaps to see whether they’re showing up to work and when.
Despite the high-tech approach, many users complain that software glitches and spotty customer service have left them mired in debt. Critics say Earnin’s marketing and business models resemble those of Payday 2.0, and that its tactics may be intended to skirt regulations on payday lending, which has been banned in 15 states including New York because of sky-high interest rates that can top 500 percent on an annualized basis.
“There is a strong incentive, given the amount of lending regulation, to design products that look as though they don’t fall within the category of loans,” Anne Fleming, a professor at Georgetown University Law Center and author of the book “City of Debtors: A Century of Fringe Finance,” told The Post.
Once Earnin users have entered their personal details, bank account number and login, they can take out cash advances in increments as large as $100. When users request money, they can tip any amount up to $14, which the company uses to pay for the service.
While skipping the tip altogether is an option, the app suggested tipping $9 or more for a one-week, $100 loan, in order to “pay it forward to someone else,” according to screenshots of the app provided to The Post by Smith.
Users who opt out of the tip, meanwhile, can see their borrowing limit capped at as little as $100 per pay period. It’s unclear exactly what other criteria Earnin uses to determine borrowing limits, but at least one of them appears to be whether a user helps the app expand its business.
“We can offer you a higher Max when we see more employees from News Corp. using Earnin. Spread the word!” the app said in a message to a reporter at The Post, referring to The Post’s corporate parent.
The key question, however, is whether the tips suggested by Earnin count as loan fees with an effective annual percentage rate, or APR, according to Fleming. That could be determined on a state-by-state level.
For now, she believes that Earnin is operating in a “gray area.”
If the service was deemed to be a loan, the $9 tip suggested by Earnin for a $100, one-week loan would amount to a 469 percent APR.
“It appears to me they’re calling it tips so they don’t have to disclose an APR, so they don’t have to comply with the Truth in Lending Act,” Lauren Saunders, associate director of the National Consumer Law Center, told The Post.
Passed in 1968, TILA requires lenders to disclose APRs and the total fees a borrower will pay for funds.
“It certainly walks like a duck to me,” Saunders said.
In an interview with The Post, Earnin Chief Executive Officer Ram Palaniappan strongly denied that his company is making payday loans, although he didn’t respond directly to questions about compliance with TILA.
“Earnin is a free product, and users can tip us if they’d like to,” Palaniappan told The Post. “We’re proud of the fact that we are helping customers move away from predatory lenders with high APRs.”
But Earnin also has a “Balance Shield” feature that automatically deposits $100 in a customer’s account once his or her balance gets too low. In order for the program to recur, the customer has to set a tip to pay every time.
Palaniappan conceded that customers who don’t tip have to manually reset it, which appears to defeat the purpose of the program.
“You can come back and set it to zero, and it will fire again. There’s no limit to how often you can do it. There’s no tip,” he said.
That feature could factor into determining if the company is subject to federal lending laws, according to Saunders.
“If Earnin limits what people can borrow if they don’t pay enough in tips, there is a strong argument that the tips are a finance charge,” she said.
Before Earnin, Palaniappan was president of RushCard, a prepaid debit card company co-founded by hip-hop mogul Russell Simmons, which charged users $9.95 a month to hold their cash and $2.50 for ATM withdrawals.
Although his LinkedIn profile suggests he was president of UniRush — RushCard’s parent company — from 2004 to 2012, he only rose to that level around 2011, according to a company rep.
Touting the need for services like Earnin, Palaniappan — who has previously likened Earnin to a “Jedi bringing balance to the universe” — pointed to a verse from the Old Testament book of Deuteronomy.
“Even the concept of a pay cycle is only a few centuries old,” Palaniappan told The Post. “There’s a reference in the Bible that employees would be paid before sunset.”
He went on to say that Earnin’s cash advances aren’t loans at all, but rather “nonrecourse transactions” that don’t charge interest or give Earnin the right to collect.
Saunders said it was “quite debatable” whether Earnin’s loans are nonrecourse — and that even if they were, it might not matter anyway.
Nonrecourse debt can be considered a loan by the IRS, even though nonrecourse lenders “cannot pursue you personally in case of default,” according to the agency.
Earnin requires that users give the company the right to automatically debit their account. It also reserves the right to sue users for violating its terms of service.
“Just because a loan is nonrecourse doesn’t mean it is not a loan,” Saunders said, adding that that’s a decision for state regulators.
Palaniappan didn’t respond to follow-up questions asking him to clarify.
It’s not just the tips that are irking customers. Some complain that Earnin can withdraw funds from their bank accounts earlier than expected, spurring the overdraft fees that they were scrambling to avoid in the first place.
Palaniappan admitted that Earnin does sometimes pull funds early if a payday lands on a holiday, or if the software mistakenly labels a user as being paid on floating dates every two weeks, instead of fixed days, like the first and the 15th of the month. He added that Earnin would pay its users back in those cases.
Others gripe that Earnin’s software is prone to random glitches that end up costing them money. “This service took a extra 100 out my account now they are giving me the run around,” one user, Anthony Vargas, wrote in a Facebook comment.
Abbie, a call center worker in Salt Lake City who spoke on the condition that her last name be withheld, told The Post that Earnin mistakenly charged her twice for a $60 advance, causing an overdraft. Earnin has no phone number that users can easily find to call for complaints. Abbie talked to three different company representatives in a chat room, but her charges weren’t reversed.
“They already took the $60 I had used and they charged me again,” she said. “This is a complete nightmare.”
Earnin’s customer service was unresponsive to her requests, though her bank ended up refunding the fees, she said.
In 2017, the Consumer Financial Protection Bureau released a report showing that payday loans can ensnare borrowers in a “debt trap” by piling on fees and pushing users to borrow more to make ends meet.
But Earnin could also run into issues on a state-by-state basis. New York has a usury law that bans any loans with an APR higher than 25 percent. Nevertheless, Earnin advertises to consumers in New York, and even has a promotional video set in Harlem.
Palaniappan said he and his employees don’t often interact with regulators.
“We haven’t had much recently with the CFPB. With some of the states, we speak on and off,” Palaniappan said, declining to name which states.
Spokespeople for the CFPB, as well as state regulators in New York and California — where Earnin is based — declined to comment.
Deandra Sullivan, a spokeswoman at the Texas Office of Consumer Credit Commissioner, said that the regulator hasn’t had any contact with Earnin. Texas is Earnin’s biggest market, according to a former exec.
While no state has yet designated Earnin a lender, Smith said he doesn’t see a big difference between the app and the payday lenders he collects for in Las Vegas.
“They are small loans because you have to pay them back. With a payday loan, you have it the same way,” he said. “You have it connected to your bank account, and when you get paid the money is out of it.”
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