Minneapolis - St. Paul Metro

Popular apps that provide cash advances for working people are trapping Minnesotans in a cycle of borrowing and repayment and increasing the rate of bank overdraft fees, according to an analysis by the Center for Responsible Lending.

The companies say they allow workers to borrow money they’ve earned but haven’t received yet, arguing that their cash advances don’t count as loans and shouldn’t be regulated as such. Many apps automatically deduct the money owed from the borrower’s bank account on payday — regardless of whether or not the borrower has enough cash on hand to make the payment, which has led to the increase in overdraft fees.

In Minnesota, two-thirds of users of the apps — known in the industry as “earned wage access” apps — experienced increased overdraft fees after borrowing money. The average user overdrafted their bank account more than 9 times in the three months after their initial payout, according to the analysis by the Center for Responsible Lending.

Rather than charging exorbitant interest rates like payday lenders, the apps make money off of instant transfer fees and “tips.”

The Center for Responsible Lending advocates a federal crackdown on payday lenders and similar businesses, including earned wage access apps.

Minnesota clamped down on payday lenders in the 2023 legislative session, capping interest rates at 33% for loans between $350 and $1,000, and even lower for smaller loans. Minnesotans can still access payday loans with higher-than-allowed interest rates, however, due to a federal law that allows banks to adhere to the laws in the state where they are based, even if they operate in states with tighter restrictions. That means Minnesotans can wind up paying higher interest rates if they wind up with an out-of-state payday lender.

Consumer protection advocates pushed for a bill last session that would have required all lenders operating in Minnesota to adhere to Minnesota regulations; that bill did not pass.

Earned wage access apps function differently from payday loans because they promise not to report outstanding balances to credit bureaus and collections agencies, and they simply discontinue service if a borrower is unable to pay.