Yves here. It’s disheartening to see an abuse like payday loans back in the form of a cute app with a misleading name, early paycheck, that finesses that the user owes the party who advanced the dough, including a hefty premium. But the need it fills is the same.
By Jared Holst, the author at Brands Mean a Lot, a weekly commentary on the ways branding impacts our lives. Each week, he explores contradictions within the way politics, products, and pop-culture are branded for us, offering insight on what’s really being said. You can follow Jared on Twitter @jarholst. Originally published at Brands Mean a Lot
Most things are paid for right away, labor is not. This, plus stagnating wages and a lack of free, widely available banking options, has paved the way for re-skinned versions of payday loans.
Wages Are Built Different
Money doesn’t buy you love, and a love of Doritos doesn’t buy you Doritos. To walk out of the store with them, you need to exchange money for the chips in real time—this is how most day-to-day purchases are made.
Wages, the grease that lubricates these purchases, are built different. You exchange something of value in real-time, labor, and with some exceptions, that labor is compensated just twice a month. A person works for two weeks without pay, then receives income on the final day of the two-week pay period for the previous two weeks of work: employees provide an advance on their labor at 0% financing to their employer.
Cash Flow Feels Good
Not only is this a free loan for employers, it benefits employers’ cash flow at the expense of workers. In a business sense, positive cash flow—more liquid money coming in than going out—enhances a company’s growth through enabling it to buy raw materials, pay workers, conduct R&D, invest in new machinery to grow the business, etc. It’s crucial for everyday operating costs.
People eat, go places, buy stuff, and tend to their bodies constantly. This extension of credit for employers puts people in an adverse position to pay their operating costs. Going back to our Doritos-craver, there’s no way for that same person to get gas at 0% down, 0% for the first month. Conoco wants the money now.
The First Version Sucked Also
For people who are underbanked and low-income, a cash flow impediment presents a problem. This conundrum mostly used to be exacerbated (or solved, depending on whether or not you worked for a payday loan company) by payday loans. Ostensibly, payday loans are quick-cash solutions for people who may not have access to a bank or need cash before a paycheck arrives.
Payday loans’ prevalence declined the past couple of decades due to regulation and pressure from consumer advocates. Why regulation and pressure? The loans are obscene: a study by the Consumer Financial Protection Bureau revealed that most borrowers paid more in fees than the loan itself. Meaning, if you borrow $200 for medicine, you may owe more than $400 by the time you’re through fulfilling your loan obligation in much less than a year’s time.
What Is Old Is New Again
Despite payday loans evaporating, the addressable market isn’t:
- 18.7% of households are underbanked (“household had an account at an insured institution but also obtained financial products or services outside of the banking system”.)
- 5.4% of households are unbanked.
- 1 in 3 adults report “having difficulty covering basic expenses.”
0% loans on labor, years of flat wage growth, and disproportionate costs in other major areas, has ensured the market has stayed ripe.