Dive Brief:

• The New York Attorney General is suing two earned wage access providers, DailyPay and MoneyLion Technologies, alleging they made “illegal, high-interest loans” to tens of thousands of workers with fees that “amount to outrageous annual interest rates in the triple digits.”
• The lawsuits alleges that the companies practices “constitute illegal and deceptive conduct and abusive lending practices” that violate New York usury laws. The state is seeking to end the companies’ lending practices in New York and obtain restitution for customers, along with civil penalties.
• DailyPay filed a federal lawsuit last week against AG Letitia James, seeking to block the state’s action. On Monday, DailyPay referred to its April 7 press release ahead of the New York lawsuit, in which it said it looks forward to showing in court that its on-demand pay product is not a loan. MoneyLion did not respond to a message seeking comment.

Dive Insight:

The Attorney General filed the lawsuits separately on Monday in state court in New York City. 

The suits are similar but describe several differences between the companies’ business models, including more emphasis on tips by MoneyLion, a New York-based fintech offering a consumer finance app, embedded finance and media services. The suits allege both companies used deceptive advertising.

“Both MoneyLion and DailyPay make paycheck advance loans to hourly workers in exchange for fees and tips, pretending to simply be advancing ‘earned’ wages,” James said Monday in a press release.

New York’s usury laws “are patently inapplicable to DailyPay’s service,” because the company does not provide loans, New York-based Daily Pay said in its press release. “DailyPay’s service is in fact a valuable no-cost or low-cost financial tool, which DailyPay has provided to hundreds of thousands of New Yorkers over the last decade.”

EWA providers typically sell their services to lower-wage, hourly employees. 

Among DailyPay’s competitors are Payactiv, FlexWage Solutions and EarnIn, although the companies’ business models vary. Some make money from fees imposed on workers while others take a slice of interchange fees when funds placed on payment cards are used. 

While some providers work through employer partners, others do not. Companies such as Burger King, Kroger, McDonald’s and Target work with DailyPay through an app-based platform, according to the state lawsuit. 

The EWA providers “all share certain characteristics,” according to the lawsuit against DailyPay: “they lend based on real-time payroll data or algorithmic estimates of future deposits; they charge transaction fees and add a higher fee for loans with terms that begin immediately, or extract tips; and they carry on as though they are not making loans and not collecting interest because they say that they will not sue or engage in debt collection.”

DailyPay charges up to $1.99 for a payment advance in a 24 to 48-hour period, and up to $3.99 for an immediate disbursement. The suit lists the most common DailyPay features – a $20 advance, a $2.99 fee and a term of seven days – which the state says equates to a 750% annual percentage rate. New Yorkers paid a median APR of 193.47% and an average APR of 398.59%, according to the state’s lawsuit against DailyPay.

In early 2024, DailyPay told prospective investors that it had reached annual recurring revenues of more than $235 million, with more than 1.2 million active users, and that every 20,000 additional workers represents an extra $1 million of revenue, according to the lawsuit. 

Between October 2018 and the end of 2023, MoneyLion assessed a fee on “nearly nine out of every ten paycheck advances” made through its Instacash product, collecting almost $25 million in fees from New York employees during that period, according to the state’s lawsuit.

The most common Instacash payment was $100 for a fee of $8.99, to be repaid in two weeks, with the $8.99 representing an annualized percent rate of about 234%, according to the suit.

MoneyLion also “relentlessly” presses its Instacash users to leave the company tips, the lawsuit states. Users agreed to pay a tip on nearly 40% of paycheck advances, leaving an average of $4.10, the suit says.

States step in

Like several states, New York legislators are considering legislation concerning earned wage access firms. EWA providers have lobbied for industry-friendly laws related to the services at the national and state levels, typically pleading for oversight that doesn’t deem their services loans because then lending laws would apply.

The pending New York bill would license and regulate EWA providers. DailyPay’s chief legal and strategy officer, Jared DeMatteis, said in a statement that the company was disappointed James “decided to preempt the bill pending in the state legislature and attempt to take this valuable service away from NY residents.”

“Many other states have adopted thoughtful legislation with consumer safeguards, and we support this approach, especially in our home state,” he said. “The actions taken by the Attorney General’s office suggest that it prefers consumers to rely on loan sharks or pay higher overdraft and late fees over on-demand pay, a proven safer and cheaper financial alternative.”

DailyPay’s business model is “fundamentally abusive,” the suit says, because of its “cultivation of a subset of employees who are utterly dependent on the ability to regularly and repeatedly obtain paycheck advances for fees, thereby depleting their future paychecks and making them dependent on access to more loans.”

Gen Digital, the parent company of several cybersecurity brands including Norton, Avast and Lifelock, is in the process of acquiring MoneyLion for about $1 billion. On Thursday, MoneyLion shareholders approved the transaction, which calls for Gen Digital to pay $82 per share. The sale is expected to close this week, MoneyLion said.

A Gen Digital spokesperson did not respond to a message Monday seeking comment about New York’s lawsuit.