Does app promising protection from overdraft fees have hidden costs?
Brendan Goad is just the kind of customer Dave Inc. is looking for. Digitally savvy, trying to turn around his finances and, most important, short on cash.
The mental health peer-support counselor in St. Joseph, Missouri, says he earns $20 an hour and sometimes can’t make it till payday, which means he’s suffered an indignity common in the U.S. banking system: $30plus overdraft charges.
That was until he found Dave, a fast-growing West Hollywood financial app serving more than 6 million Americans in need of cash advances.
The come-on was nearly irresistible: The company promised a cash advance with no fees even without a credit check. “Start today and say goodbye to overdraft fees, good riddance to hidden fees and hello to more of your money in your account,” proclaims literature sent to new customers.
“I’m like, ‘OK, I’m sure there’s some kind of a catch that they’re going to charge me. Right?’” says Goad, 32. But he figured: “I’ll just try and see what happens.’”
In fact, Dave is counting on its customers to pay for its services — or it wouldn’t have gone public this year with the backing of high-profile investors, such as billionaire Mark Cuban. That no-fee claim? It comes with an asterisk.
It starts with a $1 monthly membership fee. If you need a cash advance right away, as many do, there’s an “express fee,” which begins at $1.99 and tops out at $5.99 for advances of $100 or more. The money, typically repaid on payday, is truly free only if you can afford to wait a few days.
And would you mind, the app asks, throwing in a tip for our service?
Goad pays the premium to get his advances within hours and tips 1%. That’s well under the 15% tip the app described earlier this year as its “most popular” default option, but enough to make him feel like he’s contributing to the “community” Dave likes to celebrate.
Still, he figures the $7.99 in total he paid for a $200 advance in March was a deal compared with overdraft fees. And it’s cheaper than what a corner payday lender might charge. The average payday loan in the state was for $273, came with an interest rate of 414% and cost $43 if paid back in two weeks, according to a survey by Missouri regulators released last year.
Calculated another way, though, Dave’s advance is more expensive than it seems.
Given that the money had to be repaid in 12 days, the $5.99 fee and $2 tip, if considered as interest, cost Goad 122% on an annual percentage rate basis — a metric that helps compare the relative cost of loans. If he tipped $6.93, the company’s average in the first quarter, it would amount to an APR of nearly 200%. If he chose a 15% tip, the total cost would rise to $35.99 with an APR of 547% — corner payday loan territory.
Dave contends likening its advances to an interest-bearing loan is an apples-to-oranges comparison. The tips and express fees, it argues, are optional and flat, whereas interest is a mandatory charge that grows until a loan is repaid. In its annual report, it specifically describes its advances as 0% APR. In any case, the company’s chief executive and co-founder says, the fees are small.
“The business was born to kill the expensive cost of overdrafts,” says Jason Wilk, 36, also the company’s chairman. “And maybe someone pays a few bucks for an instant fee. But compared to a $34 fee for as little as a $5 overdraft that’s crazy. You are talking about an APR calculation that’s 17,000%.”
Still, consumer advocates say the tips and what they consider to be inflated express fees charged by Dave and other startups that have entered the cash-advance business are actually disguised interest charges that obscure their true cost and should be disclosed under the half-century-old Truth in Lending Act.
And they don’t like how the apps want the cash back on payday, creating a hole in the next paycheck and potentially sending customers on a costly path of borrowing, paying back and reborrowing for what amounts to earlier access to their own wages — a so-called cycle of debt. Goad says at times last year he was taking out advances every pay period, juggling Dave and two other cash-advance apps.
In essence, critics view the apps as a spiffed-up version of established payday lenders, long derided for three-digit APRs and luring customers into debt traps. They are seeking to have the upstarts subject to strict licensing regulations to limit fees, potentially crimping their operations.
“Traditional payday loans and traditional overdraft fees are so awful that it’s not hard to be a little cheaper and a little better — and some of these [apps] may be,” says Lauren Saunders, associate director of the National Consumer Law Center. “But are they promoting people’s financial health? That is much more debatable.”
The rise of cash-advance startups is a clear reaction to continuing skyhigh overdraft fees charged by banks, which endure despite years of criticism from consumers, regulators and politicians — and recent moves by some banks to cut or eliminate them.
The average nonsufficient funds fee cost consumers a record $33.58 last year, according to Bankrate.com. And a recent Consumer Financial Protection Bureau study found that banks of all sizes continue to rely heavily on such fees, which brought them $15.5 billion in 2019 and particularly burden lower-income Americans.
That kind of gouging is how Dave found its niche. Wilk portrays the company to the media and Wall Street as a “champion” of the consumer. During Dave’s roadshow last year to drum up interest among institutional investors prior to going public, Wilk highlighted at one event that “there are still 150 million bank customers who are living paycheck to paycheck.”
In other words, lots of people need cash in a hurry.
For hundreds of years, banks have attempted to project an image of security through their imposing architecture and names such as JPMorgan Chase or City National Bank that reflect their institutional status.
The new wave of financial apps — at their core, software code — have none of those trappings. They often bear single-word names such as Mint and Digit that might suggest what they do or how you might feel when you use them. And they don’t just differ in name.
Dave is based in West Hollywood’s posh Pacific Design Center but has few employees there — or anywhere. Wilk told Wall Street investors last year, when it employed fewer than 200, that its headcount was less than “a handful of bank branches in L.A. or New York City.” Fewer employees means less overhead, but also less human interaction.
“I don’t mean to be a big supporter of banks, but they are more personal and your information is safer,” says attorney Tim Blood, who is representing Dave customers suing over a June 2020 data breach.
Dave has agreed to settle the proposed class-action lawsuit for $3.2 million despite what Blood calls the company’s strong arbitration clause.