Activehours, a startup based in Palo Alto, California now enables US workers to take an advance of up to $100 a day on their due wages without paying any fixed commission.
The ‘payday loan’ business, which makes its money by taking advantage of the precarious financial circumstances in which some people find themselves, is booming in the United States. While this can provide a useful service, the basic problem is that as the industry is not regulated the fees charged are often exorbitant. Now a new mobile app provides a means of resolving the ‘payday’ problem. Workers can use the Activehours app to obtain an advance on the wages that are due to be transferred to them at the end of the pay cycle. An hourly-paid employee can draw down up to $100 a day, without paying either interest or fixed commission. “It doesn’t make sense to incur overdraft fees or take out payday loans when your workplace owes you money. If you work every day, why can’t you get your pay every day?” is the argument put forward by Activehours founder Ram Palaniappan.
Avoiding the debt-trap
Activehours is not intended for all US citizens. The service is in fact only available to employees who are paid by the hour on the basis of a timesheet, and excludes all those on a fixed monthly salary who are not paid for the actual number of hours they have worked. In order to obtain an advance, the employee just needs to send an electronic copy of his/her timesheet and indicate the amount s/he would like to draw down, up to a maximum of the total wages s/he has already earned but not yet been paid. For instance, for an eight-hour day at $10 an hour, the maximum would be $80. The amount will transferred the next day to the beneficiary’s bank account. When payday arrives, Activehours will debit the borrower’s account directly for the total sum advanced. Ram Palaniappan argues that this model will help to reduce the risk of spiralling debt, as a person cannot borrow more than the amount on his/her upcoming pay slip.
Voluntary donation system
Another novel feature of the Activehours service is that the company currently charges neither interest nor fixed fees. Instead, customers may opt to give Activehours a ‘voluntary tip’, the suggestion being that the borrower donate from $3.84 to $10.99 for a $100 advance. However, a person can equally choose to give nothing. “You decide what you want to pay, what you think is fair, and you could decide you don't want to pay anything,” explains Palaniappan. The entrepreneur is confident that “the model is sufficiently robust to build a sustainable business.” The only problem, however, is that “people aren’t used to the model, so they think it’s too good to be true.” Meanwhile Gail Cunningham, of the US National Foundation for Credit Counseling, strikes a warning note. “Ten bucks feels cheap, and the person is so relieved to have the money that they are happy to be a big tipper,” she argues, pointing out: “It all sounds great – no fees, no interest charged, no mandatory payment on top of what's borrowed – but this could snowball downhill quickly if the well-intentioned person, the one who thinks they'll utilise it 'just this once,' continues to rely on this pay advance instead of probing to see what the real problem is and resolving it.”