Cash advance apps: Financial relief, or "loan shark in your pocket"?

Dave, a cash advance app that allows users to borrow money from their next paycheck, comes with an eye-catching claim they can "get up to $500 in five minutes." "Like David slaying Goliath, we’re taking on big banks and their outdated ways," Dave’s website states. The app grew quickly last year. 

Dave ended 2024 with the highest annual share price growth of any U.S. financial stock; shares were trading on Dec. 20 at a price 934% higher than the start of the year. In the first half of 2024, Dave reported a 28% increase in revenue alongside a 5% reduction in core expenses. Within seven years of its launch, Dave had emerged as a leader in the “earned wage access” space, a cluster of mobile apps like EarnIn, Tapcheck, DailyPay and Empower that offer fast cash to consumers.

But at the end of last year, things shifted for Dave. The U.S. Department of Justice, acting on a complaint filed by the Federal Trade Commission, sued the app and its CEO Jason Wilk. The agencies alleged Dave's marketing tactics were misleading, and few consumers were offered the advertised amount or even a cash advance. Dave charged consumers hidden "express" fees of $3 to $25 to receive cash faster and signed users up for monthly subscriptions without their knowledge, the complaint said. The app charged an additional 10% to 20% of a consumer’s cash advance as a “tip” without properly disclosing the charge and whether it can be avoided, the complaint said. 

The DOJ has asked for a permanent injunction against the company, along with civil penalties and refunds for consumers. Dave issued a Dec. 31 statement calling the complaint "a continued example of government overreach and includes numerous allegations that are based on various inaccuracies."

Dave isn't the only cash advance app to be targeted by federal regulators; the FTC settled similar complaints late last year against Brigit and FloatMe. Some say it's a warning sign for a fast-growing industry that offers consumers access to their paychecks early, often for a fee.

While the apps say they're helping cash-strapped people pay bills in a tough economy, critics call them "payday lending on steroids" that cater to the financially vulnerable as an affordable alternative to predatory lenders and faceless banks. The apps' triple-digit annual interest rates lead to frequent overdraft fees and keep users in a cycle of debt, according to the Center for Responsible Lending. 

Feds: Misleading "tips" drove revenue

One of the most notable allegations is that Dave solicited monetary "tips" from users after issuing their payment, inviting them to donate to "healthy meals" for needy children. "We provide a meal for every % you tip," the app says, offering three options for tipping percentages and the number of meals the percentages would pay for.

Dave was only donating a small fraction of that revenue to the hungry, the complaint said. The company donated 10 cents for each percentage point tipped, according to the complaint. That meant a 15% tip for 15 meals yielded an actual donation of $1.50 — far less than what it would cost to purchase ingredients and prepare 15 meals.

Dave reported earning more than $149 million in "tip" revenue from 2022 through the first half of 2024, according to the Federal Trade Commission. Dave has since removed the "tip" feature.

"Dave internal documents acknowledge this ‘Healthy Meals’ screen content is misleading," the DOJ complaint said. "For example, a Dave executive described the ‘Healthy Meals’ content of these screens to Wilk as involving a ‘dark/guilt inducing design pattern’ that helps drive revenue."

The complaint cites two executives as describing the interface as a "dark pattern" exhibiting "very questionable design decisions." The two agreed that the "hungry child def[initely] leaves us open for criticism," according to the complaint.  

"We believe that we have always acted within the law, and we have continued to rely on the fact that other government agencies have previously reviewed the Company’s business model without taking action,” Dave said in its statement. “We take compliance and consumer transparency very seriously, and we intend to vigorously defend ourselves in this matter."

How cash advance apps work

Cash advance apps have been around for more than a decade and became popular around the time of the COVID-19 pandemic, according to the Consumer Financial Protection Bureau, which announced a crackdown last year. 

Users can request small advances ranging from around $25 to as much as $750. After they sign up and connect their bank accounts, the app analyzes their direct deposit and cash flow history to determine whether they qualify for the advance.

The money is typically issued within three days, and the platform repays itself by withholding those wages from the user’s next paycheck. If the user wants their money instantly, they’re charged a fee ranging from $1 to $10. 

Although Dave markets itself as offering "up to $500 in five minutes," it gave a $500 advance to just 0.002% of new customers, or 1 of every 45,000 users, according to the complaint. More than 75% of new users didn’t receive any sort of cash advance. When Dave did offer a cash advance, the most common was $25, the complaint said.

Brigit and FloatMe, apps that offer cash advances via monthly memberships, faced similar allegations last fall. Their claims that customers could cancel anytime weren't true, the FTC said, and they often provided less than the promised amount, or no cash advance at all.

Brigit agreed to pay $18 million to settle the claims, and FloatMe settled at $3 million. The FTC said most of the money will be distributed as consumer refunds.

Tech’s solution to an affordability crisis

Transactions processed by cash advance apps grew by over 90% from 2021 to 2022, according to a report released by the Consumer Financial Protection Bureau last summer. More than 7 million people used the apps during that time, accessing around $22 billion in 2022. 

Workers took out an average of 27 loans per year, and the average transaction amount was $106, according to the report. 

The average transaction amount ranged from $35 to $200, and the average worker accessed $3,000 in funds per year, the report said. 

Business has been good for the apps. Globally, the sector is valued at roughly $23.5 billion; by 2030, it’s projected to be worth $38.2 billion, according to a report by HTF Market Intelligence.

The current economy would suggest that could continue. Food prices are up 28% over the past five years, and the cost of used or new cars is up roughly 20% over the past three years. At the end of 2023, 60% of Americans were living paycheck to paycheck. 

The average cash advance app user earns less than $50,000 a year, according to the Government Accountability Office.

"As the country continues to battle the wake of record-high inflation, more workers are reporting high levels of financial stress," Tapcheck, a cash advance app, states on its website. "To ease the burden of bills that can’t wait for payday, employees that have on-demand pay programs available to them are less likely to pile extra debt onto their credit card or turn to a high-interest loan."

The apps can seem like a better option than payday lenders that can charge annual percentage rates of 400%, according to the Consumer Financial Protection Bureau. But the Congressional Research Service found that paycheck advances from apps typically come with an average APR rate of 109%, much steeper than the average APR — currently around 24% — charged by credit card companies. A 2023 report from the California Department of Financial Protection and Innovation found that cash advance app APR fees can average 330%. 

The apps also typically charge users an average of $70 in additional fees per year, the CRS report found.  

"By offering predatory credit with just a few taps on your cell phone, cash advance apps are a loan shark in your pocket .. cash advance app borrowers are trapped in a cycle of debt like that experienced by payday loan borrowers," Candice Wang, senior researcher at the Center for Responsible Lending, said on the group's website.