Mandi Trumpy, a 25-year-old hospitality worker based in Canton, Illinois, took out a $400 payday loan more than six months ago, and is still paying it off.

"I was in a super huge pinch with this coronavirus thing," she said. "I knew what I was getting myself into, but if I'm sitting here paying $82 or $83 every two weeks, I've already paid it off a few times."

Trumpy said she was about to get laid off from her previous job when she took out the loan for some unforeseen expenses. She's one of 12 million Americans who take out payday loans each year, spending $9 billion on loan fees. Payday loans usually charge a percentage or dollar amount per $100 borrowed. Maximum amounts vary by state, but a fee of $15 per $100 is common, which amounts to a 400% annual percentage rate for a two-week loan. Many payday loan borrowers cannot afford to pay their loan off in a couple of weeks, and are forced to borrow again.

Over the last five years, however, fintech companies have been disrupting the payday loan model, allowing workers to access portions of their paychecks prior to payday through a concept known as earned-wage access. These services are offered at either no cost to the consumer or for fees that are typically under $5. Challenger banks, or startups that offer banking services, also offer a range of low-cost or free tools aimed at boosting or rebuilding credit. With the proliferation of more affordable digital financial services, and a pandemic keeping many socially distanced, customers may have fewer reasons to go to payday lenders.

The growth of these new business models, however, still hasn't stamped out payday lending: There are an estimated 18,000 payday loan stores across the U.S. Between 2015 and 2019, though, the percentage of U.S. households that used payday loans did drop slightly, from 2.1% to 1.5%, according to the Federal Deposit Insurance Corporation.

Safely getting a portion, or all of, the paycheck early

Digital earned-wage access services are provided either directly to consumers or through employers. When they aren't integrated with employer payroll systems, consumers may need to prove that they're getting paid regularly, and some providers use technology to track or anticipate when incoming payments will hit a customer's bank account. They typically don't carry out a credit check.

The Dave app, for example, allows consumers to take out up to $75 prior to payday (up to $100 if they sign on to the free Dave bank account), and customers can choose to add on optional tips. Meanwhile, Earnin allows its customers to take out up to $100 of their accrued earnings per day up to $500 per pay period, and can also add an optional tip. The use of voluntary tips as a compensation vehicle; however, it has drawn scrutiny from governments and consumer advocates, prompting an investigation by state regulators as to whether these tips constitute "usurious or otherwise unlawful interest rates."

Companies in the space, including Dave and Earnin, say these tips are entirely voluntary, and that customers can access payroll advances services at no cost.

For an additional $1 per month, Dave customers get access to automated personal finance and budgeting tools, and access to Side Hustle, a job-finding platform. If customers use Dave as the direct deposit accounts for their paycheck, they are offered a free credit-building tool which reports their rent and utility payments to credit bureaus. Dave customers also get paycheck deposits two days prior to payday at no cost.

"Compared to a payday lender, Dave is a dream," Dave co-founder and CEO Jason Wilk said. Other earned-wage access providers integrate with employers' HR and payroll systems, including PayActiv, DailyPay and Clair.

PayActiv, which serves 2,000 businesses — from large chains like Walmart and Wendy's to small companies with under 100 workers — allows employees to take out a portion of their paycheck at no cost if they receive their wages through the PayActiv Visa debit card. It levies a $1 fee per day if customers choose to receive their wages in a different account, and it charges $1.99 for instant transfers.

Another major player in the employer-provided earned-wage access field is DailyPay, which serves more than 500 corporate clients, including fast food chains McDonald's, Taco Bell and Burger King. It charges customers $1.99 for withdrawals that are received the next day, and $2.99 for instant transfers. Clair, which connects with time and attendance and payroll systems, said all pay advances its users draw on are fee-free.

Both PayActiv and DailyPay said they've seen usage spike among certain categories of customers during the pandemic. Jeanniey Walden, chief innovation and marketing officer at DailyPay, said the platform saw a 400% spike in usage in mid-March, but it's since leveled off to 20% to 30% higher than use before the pandemic.

Both DailyPay and PayActiv contend that their offerings aren't loans, since they offer access to wages that are already earned. "We know the amount of time they've already worked on the hours that they have worked, so we are not underwriting them per se," Safwan Shah, CEO of PayActiv, said. "A payday lender gives money to the person and takes money back from the person, and in our case, monies are offered on behalf of the employer."

Some consumer advocates argue that repeat use of earned-wage access services can get expensive. A $5 fee on a $100 advance taken out five days before payday is equivalent to an annual percentage rate of 365%, Lauren Saunders, associate director of the National Consumer Law Center, recently told The New York Times.

As earned-wage access products are a relatively new category of financial services, regulators are beginning to offer some clarity on how they classify them. In November, the Consumer Financial Protection Bureau offered an advisory opinion on earned-wage access products.

It stated that a "covered" earned-wage access program does not involve the offering or extension of "credit" under Regulation Z, the Federal Reserve Board rule that implements the Truth in Lending Act. Among the characteristics of a "covered" earned-wage access program, the provider must contract with employers to offer services; the employee "makes no payment, voluntary or otherwise, to access earned-wage access funds" (though programs that charge nominal processing fees can seek clarification from the CFPB about a specific fee structure); and that recovery can only be done via payroll deduction.

Alex Horowitz, a senior research officer at Pew Charitable Trusts, said the advisory opinion draws a clearer line between earned-wage access providers that work with employers, and others that offer services directly to consumers. At the same time, it doesn't stipulate whether earned-wage access products offered directly to consumers are credit products. Credit products are subject to Regulation Z, and providers need to make certain disclosures, including the annual percentage rates, he added.

"They're just specifying which transactions are not considered credit," he said. "[Direct-to-consumer providers] are not legally in a different place than they were before."

PayActiv appeared to take a positive tone on the CFPB opinion. In late December, the CFPB issued a 24-month approval order clarifying that PayActiv's earned-wage access program is not credit and therefore not subject to the Truth in Lending Act and Regulation Z rules which govern creditors. Earnin, however, suggested that earned-wage access products offered directly to consumers should be viewed differently than loans. "We believe it is important to draw a bright line between services like Earnin, which allow workers to be paid for work they have completed, and other financial mechanisms that are based on debt and structured as loans," an Earnin spokesperson said.

Nico Simko, founder and CEO of Clair, suggested greater clarity on regulations will help providers evolve their product development journeys. "Regulatory uncertainty is one variable in product development that hinders innovation," he said.

The challenger bank playbook: Early paydays, credit building and small-dollar advances

Startups that offer banking services focus on day-to-day money management. San Francisco-based Chime, which has more than 8 million customers, provides users with a financial toolkit so they won't need to go to payday lenders.

"In extreme cases, maybe we're preventing some payday loan usage, but that's not really the impetus behind these products," said Zachary Smith, head of product at Chime. "Most of our members are coming from mainstream banks, where they had overdraft services that they could draw on. They're ridiculously expensive and predatory, and Chime has taken all those products and made them much more consumer friendly."

Chime, which partners with The Bancorp Bank, has three guardrails that could potentially reduce traffic toward payday loans: the ability to receive paycheck deposits two days early; a free credit-building product; and no-fee overdrafts up to $100. The company claims to have saved its clients $5 billion in overdraft fees.

Meanwhile, Varo Bank, a 5-year-old startup that obtained a national bank charter in July, said its tech stack allows it to offer low-cost credit products. The company launched a small-dollar loan product in October that allows qualified customers advances of up to $20 for free, with a maximum fee of $5 for a $100 advance. Customers have 30 days to repay the loan. Varo, which has 2 million customers, also offers its clients access to paychecks two days early and no-fee overdrafts up to $50. The company said it will continue to expand offerings to enhance financial security for its customers.

"The fact that we are a bank positions us to offer all of those products in a very unique way versus other fintechs that rely on sponsor banks," Wesley Wright, chief operating officer at Varo, told Protocol.

Varo and other fintechs, however, are facing competition from legacy banks following recent guidance from the Federal Reserve, the FDIC, the Office of the Comptroller of the Currency and the National Credit Union Administration aimed at encouraging banks to offer small-dollar loans. Earlier this month, Bank of America announced that it will soon offer loans of up to $500 for a flat $5 fee for customers who have had checking accounts with the bank for at least a year.

A new use case for peer-to-peer payment apps

While Square is probably best known for its payment infrastructure services and the peer-to-peer Cash App, it also offers payroll services. The company is using the Cash App as a way to distribute earned-wage access funds from employers to workers. Square launched on-demand pay for employees in September. Each pay period, eligible employees can transfer up to $200 of their earned wages to the Cash App for no charge or transfer the money to a linked debit card for a 1% fee that does not exceed $2.

"One of our key goals was making sure that these tools were affordable to employees," Caroline Hollis, general manager of Square Payroll, told Protocol. "Moving dollars from the seller ecosystem to the Cash App ecosystem, we can do that instantly at no cost."

Will fintech solutions ultimately displace payday loans?

Given the relatively recent rollout of lower-cost, digital alternatives, the impact on the market for payday loans is still unclear. A big question mark with earned-wage access products is whether they encourage good financial behavior or simply push consumers to habitually rely on them, Horowitz said.

"Whether earned-wage access is on net helpful or on net harmful is unknown," he said, and it's yet to be determined if these tools provide a pathway to a whole paycheck, or whether they will replace more expensive options.

Horowitz, however, is bullish on the prospects for two-day-early paycheck deposits. "It's easier to see how that is going to turn out well, because it doesn't have the trade-offs of not getting your whole paycheck," he said. "You don't lose that commitment device element of a full paycheck acting as a forced savings mechanism, and you don't have the fee."

Despite the risks, some consumers may still see earned-wage access as a ring-fenced alternative to payday loans because they have simpler fee structures, lower fees and shorter payback periods. Trumpy said she's relied on the occasional payday advance through Dave or Earnin since she started working again in July. She acknowledges that drawing on future paychecks can cause budgeting issues, but argues that easier user experiences and the transparency of repayment amounts make earned-wage access products safer alternatives to payday loans.

"With Earnin, I get a breakdown: The app says 'You've borrowed $100, this is your fee, this is how much you're tipping, and this is why we're charging you this much,'" she said. "With my payday loan, I log into the website and it won't let me go past the home screen — it wants me to call them."

As the pandemic pushes consumers to continue to look for ways to meet unforeseen expenses, the pie for digital solutions that offer access to earned-wage access solutions continues to expand. In November, ADP, one of the largest payroll providers in the U.S., began testing an earned-wage access tool. The company already offers its employer clients integrations with DailyPay and PayActiv. The same month, Immediate — a 2-year-old earned-wage access provider that works with employers — entered into a partnership with ScriptSave WellRx to offer users discounts on prescription drugs. Earned-wage access is part of a broader toolset to improve users' financial health, providers say.

"Maybe [users] got in a little bit of a bind during COVID, now they're actually taking money out early not because they need it, but because they're proactively paying down bills early to help improve their credit score and boost it back up to repair any damage that was done during COVID," Walden said.