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Imagine your bank’s ATM asking for a tip when you withdraw money. You insert your debit card, select $40 and before the machine gives you cash, it requests a small gratuity. Would you pay it?
That’s the proposition of many cash advance apps that promise fast advances on money you’ve earned, charging low or no mandatory fees for up to $200 or more. In return, they ask for a tip if you value the service.
The experience leaves it up to borrowers to assess how much a cash advance is worth — a decision that may be no easier to make on an app than when in a coffee shop.
The apps say the tipping model gives users the flexibility to pay what they can afford for the advance, rather than charging a mandatory fee. But consumer advocates say a tip request isn’t a transparent way to disclose what they view as interest on a loan.
The freedom to tip — or not
Here’s a typical borrowing scenario: A user opens the app and requests an advance. Qualification requirements vary, but most apps review transaction history from a connected bank account or a work time sheet the user has provided to determine the advance amount. Once approved, the app displays the repayment date — typically the user’s next payday — and requests a tip before sending the cash.
Cash advance apps say tips allow borrowers to decide what to pay because if they can’t afford to tip, they don’t have to. Sharmaine Rouse, who uses the popular app EarnIn, says she prefers an optional tip to the mandatory fee common with payday loans.
“I think the tipping option is a little better than them forcing you to pay a fee because at the end of the day, it’s still your own choice; you can put zero if you wanted to,” she says.
EarnIn CEO Ram Palaniappan says the tipping feature forces the company to provide a product worthy of a tip.
“The consumer can choose what to pay, and that keeps the company really focused on keeping the consumer happy,” he says.
EarnIn objects to the characterization of its product as a loan or cash advance in part because it doesn’t pursue borrowers who don’t repay them, as lenders often do. The app says it offers “access to earned wages.” But consumer advocates say that, like lenders, cash advance apps act as intermediaries that provide cash and take it back on the following payday.
An analysis by the California Department of Financial Protection and Innovation (DFPI) of more than 5.8 million transactions across three tip-based apps in 2021 showed that users added tips on over 70% of transactions.
That may be, in part, because of how apps request tips, says Lauren Saunders, associate director of the National Consumer Law Center, a nonprofit consumer advocacy group.
An app may set a default tip amount or show recommended percentages like your local coffee shop does. The screen may include a message about tips helping to keep the app in business or providing advances to more users.
Dave, another cash advance app, says on its website that part of the proceeds from tips help provide meals to families through a partnership with Feeding America. A Dave tipping screen shows an illustration of a little girl in pigtails. If the user tips, she’s shown smiling and surrounded by food. If the user sets the tip amount to $0, she’s replaced by an empty plate.
Representatives at Dave declined an interview request, but a spokesperson verified the tipping screen experience.
When Rouse first started using EarnIn in 2020, she says the app automatically set the tip to $11 for an advance up to $100. She thought the suggested amount was steep, but recalls that the app displayed a message about tips helping EarnIn help other consumers, so she tipped $8 to $11 per advance.
In a 2023 memo, the California DFPI cited strategies that apps use to make tips “almost as certain as required fees,” including preset tip amounts, user interface elements that make tipping hard to avoid and not advertising that tips are optional.
“There are laws against deceptive practices, but we certainly don’t have effective laws against using psychological manipulations to play on our behavioral instincts,” Saunders says.
The choice could be a burden
Tipping is a squishy subject for Americans — it’s not always clear when you should tip or how much. It often comes down to your personal philosophy.
According to a November 2023 survey from the nonpartisan Pew Research Center, 92% of adults who eat at sit-down restaurants say they always or frequently tip for the service. More than 70% say they tip for services such as a haircut and also for food delivery.
Tips are often provided in the context of person-to-person interactions. Someone brings your dinner, does your hair or serves your coffee, and you assume your tip goes directly to that person for their hard work.
With a cash advance app, it usually isn’t clear where the tip goes or whether it has an impact on the service, Saunders says.
“People may think that they have to tip to get the loan; they may think they won’t be able to borrow in the future if they don’t tip enough,” Saunders says. The apps “play on the psychology of ‘what will happen if I don’t tip?’”
Many apps’ terms and conditions say tipping isn’t a factor in determining eligibility or advance amount.
The extra few dollars users add before getting a cash advance mostly contribute to a company’s bottom line. The California DFPI’s report found that tips generated about $17.6 million in revenue in 2021 across three tip-based apps.
Currently, cash advance apps aren’t considered lenders in most states, so they don’t have to adhere to many state and federal lending laws. The Consumer Financial Protection Bureau is expected to release guidance in the coming months about whether cash advances from an app can be considered credit.
If they were regulated as lenders, cash advance apps would have to adhere to the Truth in Lending Act, which requires lenders to disclose the cost of borrowing, expressed as an annual percentage rate, before it can provide funds.
An $11 fee on a $100 loan repaid in 14 days would have a 287% APR — and may violate some states’ interest rate laws.
Should you tip?
Before you get to the tip screen, it’s worth exploring alternatives to borrowing, including options with lower or no fees and those that can help you build credit.
If a cash advance app is your best option, it may be time to develop your tipping philosophy. Rouse says app users shouldn’t feel pressure to volunteer money like they do in a restaurant.
“My best advice would be to use your own discretion, but at the same time, don’t feel obligated to tip,” she says. “When you order food or something, I think that those tips are important, but with an app like this, I don’t think it’s important because they’re making their money regardless.”
The article Should You Tip an App for a Paycheck Advance? originally appeared on NerdWallet.
