Cash advance apps: Financial relief, or "loan shark in your pocket"?
The Federal Trade Commission has cracked down on the apps, saying they mislead consumers
Dave, a cash advance app that allows users to borrow money from their next paycheck, has made bold claims, such as enabling users to "get up to $500 in five minutes." The company positions itself as a disruptor in the financial sector, with its website stating, "Like David slaying Goliath, we’re taking on big banks and their outdated ways." The app experienced significant growth in 2024, ending the year with the highest annual share price growth among U.S. financial stocks. By December 20, its share price had surged by 934% compared to 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 became a leader in the "earned wage access" market, competing with apps like EarnIn, Tapcheck, DailyPay, and Empower.
However, Dave's success faced a major setback at the end of 2024 when the U.S. Department of Justice (DOJ), acting on a complaint filed by the Federal Trade Commission (FTC), sued the company and its CEO, Jason Wilk. The agencies accused Dave of misleading marketing practices, alleging that few consumers received the advertised cash advances. The complaint also claimed that Dave charged hidden "express" fees ranging from $3 to $25 for faster access to funds and enrolled users in monthly subscriptions without their consent. Additionally, the app allegedly added a 10% to 20% "tip" to cash advances without clearly disclosing the charge or whether it could be avoided.
The DOJ has sought a permanent injunction against Dave, along with civil penalties and consumer refunds. In a December 31 statement, Dave called the complaint "a continued example of government overreach" and denied the allegations, stating that the company has always acted within the law and intends to vigorously defend itself.
Dave is not alone in facing regulatory scrutiny. The FTC settled similar complaints against Brigit and FloatMe in late 2024, signaling a broader crackdown on the cash advance app industry. Critics argue that these apps, while marketed as helping cash-strapped individuals, often exploit financially vulnerable users with high fees and interest rates, trapping them in cycles of debt. The Center for Responsible Lending has likened these apps to "payday lending on steroids," citing their triple-digit annual interest rates and frequent overdraft fees.
### Misleading "Tips" and Revenue Generation
One of the most striking allegations against Dave involves its "tip" feature. After issuing a payment, the app encouraged users to donate a percentage of their advance to "healthy meals" for needy children, with claims like, "We provide a meal for every % you tip." However, the complaint revealed that Dave donated only 10 cents for each percentage point tipped. For example, a 15% tip for 15 meals resulted in a mere $1.50 donation—far less than the cost of preparing 15 meals. According to the FTC, Dave earned over $149 million in "tip" revenue from 2022 through the first half of 2024. The company has since removed the feature.
Internal documents cited in the DOJ complaint acknowledged that the "Healthy Meals" screen was misleading. One executive described it as a "dark/guilt-inducing design pattern" that drove revenue. Two executives reportedly agreed that the imagery of a hungry child left the company open to criticism, calling the interface a "dark pattern" with "very questionable design decisions."
### How Cash Advance Apps Operate
Cash advance apps, which have been around for over a decade, gained popularity during the COVID-19 pandemic. Users can request small advances, typically ranging from $25 to $750. After signing up and linking their bank accounts, the app analyzes their direct deposit and cash flow history to determine eligibility. Funds are usually issued within three days, with the app repaying itself by deducting the amount from the user’s next paycheck. For instant access, users are charged fees ranging from $1 to $10.
Despite Dave's claim of offering "up to $500 in five minutes," the complaint revealed that only 0.002% of new customers received a $500 advance, while more than 75% of new users received no cash advance at all. The most common advance offered was $25.
### Regulatory Actions and Industry Growth
The FTC's crackdown on cash advance apps reflects growing concerns about their practices. Brigit and FloatMe, which offer advances through monthly memberships, faced similar allegations in late 2024. Both companies settled with the FTC, agreeing to pay $18 million and $3 million, respectively, with most of the funds allocated for consumer refunds.
Despite these challenges, the cash advance app industry continues to grow. Transactions processed by these apps surged by over 90% from 2021 to 2022, with more than 7 million users accessing around $22 billion in advances in 2022 alone. The average user took out 27 loans per year, with an average transaction amount of $106. Globally, the sector is valued at approximately $23.5 billion and is projected to reach $38.2 billion by 2030.
### The Broader Economic Context
The rise of cash advance apps coincides with increasing financial stress among Americans. Food prices have risen by 28% over the past five years, while the cost of used and new cars has increased by roughly 20% over the past three years. By the end of 2023, 60% of Americans were living paycheck to paycheck. The average cash advance app user earns less than $50,000 annually, according to the Government Accountability Office.
While these apps position themselves as a better alternative to payday lenders, which can charge annual percentage rates (APRs) of up to 400%, cash advance apps are not without their own high costs. The Congressional Research Service found that paycheck advances from these apps typically come with an average APR of 109%, significantly higher than the average credit card APR of around 24%. A 2023 report from the California Department of Financial Protection and Innovation revealed that cash advance app APRs can average 330%. Additionally, users typically pay an average of $70 in additional fees annually.
### A Cycle of Debt?
Critics argue that cash advance apps perpetuate cycles of debt, particularly for financially vulnerable individuals. Candice Wang, a senior researcher at the Center for Responsible Lending, described these apps as "loan sharks in your pocket," noting that borrowers often find themselves trapped in debt similar to payday loan users.
As the industry continues to grow, regulators are stepping up efforts to protect consumers from predatory practices. For now, the future of cash advance apps remains uncertain, with companies like Dave facing legal challenges and increased scrutiny.