Is San Antonio’s FloatMe a Safer Alternative to Payday Loans?

FloatMe, a San Antonio tech startup that gives workers cash advances against their next paycheck, said it has increased $16.2 million from investors in its latest fundraising round.

In total, the startup has raised $49.1 million in funding since June 2019, including $25 million in debt funding, according to Crunchbase, which tracks investments in tech companies. FloatMe’s newest investors include local Active Capital and Iowa-based ManchesterStory.

“We were under the radar,” said Joshua Sanchez, co-founder and president of FloatMe. “The funding is validation that we have grown significantly and allows us to scale.”

However, he did not want to say how many customers use the app.

FloatMe, with 60 employees and an office on Soledad Street downtown, is part of a wave of online and mobile cash advance companies that have been gaining ground during the coronavirus pandemic. They compete with payday lenders that sell high-interest loans to mostly low-wage workers, a disproportionate proportion of whom are black and Hispanic.

FloatMe’s service is similar to what financial technology or fintech companies offer, such as money lionEarnin and David.

Like its larger competitors, FloatMe offers its customers cash advances on their wages, not loans.

Customers pay a monthly fee of $1.99 and can request small advances — no more than $50 — which they pay back when their upcoming paychecks arrive in their bank accounts.

Those of the startup Terms of Use Say users must be US citizens at least 18 years old with a cell phone and email address. To create an account, customers authorize the company to access their bank account balance and transaction history.

They must also demonstrate that they have received at least $200 in electronic wage deposits three times before they can apply for advances.

Josh Sanchez, CEO of FloatMe, markets his business as an alternative to payday lenders.

Jessica Phelps

Once approved, users can transfer their advances to their bank accounts within one to three business days through an automated clearing house. Or they can pay $4 for an “instant” cash drop over eight hours.

Fees for faster access to cash advances have attracted the attention of industry regulators. Many workers seeking cash advances are in a financial bind and need the cash fast.

“These types of fees are meant to be voluntary, but they really add up for consumers,” he said Yasmine FarahiSenior Policy Counsel at the Center for Responsible Lending, a North Carolina-based nonprofit research and policy group.

FloatMe users can also receive offers from third-party companies for financial management services or products — if they choose, the startup says.

From the Terms of Service: “In all cases, you must ‘opt-in’ to receive these partner offers, and FloatMe may receive compensation from those partners for connecting you with them. FloatMe is not responsible for the products and services offered by these partners.”

payday debt traps

Federal Office for Consumer Protection describes a payday loan as “a short-term, high-priced loan, generally for $500 or less, which is usually due on your next paycheck.” The loans are available in stores and online.

When borrowers fail to repay their loans on time or at all, lenders can withdraw funds from their bank accounts, sometimes resulting in overdraft fees. Payday lenders also sometimes send collection agencies after defaulting borrowers.

Payday loans have long been big business in Texas.

The Center for Responsible Lending has analyzed the average APR or APR for a $300 loan with repayment terms of 14 days in each state. The data shows that Texans can pay up to 664 percent APR — the highest in the country — because the state doesn’t have an interest rate cap to protect borrowers.

“Payday loans are marketed as a quick financial fix, but it’s actually a long-term debt trap,” Farahi said. “People take out a loan thinking it’s a one-off loan to deal with a short-term crisis. But with all the fees and costs, they end up having to take out another loan and another loan.”

Like his peers, Sanchez says FloatMe is not a payday lender.

“FloatMe is focused on transparency,” he said. “We charge $1.99 per month for members to access personal finance management tools, overdraft alerts, and other budget management features. Members can access floats without having to pay the $1.99. There are no credit checks. There is no interest and no hidden fees.”

“We do not collect or store any sensitive (personal information),” Sanchez said. “We work with a third party to easily connect a member’s bank account. We do not sell user data.”

The company’s website states that Plaid, a California-based financial services company, is used to connect to customers’ bank accounts.

debt trap

Sanchez said he had his own bad experiences with a payday lender.

Five years ago he was driving in San Antonio when a VIA Metropolitan Transit bus pulled into his lane and collided with his vehicle.

The University of the Incarnate World graduate had car insurance but couldn’t wait for the payout to fix his car — he needed it to drive to work. At that time he was one of the 67 percent millennia without a credit card. So he drew on his savings to pay for vehicle repairs, leaving him short on cash before his next paycheck.

He didn’t want to ask his mother for money, so he approached a payday lender about a $200 loan — and soon fell behind on payments.

“I have to understand that it’s important to pay on time,” he said. “The way lenders get their revenue is that people cannot pay back up front and get into a habitual cycle of having to pay interest. The sad thing is that the majority of people cannot afford an abrupt payback.”

Later that year, Sanchez pitched the idea for FloatMe at a startup challenge at the Geekdom, a downtown San Antonio coworking space, and won $13,000.

FloatMe’s terms of service state that it doesn’t charge late fees or penalties, and it doesn’t go to a collection agency to track down customers for payment.

“If a member fails to repay a float, we do not seek recourse,” Sanchez added. “Our only response is not to allow the member to take another float.”

Still, consumer advocates remain wary of cash advance companies because they aren’t regulated like payday lenders.

“A lot of them are trying to say they’re not credit, but we believe they are credit and should be regulated by consumer protection laws and state credit laws,” Farahi said. “Obviously in Texas, these laws aren’t strong when it comes to user caps, but we’re concerned they’re trying to get carve-outs from state and federal credit laws that say they’re not loans.” And really, a lot of them are payday loans in some other form.”

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