- New service lets workers access pay they've already earned, before payday
- Instead of charging fees or interest ActiveHours allows users to pay what they want
- The service is only available to hourly workers
Payday lenders aren't the most scrupulous of operations. Preying on the desperation of people who don't have enough money to make it to their next payday, these lenders dole out short-term loans with exorbitant interest rates, forcing already cash-strapped customers deeper into debt. And while many have tried to reform the payday lending industry, we're still awaiting the right answer.
Ram Palaniappan has a new approach. He wants to solve the problem at its root, by eradicating the payday altogether.
According to Palaniappan, the real culprit here is the very concept of the payday. The way he sees it, there's no reason people who already have done their work should have to wait several days, or even weeks, to get the money they've rightfully earned. So, in May, Palaniappan launched ActiveHours. The Palo Alto startup, which recently raised $4.1 million, makes an app that allows hourly workers to immediately access pay they've already earned, without having to wait for their employer's standard pay cycle.
What's more, there are no fees. Instead, ActiveHours makes money on tips, asking users to pay what they want. "We're trying to build something that's completely aligned with the consumer, unlike what people are used to today in typical financial services, where it's, in some ways, adversarial, " he says.
Palaniappan is far from the only entrepreneur who sees opportunity in creating an alternative to the payday loan. LendUp, for instance, has raised $64 million to offer loans with lower interest rates that become cheaper over time. ZestFinance, launched by an ex-Googler, is similar. But even these players still rely on fees, both for profit and protection. In this demographic, after all, there tends to be a high rate of delinquency, so even the most upstanding lenders typically account for those losses upfront. But with its no-fee model, ActiveHours is a radical departure.
It's also riskier. The company is betting that when given the choice, its customers - already struggling financially - will still pay for the service it provides. "Some people look at the model and think we're crazy, " Palaniappan says, "but we tested it and found the model is sufficient to building a sustainable business."
Unlocking the Money You've Already Earned
This is not Palaniappan's first financial services company. In 2004, he launched RushCard, a startup that allowed people without access to a traditional bank account to get their paychecks loaded onto a prepaid ATM card. The goal was to offer the so-called "under-banked" an alternative to going to Western Union or other check cashing businesses, which take a large cut of every transaction.
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