Earnin, the venture capital-backed fintech company, is facing a lawsuit over alleged high-interest payday loans that are predatory against customers. 

The District of Columbia’s Attorney General Brain Schwalb has now filed a lawsuit against Earnin, accusing the startup company of engaging in deceptive marketing practices. Additionally, the lawsuit claims that Earnin is giving users illegal, high-interest payday loans. 

Schwalb is alleging that the company is posing harm to consumers and engaging in poor industry practices.

An Overview of Earnin’s Business Model

Earnin’s services provide wage advances and loans up to $150 daily or $750 per pay period. The platform had marketed itself as a fee-free service with no credit checks or additional charges. 

However, the company had what they called “lightning speed” fees, which required payment for users to access their funds immediately. Earnin would then withdraw the repayments directly from users’ accounts on their payday.

The Allegations Against Earnin

The attorney general is accusing the company of hiding high interest rates in fees, which averaged a 300% interest, far exceeding the District’s legal cap of a 24% interest rate.

Additionally, Schwalb says the company is operating without proper licensing required within the District. Thus, they have deemed the excessive charges exploitative and claim the process targets financially vulnerable individuals.

Earnin’s Defense

The company’s lawyer, Karl Racine, argues that there is a fundamental misunderstanding of the product’s structure. He claims the “lawsuit demonstrates a fundamental misunderstanding of how our product works and why so many DC residents benefit from it.” 

He added that “DC workers who use our EWA product have the choice to access their earned money at no cost, in which case money is received within 1–2 business days,” as an alternative to paying the “lightning speed” fees.

Instead, Earnin claims that the service is beneficial for consumers who are living paycheck to paycheck. The company claims that the product is instead a solution for wage fairness, countering the claims that it is exploitative.

Industry Context and Trends

Earnin’s success began in 2018 when the fintech company was backed by $125 million in venture capital from notable investors. Its founder, Ram Palaniappan, promoted The company as a fair solution for financially constrained workers. 

Similar fintech services are also facing increasing legal action. The Federal Trade Commission made a case against the cash app for misleading customers about fee disclosures. Additionally, the Consumer Financial Protection Bureau (CFPB) has filed a lawsuit against SoLo Funds, which ultimately led to a settlement with DC’s attorney general.

Broader Scrutiny Against the Payday Loan Industry

More and more payday lenders, including fintech companies like Earnin, are facing increasing regulation and criticism for their services. Chime, another fintech company, has recently introduced similar payday loans, advertised as having “no fees,” yet charges for instant transfers. 

The CFPB has created new regulations, including restrictions on lenders’ auto-withdrawals, which are set to take effect in March 2025.

Implications for Earnin and the Industry

Earnin could potentially face significant legal and financial penalties if found guilty of the alleged malpractices. If they are found guilty, the company will also face a considerable drop in brand reputation and a loss of consumer trust.

The upcoming regulatory changes to auto-withdrawals may force adaptations in similar fintech business models. The industry must find a way to balance profitability while upholding consumer protection and legal compliance.

The Future of Earnin and Payday Loan Fintech Companies

Earnin’s legal troubles reflect a broader regulatory crackdown on the new industry of payday lending companies. Critics of the business model continue to debate the ethics and fairness of fintech models, claiming that the practice targets financially vulnerable populations.

The company’s case, along with the cash app and SoLo Funds, could set a precedent for how similar companies operate in the future. These legal clampdowns are likely to set off further regulatory actions in the fintech lending industry.