MOUNTAINSIDE, N.J.-At first glance, FlexWage Solutions is selling something that looks a lot like a payday loan.

But founder Frank Dombroski says he has built a more consumer-friendly alternative to those much-criticized products, and one that will even benefit from regulators' increasing scrutiny of the payday lending industry.

His startup, founded in late 2009, has developed a payroll card with an unusual feature: it allows employees to access wages they have earned before the end of their employer's pay period, for a flat fee of $3 to $5 per transaction. People can essentially use FlexWage cards to get part of their paycheck ahead of time-but they are paying for early access to earned funds and are not taking out a loan against future earnings, which Dombroski said has insulated his company from regulatory scrutiny.

"The whole payday lending and pawnshop thing has gotten a lot of very negative press, and that's opened up a nice window for us," he told American Banker, an affiliate of Credit Union Journal.

Dombroski, a former JPMorgan Chase (JPM) executive, says that regulators have so far voiced support for the company as a substitute for payday lending.

A CFPB spokeswoman says the agency does not endorse or comment on particular companies.

But some consumer advocates are more skeptical, warning that FlexWage or other start-ups looking to meet the demand for short-term loans may still contribute to consumers spending beyond their means.

"Even if the fees are low, it encourages employees to spend their money in advance of when they would normally be paid, making it too easy to get behind in the pay cycle and putting them in a cycle of paying extra fees each month just to have access to their regular income," Lauren Saunders, a managing attorney with the National Consumer Law Center, told American Banker in an email.

"The ease of the program is a big part of the problem with this product and payday loans and other 'fast cash' products, because they encourage overspending beyond emergencies," she adds. "Whether the funds are called a loan or an advance on pay already earned doesn't really make a difference; either way it is taken out in a lump sum from the next regular paycheck."


Other Concerns

Other observers warn that while FlexWage may have so far avoided tripping regulatory alarms, regulators are still grappling with how to assess new products.

FlexWage made its name in part last year as one of four finalists in the Core Underbanked Innovation challenge, a contest sponsored by Core Innovation Capital, the investment arm of the Center for Financial Services Innovation.

Cardholders include both those without bank accounts and those who already had direct deposit set up at a bank. The startup partners with CenterState Bank, of Davenport, Fla., to issue its payroll cards.

Employees depositing funds on the card pay no monthly fee and have one free ATM withdrawal a month, according to Dombroski. If they choose to use the paycheck-advance feature to access funds ahead of their pay date, the flat fee is $3 to $5. That compares to typical payday loan prices of $15 or $20 per $100 borrowed for two weeks.

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