Financial-technology firm Activehours Inc., which does business as EarnIn, lures customers in with false promises of an early payday with no mandatory fees or interest costs while actually charging consumers rates of more than 300%, the attorney general of Washington, DC, alleged in a lawsuit.

EarnIn claims that consumers can access their wages “within minutes of earning it,” but to secure those wages almost immediately, consumers must pay a mandatory fee, according to the complaint filed in the Superior Court of the District of Columbia. With that fee alone, the average interest rate on EarnIn’s loans exceed 300%, the attorney general said.

“EarnIn takes advantage of a population that faces extreme financial challenges — those who are in such tight financial straits that they cannot even live ‘paycheck-to-paycheck,’ needing funds in between pay periods to meet their daily living expenses,” according to the complaint. “Although EarnIn promotes itself as an alternative to payday lending, it employs the same model, providing short-term loans at high interest rates and requiring repayment on the borrower’s next payday.”

The lawsuit against EarnIn “demonstrates a fundamental misunderstanding of how our product works,” an attorney for the firm said in an emailed statement.

The product, known as earned-wage access, “is about providing workers access to the money they’ve already earned, but have yet to receive from their employer — no interest, no recourse and no hidden fees,” said Karl Racine, a former DC attorney general who now represents EarnIn. “EWA empowers individuals to make financial decisions that work for their unique situations. Elected officials should empower workers to make choices that best meet the needs of their families.”

The early-payday firms have grown in popularity over the past several years. In addition to EarnIn, other players such as DailyPay Inc. and Dave Inc. offer consumers early access to their pay, with some even working directly with employers including Amazon.com Inc. and Walmart Inc.

States have varied in their regulatory approach to earned-wage access, with some treating the advances like traditional loans and others taking a less strict approach by requiring the companies to register with state regulators.

–By Paige Smith (Bloomberg News)