How exactly does the Dave app make money?
In addition to a health crisis, the COVID-19 pandemic was a time of financial hardship for many people, with 22 million Americans losing their jobs in the early months of the pandemic. Few rushed into that vacuum like Dave, an app that provides users cash advances of up to $100. For a fee of payday loans Murfreesboro Tennessee $1 a month, the app alerts users to upcoming due dates for recurring payments like rent and utilities.
But Bryan Routledge, an associate professor of finance at Carnegie Mellon University’s Tepper School of Business who specializes in investing and personal finance, explained that the app is essentially providing short term loans but obscuring the interest rate
Dave launched in 2017, with $76 million in funding, and another $110 million in a second round. The app received fairly positive reviews from outlets including Insider, with the caveat to be mindful of its “tipping system” (more on this later) where users can give a tip to the corporation after putting in the request for an advance. According to Insider’s review, the app defaults to a 10 percent tip, which, on a $75 loan taken 13 days before payday, is equivalent to a percent APR-comparable to the average APR for payday loans.
If they are on track to fall a little short that month, the app will allow them to take the aforementioned cash advance
Based on Dave’s pitch and the positive press surrounding its launch, it’s hard not to get the sense that the Dave app may be too good to be true. Without all the details of how it makes money while charging such a low monthly fee, it’s reasonable to question whether Dave is merely a rebranded version of the notoriously predatory payday lenders.
Furthermore, it doesn’t take much digging to realize that Dave has some serious security issues. After a 2020 data breach affected 7.5 million Dave users, five of them filed a class action lawsuit against the app’s owners. The plaintiffs alleged that Dave waited nearly a month to alert them of the breach, and that the company provided an insufficient explanation of how it occurred. The affected customers said that Dave described the incident as a breach at an unidentified third-party vendor, and that the service had since cut ties with that vendor. The California state court lawsuit is still pending; the federal court lawsuit was dismissed by the plaintiffs.
To get a better sense of what Dave’s whole deal is, VICE spoke with experts who provided more insight on how exactly the app works, its pros and cons, and its potential pitfalls. Here’s what you should know about Dave.
It might seem impossible for any company to make a profit from only charging users a dollar per month. “If you borrowed $100 every month, you paid 12 percent on a loan,” Routledge told VICE. “That’s not outrageous, but it’s certainly not free. If you’re loaning out $100 and earning interest of 12 percent, that’s good business. That’s all profit.”
Much of Dave’s marketing claims involve drawing contrasts with the specter of banks: Banks make $30 billion per year from overdraft fees; banks charge “insane interest rates.” But banks have not been able to enroll customers in any overdrafting services by default for over a decade, and Dave’s effective interest rates don’t measure up all that favorably.
Ted Rossman, senior industry analyst at , told VICE that after each loan, the Dave app invites users to leave a tip, which goes directly to the company.
“While it’s technically possible to leave a $0 tip, Dave makes it difficult,” said Rossman. If you opt to leave no tip, the app displays an unhappy avatar and reminds you that you’re not helping the charity organization the company works with. The default tip is 10 percent, so if you take the maximum loan of $100, you’ll be tipping $10, plus the $1 monthly fee you’re already paying.