ZestCash is not Good

A couple of days ago, TechCrunch featured a favorable story about a new startup called ZestCash, which provides an online lending alternative to existing payday loans (I'm not going to link to them directly, you can get to them on your own easily enough). The story regurgitates ZestCash's copy about the evils of the existing payday loan industry, including numbers highlighting just how usurious the sector is. What it fails to mention is ZestCash's own rates, which run between 242% and 462% APR at the time that I'm writing this.

To put that into perspective, consumer advocates regularly warn against the abusive nature of the ~30% APRs charged by many credit cards. The Center for Responsible Lending, which is frequently mentioned on ZestCash's website at the time of this writing, supports a 36% annual interest rate cap. To make that point absolutely clear: ZestCash repeatedly cites a consumer advocacy group in making the case that they're a responsible lender, and then turns around and charges rates up to more than 12x those advocated for by that same group.

Beyond the ridiculously high rates, the entire site is filled with disingenuous copy that seems designed to make unsavvy consumers feel smart and responsible for using ZestCash. They claim in big letters on the front page that ZestCash is "up to 50% cheaper than a payday loan", but you have to click two links deep to find the explanation for where that number comes from, at which point you learn that 50% is over a payday loan that has been "rolled over" 7 times. They have an entire page dedicated to trying to convince you that APR doesn't really matter. They make a big deal about the fact that they don't have a lot of extra fees, but the fees they do have are massive: a 30% 'origination fee' on every loan, and a $35 late fee per missed payment on top of whatever overdraft fees your bank charges. They make a big deal of the fact that they clearly disclose their terms, but they're required to do so by federal law. Almost every sentence on their website makes me tremble with rage for one reason or another.

The worst part about all of this is that their marketing message seems to have worked, at least this early on. I learned about them from a tweet by an entrepreneur I admire, which said he liked how ZestCash was trying to do payday loans in a "don't be evil" way (he seemed to back off this when their rates were pointed out). A twitter search right now shows an overwhelmingly positive reaction, and the coverage of the service from major tech and business sites has been mostly positive as well. What gives? Do people really trust the press release they get from a company that much? Do they not go to the front page of the service and click around at least a little bit? Are Douglas Merrill and Shawn Budde big enough players that nobody's willing to criticize them? Are their investors? I was similarly confused by the positive reaction to Betterment, a service that launched a little while ago that appears to try to convince consumers that ETFs are just savings accounts with higher returns, but this really takes it to a whole new level.

(ed. note: Betterment is no longer pushing the marketing approach mentioned above as aggressively as when they launched. Thanks, KW)

Jason Fager