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Google’s Payday Loan Ad Ban Hits a Startup It Backed

May 19, 2016, 4:30 PM UTC

Google’s decision last week to ban digital advertising for short-term, high-cost loans, so-called payday lending, will also hit a startup lender it backed.

Alphabet, the parent of Google, has a venture capital arm called GV, which had made multiple investments in San Francisco-based LendUp, an online lender making short-term loans at annual interest rates that start at more than 250%.

Google’s search engine unit is completely separate from the VC business under the Alphabet (GOOGL) holding company structure and LendUp says it didn’t know about the decision in advance.

The startup says it seeks to avoid the predatory loan schemes that have plagued the payday lending industryone study found the average customer paid $520 in interest and fees per year to repeatedly borrow just $375by not automatically rolling over loans, not charging as many fees and by helping customers build a history with credit bureaus.

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But the company, which has also received investments from other leading venture capital firms like Andreessen Horowitz and Kleiner Perkins Caufield & Byers, acknowledged on Thursday that some of its loan product ads will be banned under Google’s new policy.

“Because we offer short-term loans and charge high interest rates in the beginning, the entry point to the LendUp Ladder will be blocked from paid advertising on Google,” CEO Sasha Orloff wrote in a post on Medium.

But Orloff wrote that he still supported Google’s decision, which he said would pressure his less ethical competitors to clean up their act.

“The marketing of these products has to change to better protect consumers from deceptive practices, illegal products and identity theft,” Orloff wrote. “If effectively enforced, Google’s ban will push the payday loan marketing competition away from ads and toward natural search, where safer alternatives with quality content can shine. Obviously, I think that’s good for LendUp — and good for Americans who are locked out of the banking system.”

Google’s payday ad ban was “designed to protect our users from deceptive or harmful financial products,” David Graff, Google’s director of global product policy noted in a blog post last week.

Under Google’s new policy, which goes into effect July 13, it will no longer accept online ads for loans that are due within 60 days and, in the United States, loans with an annual percentage rate of 36% or higher. The ban does not effect companies offering traditional loans, such as mortgages, car loans, student loans, commercial loans, and revolving lines of credit such as credit cards, Google noted. The ads are extremely lucrative for Google, with lending ranking among the most expensive categories for online advertisers.

The federal Consumer Financial Protection Bureau is also expected to release a proposal to crack down on payday lenders soon.