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Google announced this month it would ban payday-loan ads.

One wrinkle: It is an investor in a payday lender.

GV, the venture-capital investment arm of Google's parent company, Alphabet Inc., has been investing in online lender LendUp since before the startup launched in 2012. The company provided capital for every equity round LendUp has since done.

Last week, Google announced it was banning payday-loan ads from its site in response to growing consumer-advocate concerns about the lending practice. The Consumer Financial Protection Bureau is also expected to release proposed rules for the payday-loan industry this spring that could wipe out a large share of that industry.

San Francisco-based LendUp is among the most well-funded lenders in recent years, having raised $150 million in debt and equity earlier this year despite a broad pullback in new money for financial-technology startups. Its other backers include Andreessen Horowitz, Kleiner Perkins Caufield & Byers and QED Investors.

The Silicon-Valley backed firm specializes in mostly high-cost loans geared to borrowers who can't get financing from banks. The lender says it is an alternative to payday loans, because it doesn't charge early-payment penalties or roll over loans when borrowers don't pay it back, practices common in the payday industry.

But like a traditional payday lender, it specializes in short-term, small-dollar loans with annual percentage rates generally in the triple digits that can run higher than 600%. Borrowers' repayment periods can be seven to 45 days, depending in part on their state. So it will be affected by the ad ban, LendUp acknowledges.

"We do worry about how this will play out and think it paints with too broad a brush," said Sasha Orloff, LendUp chief executive. LendUp, the moniker used by Flurish Inc., said the Google ad ban could make it harder for the company to market its loans and that the firm will have to change its strategy for attracting new customers.

The lender wasn't involved in Google's decision, which takes effect July 13. The ad ban also affects traditional payday lenders including tribal lenders tied to Native American reservations that can skirt state laws and are frequent advertisers on Google.

LendUp's marketing team has spoken with Google to understand how the payday-loan ad ban would be implemented. It expressed concerns to Google that certain payday lenders might find ways around the ban.

"Even though we were surprised by the announcement and would take a different approach, LendUp and Google agree on a fundamental fact: The current payday-loan industry is bad for Americans," Mr. Orloff writes in a coming blog post that was reviewed by The Wall Street Journal. "Google is applying pressure from the outside, and we applaud them. LendUp is trying to change the system from the inside."

In its May 11 announcement, Google cited research that showed payday loans "can result in unaffordable payment and high default rates for users." It also explained its decision by noting that "ads for financial services are a particular area of vigilance given how core they are to people's livelihood and well being."

Google didn't consult GV when considering its ad move but did consult industry officials broadly, according to a person familiar with the company's thinking. The policy won't affect search results, only paid ads, and won't apply to all LendUp products, for instance, some of its longer-term financing options.

LendUp distinguishes itself from payday lenders in part by lowering the interest rates it charges repeat customers. The lender also offers longer-term financing, referred to as installment loans, and more recently rolled out a credit card for some of its more qualified borrowers.

Google's move will also affect other companies that offer short-term loans. Online lender Elevate Credit Inc., based in Fort Worth, Texas, also charges triple-digit interest rates on some short-term loans, which are primarily marketed to consumers who can't get loans from banks.

"Unfortunately, Google's decision just makes it harder for consumers to evaluate the available options and select the product that is right for them," said Elevate CEO Ken Rees. Elevate said its products are distinct from typical payday loans, for several reasons, including that it reports to credit bureaus and eliminates many fees, including for late payment.

(END) Dow Jones Newswires

May 19, 2016 07:05 ET (11:05 GMT)

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