Despite transaction fees as high as 15 percent and annualized interest rates as high as 400 percent, a staggering 10 to 12 million Americans take out payday loans each year. And a new legion of lending startups serving non-prime borrowers like LendUp and Elevate are hoping to cash in on the space traditionally held by payday lenders, a market estimated to be worth $38.5 billion. (Other online lenders like Prosper and SoFi target borrowers with high credit scores.) "If you take out the fintech lending, what are the options? With traditional banking, it's basically credit cards," said George Hodges, director of strategy and fintech innovation at PwC. Most banks and lenders don't offer loans below a threshold, usually $3,000. The selling point for startups: Customer experience and financial inclusion. Fintech companies like LendUp, Elevate and others have jumped in with a promise to lower fees and broaden access to credit. These online lenders compete directly with payday lenders on customer experience. That's not hard to do. Traditional payday lenders don't exactly have the greatest reputations -- it's considered high-risk borrowing that preys on the poorest and often offers a less-than-glamorous in-person experience. Still, they've been the de facto way to get small loans quickly -- especially for those with weak credit. Fintech startups operating in the market are also pushing a customer-centric approach, saying they work with the customer on repayment terms instead of resorting to heavy-handed, predatory tactics. "If a customer is struggling to make payments, we offer flexible terms and programs to help that person get back on track. We have a strict policy on nonaggressive collections practices," said Elevate CEO Ken Rees. "If in the end, the individual must default on their loan, we write it off as a loss." Another sell that fintech startups offer is to help get customers who are underbanked or have thin credit files into the financial system. While Elevate offers loans between $500 and $3,000, LendUp offers customers options below $500 with opportunities to increase the amounts after showing good repayment history. Both offer installment loans that allow customers to pay back the loans over time and assess ability to pay using a broader range of data than just raw credit scores. "Along with the application of industry-leading advanced analytics, we are able to ensure that we loan money to the most deserving applicants -- those who are most likely to be able and willing to pay loans back," said Rees. LendUp doesn’t touch traditional credit scores for many of its products including its short-term loans, relying on alternate data sources including information provided from subprime credit bureaus. "A hard inquiry on the customer hurts their credit score -- for a loan of a month, you don't want to damage their score, so we've chosen not to use FICO or the big three credit bureaus," said COO Vijesh Iyer. The other related selling point is to position themselves as inclusive. If fintech lenders are able to use advanced data analytics technology to underwrite a larger cohort of borrowers, it's a win for financial inclusion, said Hodges, who acknowledges these loans aren't a cure-all for poverty. But what happens after the loan is an important difference when compared to payday loans. "In addition to the APR, it's what happens at the end of the loan," he said. "In payday lending, it rolls over [if the customer can't pay on deadline] -- it's not designed to lift themselves up or build savings.” By contrast, fintech startups say they help customers gain a foothold in the financial system. LendUp and Elevate say customers that have good payment histories can lower their APRs over time and have the option of getting their payment history reported to credit bureaus. But this does come at a cost. Both Elevate and Lendup have annualized interest rates that can go into the triple-digit percentages for new customers. Iyer said APRs depend on the state, but a look at LendUp’s sample fees for California on its website shows annualized interest rates for a new borrower that range from 214 to 459 percent, depending on the amount loaned and the repayment time frame. Meanwhile, according to Rees, Elevate's average APR is 149 percent (but there is a range, depending on credit, employment and loan repayment history and other factors). In comparison, payday lender Advance America’s APRs for the same state are 456 percent, according to its website. Despite the high interest rates, these loans are intended for quick payback, so to lenders -- whether fintech or payday loan companies -- the high interest just amounts to a fee for a service banks aren’t well-positioned to provide. “We think of what we charge customers as more of a fee than an APR,” said Iyer. “For a 14- to 30-day loan of $250, we’re looking at a 15 percent fee; we view that as comparable and in many cases cheaper than what your bank charges you for an overdraft.” He noted that converting interest rates into APRs doesn’t make sense for a short-term loan. The FAQ section of Advance America's website has a similar message: “A typical fee for a payday loan is $15 per $100 borrowed. ... Often, the cost of a cash advance may be lower than the alternatives considered by many people, such as paying a bill late or incurring overdraft fees from banks and credit unions.” To Jamie Fulmer, svp of public affairs at Advance America, the entry of new players on the market is a positive development, but the notion that their products are substantially different from payday loans may be a stretch. "A lot of these companies that are touting a better alternative are trying to make their product look better than a traditional payday loan, and that's just marketing spin," he said. "Some are not operating under the same regulatory framework we're operating under, and some are doing exactly what we're doing but marketing it in a different way." Still, the fees for small-dollar loans draw criticism from consumer advocates. "Whether it's Elevate or a payday loan operator, it's primarily the same problem -- these loans are high-cost and targeted to individuals who don't have capital or assets to begin with that are excluded from personal loans or high-credit products," said Ricardo Quinto, communications director at the Center for Responsible Lending, a nonprofit advocacy group with links to a credit union. From a venture capitalist perspective, it's too early to tell if fintech lenders’ business models can be sustained over the long term. "The bets they're making is that they've got all sorts of data, and put that into an algorithm and make better determinations of whether someone is able to repay a loan," said Vica Manos, director at Anthemis Group. "We still need to see how it plays out. None of these lending propositions have actually been tested in a crisis situation -- they haven't gone through a downturn to test how robust the algorithms are."