The State Of Earned Wage Access In 2024

Businesses have found that EWA can be an effective recruiting tool, and employees are beginning to demand this benefit. The rush to provide this benefit during the labor shortages created by the pandemic has led to some confusion. There have certainly been some opportunists providing the service with hidden fees, subscriptions, and transaction costs equating to interest rates of 300% APR or more.

The concerns come down to three basic issues:

  • Which model best serves the employees?
  • Is EWA just another iteration of Pay Day loans?
  • How will State and Federal legislative efforts affect the future of EWA?

The B2B model uses employers’ payroll and time-sheet records to track the users’ accrued earnings. When payday arrives, the employee receives the portion of pay that hasn’t been tapped early.

Third-party apps are similar but issue funds based on estimated or historical earnings and automatically debits a user’s bank account on payday.

Big companies such as Dollar Tree, Kroger, Hilton, McDonald’s, Target, Uber, and Walmart now offer employees early access to paychecks.

Companies in the B2B market often tout themselves as a win-win for employers and their employees who use the services.

High worker demand for such programs makes them a cost-effective way for businesses to retain and recruit employees, according to consultants and academics. Employees can cover any short-term expenses that might arise before payday — maybe an unexpected car repair or medical bill — perhaps for lower fees than they would incur using credit cards, bank overdrafts, or other ways to access quick cash.

Branch, DailyPay, and Payactiv are among the “most significant” B2B companies.

Some programs, depending on how consumers use them, may grant that early paycheck access free of charge. Further, 28% of users — who tend to be lower earners, hourly workers, and subprime borrowers — said they turned to alternative financial services such as payday loans less frequently than before using earned wage access, according to the Harvard paper.

There may be fees attached for accelerating the time it takes to receive the funds, such as $2 for receipt within a day or $10 within an hour instead of free within a few days. Generally, most B-to-B providers make a significant portion of their revenue from an optional debit card. The card is free for consumers but levies a transaction, or “interchange,” fee on businesses when consumers make purchases.

Although there can be some associated fees based on how the employee uses the service, a free option is always available.

Third-party providers are direct-to-employee Apps offered by various vendors. These apps are, frankly, the primary concern of state and federal governments and employee advocates.

They typically have monthly subscription fees, per-transaction fees, and the potential for overdraft fees for users. There is the added risk that individuals may have more than one App (studies show that many workers have up to five apps on their phones), which could lead to serious financial risk.

According to the California report, total fees translate to an annual percentage rate of more than 330% for the average earned wage access user—a rate comparable to payday lenders. The report analyzed data from seven anonymous companies across business models and fee structures. 

A recent U.S. Government Accountability Office study found that earned wage access products “generally cost less than typical costs associated with payday loans.” That said, the products pose a few consumer risks, including a lack of cost transparency, the study found.

Experts say fees can add up, particularly for users who frequently access their paychecks early. According to California regulators, the average user did so nine times a quarter.

Additionally, 40% of people with employer-sponsored EWA access use the service at least once a week, and more than 75% use money for regular bills instead of emergency expenses, according to the Harvard paper. Liquidity issues most often affect low-income households, which have fewer savings and less access to traditional credit.

According to the GAO, the typical user earns less than $50,000 a year.

High fees and user dependency “are kind of the darker side of the business,”

Consumer risks are generally greater in the direct-to-consumer rather than the business-to-business market. The analysis seems to describe the B-to-B model as more like an ATM service and Third-Party providers as closer to payday loans.

Like a snowball rolling down a hill, the push to pass legislation to regulate earned wage access (EWA) providers is growing. In June 2023, Nevada became the first state to officially regulate earned wage access providers, and Missouri followed soon after. In the month of January 2024 alone, four states, Arizona (Senate Bill 1273), Florida (Senate Bill 1146), Hawaii (Senate Bill 2664), and Kentucky (House Bill 322) introduced bills to regulate earned wage access providers.

These four bills highlight the differences in how states may be preparing to regulate earned wage access, including with respect to the critical issue of whether earned wage access transactions are considered to be loans or credit. One industry trade association recently wrote a letter to CFPB Director Rohit Chopra noting this “patchwork” approach and urging the CFPB to “engage in a more substantive regulatory endeavor, such as a formal rulemaking,” that creates a “clear and consistent regulatory framework” for EWA providers.

Legislation is all over the place but generally looks to limit the amount employees can receive, limit the fees that can be charged, and seek to regulate, especially the third-party opportunists.

This story was sourced from the Federal Office Of The MBO, CNBC, Mayor/Brown LLC