On-demand streaming, delivery, and, next up, on-demand compensation. The biweekly paycheck is on the cusp of disruption, although expansion plans have hit a snag among skeptical financial regulators.
Called earned wage access (EWA), these programs allow employees to collect their pay at the end of each workday. Major corporations such as Walmart and Amazon have already started offering in-house EWA programs for their employees, and the Consumer Financial Protection Bureau announced last month that it would be issuing federal guidance on EWA soon. Increasing momentum around EWA is an encouraging sign for its proponents, who say that these programs could help scores of Americans who run out of money before the end of the standard two-week pay period in covering daily expenses such as food, gas, and utility bills.
But to hit the U.S. mass market, EWA advocates first have to convince regulators that they’re different from payday lenders—and that EWA is a tool to help Americans get out of debt, not the other way around.
EWA and payday loans do exhibit differences. Many EWA providers don’t charge interest to employees who collect pay early from an employer, and instead make money from contracts with businesses, similar to the way services such as ADP operate. But one factor working against widespread adoption is that some companies that brand themselves as EWA providers, such as MoneyLion and EarnIn, charge optional consumer fees for the service. These fees have drawn criticism and comparisons to payday lenders.
“We look at these products as a payday loan with a fintech veneer,” said Andrew Kushner, senior policy counsel for the Center for Responsible Lending, in an interview with CBS 8 San Diego.
Yet EWA has been rolled out successfully in Europe and the U.K.—97% of participating U.K. firms said that EWA programs improved their employees’ sense of financial security.
On this side of the pond, however, it’s been a tougher sell. Some 76% of American employees say they want to be able to collect their wages daily, but consumer-lending regulations are working against EWA programs, even if they don’t charge interest.
Short-term consumer lending doesn’t have the best reputation: High-interest payday loans burst onto the scene in the 1990s, taking advantage of a regulatory loophole to balloon into a $9 billion industry that’s been shown to send users, who trend low-income, into permanent debt spirals. The CFPB proposed federal-level rules in 2017, but states have taken on the majority of the regulatory responsibility, which has created a patchwork of state-level laws that make it complicated for EWA providers to get nationwide approval.
But that could be set to change, as EWA payroll providers call for federal-level regulations that would allow for widespread adoption of what they call a “no-brainer.”
“EWA is like a vaccine for financial wellness,” said CloudPay vice president Borja Perez in an interview with Fortune. “We’re just trying to empower employees to really manage the disease [of] financial stress.”
As household debt levels reach record highs, zero-interest EWA programs could provide relief for the more than 60% of Americans who live paycheck-to-paycheck. EWA gives employees a way to access compensation as soon as they’ve earned it, rather than having to wait multiple weeks for payday or shoulder interest on short-term loans or credit card bills.
Many payroll platforms that support EWA, such as CloudPay, work by giving employees the option to redeem payroll deposits at the end of every workday. Employees with access to these types of plans don’t pay any fees or interest to use the service. More than 70% of Americans get paid every two weeks or weekly, according to BLS data. EWA advocates argue that getting paid daily isn’t just a useful benefit, it should be an employee’s right—and it isn’t fair that workers should have to wait weeks to be compensated for their work.
“This isn’t a short-term loan or anything: This is money you’ve already earned. So why don’t we just make this available to your pocket?” said Perez. “The money that you have already earned? Let’s make it available to you. It’s as simple as that.”
Some third-party EWA apps do charge fees, often for instant withdrawals that users can avoid if they’re willing to wait a few days for transactions to post. MoneyLion charges instant transfer fees ranging from $1.99 up to a maximum of $9 depending on the size of the withdrawal, and EarnIn charges between $1.99 and $3.99.
Multiple states have started to take legislative aim at EWA in the past few months. California lawmakers are mulling over a proposal to require EWA providers to register with the state and cap their fees, and Connecticut instituted a similar proposal last September. But Montana’s attorney general declared that EWA should not fall under lending regulations last month, and Nevada and Missouri have similarly distinguished between EWA and loans. This state-to-state regulatory inconsistency has left EWA supporters calling for the federal government to step in.
“[EWA] should be regulated at the federal level,” said Perez. “Payday loans and things like that … are charging the employees crazy interest rates. We are not under that category. We are not loaning any money. This [regulatory environment] is creating competitive advantages from state to state because in one state, employees will have the luxury of this benefit, but in another, they won’t. This is challenging. We’re not finding this in our other [international markets.]”
CloudPay operates in 40 countries, and its global usage history data suggests one of the biggest fears about EWA—that workers will cash out their entire paycheck every day, creating cash flow problems for their employers—is overblown. CloudPay says that the average EWA user only withdraws about 5% of their base salary before their regularly scheduled biweekly or monthly payday.
And most withdrawals aren’t for round numbers, but rather for specific values, down to the cent—suggesting that employees are using EWA to pay off bills and avoid paying interest on other debt, as opposed to going on spending sprees. Most CloudPay users withdraw between $85 and $135 a month, and employees who earn less than $30,000 a year use EWA the most, per the company’s internal user data.
“Think about Uber—in the United States, it became very popular, but they tried to go to Europe and faced a lot of legislative challenges. But now, guess what? You have Uber in every single city in Europe,” said Perez. “For [EWA], it’s kind of like the other way around … It’s a no-brainer.”
Source link
