Earned wage access and advances on pay are very different products

A multibillion-dollar Earned Wage Access (EWA) industry has developed over the past decade to enable workers to obtain, on demand, pay they have already earned. In parallel, a handful of personal finance fintechs have created what they consider to be a similar offering, a direct-to-consumer (D2C) advance product, delivering advances based on checking account data, marketed directly to end users. Now, regulators, policymakers and industry and consumer advocates are debating whether these arrangements constitute "credit" under state and federal consumer protection laws.

If we really want to protect consumers, we need to understand each product's impact on consumers' financial health. That requires asking a quite different set of questions — and thinking beyond traditional regulatory frameworks that have, in some cases, been eclipsed by technological innovation.

If families had sufficient income to cover their regular expenses and savings to fall back on in the event of an unexpected expense, biweekly pay — which is the most common mode of payment — could be a useful budgeting tool to help families manage their expenses.

The reality, of course, is far from this rosy picture.

According to the Financial Health Pulse 2023 U.S. Trends Report, 17% of individuals — and over a third of those with household incomes under $30,000 — are financially vulnerable, meaning that they are struggling with most or all aspects of their financial lives. Of those households, 60% report that their household expenses exceed their income, 69% report that they have more debt than is manageable and only 9% have three or more months of liquid savings.

What's more, over the last 40 years, real wages of low-income workers have actually declined. Following the pandemic, facing worker shortages and renewed worker power, many of the nation's largest employers did raise hourly wages. But as the economy cools, some have also begun to lower them again.

It is not surprising, then, that many families cannot consistently make it to the next paycheck without a cash infusion. Indeed, the FinHealth Spend Report 2023 found that, in workplaces in which EWA is offered, upwards of 40% of workers turn to it for liquidity. And, according to a recent GAO report, these users are overwhelmingly low-wage workers.

EWA products and D2C advances are both designed to provide short-term liquidity to consumers, but they differ in some fundamental respects.

EWA providers leverage technology to access payroll data, calculate an employee's earnings since the start of a pay period and provide the employee with access to some, or in some cases all, of those already-earned wages, with a corresponding reduction in the amount of the employee's next paycheck.

In contrast, fintechs that offer D2C advances analyze transactional data from consumer checking accounts to forecast a consumer's income over a pay period and determine the advance amount subject to a stated maximum. Repayment occurs through an electronic debit of the consumer's bank account, timed to coincide with the expected date of deposit of her next paycheck.

There are also cost differences between the two products. Both EWA and D2C advance providers generally provide no-cost access to those willing to wait a day or two to receive funds through the ACH network. But for consumers seeking immediate access — which is, after all, the rationale for these products — both EWA and D2C advance providers generally charge an "express delivery" fee.

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For EWA, the fee is typically in the $3 range — substantially above what various payment networks charge providers for real-time payments — although providers offer a reduced fee, or will even waive the fee, if the employee elects to receive immediate access via a provider-sponsored prepaid card. Mega-employers, most notably Amazon and Walmart, have elected to enable their employees to access earned wages in real-time at no cost.

Providers of D2C advances generally charge even more for immediate access — as high as $8.99 or even higher depending on the size of the advance and whether the provider also charges a monthly subscription fee. Several of the D2C providers also solicit tips — sometimes aggressively so — which, while optional, may feel more or less obligatory to the consumers.

Beyond cost, the most important question we should ask in deciding whether and how to regulate these new products is this: What impact do they have on consumer financial health?

The Financial Health Network's qualitative research, coupled with survey research conducted by others, provides evidence that consumers experience some benefit in being able to obtain liquidity between paydays. The consumers we spoke with for this research explained that they turned to EWA or D2C advances to deal with emergency situations or unexpected expenses such as car and home repairs, and that these products gave them more breathing room in managing their day-to-day spending. They also viewed these products as superior to their other options for meeting liquidity needs.

At the same time, we found — as have other researchers — that, as is true of other short-term liquidity products, consumers who use EWA or D2C advances tend to do so on a recurring basis for extended periods of time. While users often point to an unexpected expense or a cash shortfall as the reason for taking the first advance, consistent shortfalls and/or the challenge of managing with the resulting smaller paycheck leads most of them to take advances regularly.

While both EWA and D2C advance users pointed to similar benefits of using them, the distinction between the two products looms large when assessing financial health outcomes.

EWA products that access reliable evidence of an employee's earnings from payroll records and allow the employee to access at least a portion of earned but not yet paid wages, with recoupment limited to a corresponding reduction in the employee's next paycheck, appear to pose minimal risk as they are currently offered.

D2C advances, in contrast, raise larger concerns. The size of D2C advances are based on a forecast of a consumer's future income, and the advances are recouped from a debit of the consumer's bank account when the next paycheck is expected to be received. If the provider overestimates the consumer's income, the resulting repayment may create a hole in the consumer's budget; if the provider mistimes the debit from the consumer's bank account, the consumer may incur overdraft or nonsufficient funds (NSF) fees. (Many providers agree to reimburse such fees if assessed on the provider's debit, but not if the debit causes an overdraft or NSF fee on some other transaction.)

Further, to the extent providers of D2C advances charge membership fees, two recent FTC enforcement actions highlight concerns regarding consumers' understanding of the benefits available to them and the costs of the advances. And, to the extent that providers' business models rely on soliciting tips, our recent research suggests consumers are confused by tip requests and are concerned about high default tip settings. For these reasons, D2C advances warrant more intensive regulatory attention than EWA products.

Ultimately, it's the outcomes for consumers that matter most. Rather than seeking to force-fit these new types of products into old regulatory paradigms, regulators and legislators should focus on crafting rules that are attuned to the differences between the products in order to ensure that they are designed to advance consumers' financial health.