Earned Wage Access (EWA), also known as on-demand pay, arrived on the scene in 2015, much to the relief of millions of hourly workers who were living paycheck to paycheck. What did this mean for them? It meant a much-needed reprieve from overdraft fees, late payments, and being at the mercy of predatory payday lenders. Employees whose employers offer the service can access all or a portion of their pay prior to payday in order to pay bills and meet financial obligations that come up between paychecks.
On July 18, 2024, the Consumer Finance Protection Bureau (CFPB) proposed a landmark interpretive rule that will likely change the landscape of employer-integrated EWA and on-demand pay. This interpretive rule demonstrates that the CFPB favors fee-free models for employer-integrated EWA products — and new regulations could come faster than anyone expects because the industry has matured rapidly in the last few years.
Rapid Expansion
Over the past decade, hundreds of employers began to offer the service to their employees, making earned wage access a mainstream HR benefit for hourly workers.
Since then, the market has continued to accelerate. Growth in the number of transactions that EWA providers processed grew by over 90% from 2021 to 2022, with more than 7 million workers accessing about $22 billion in on-demand payments in 2022. That’s phenomenal growth, and the number of workers using earned wage products continues to increase each month.
A landscape that began with a handful of forward-thinking employers working with fintech startups quickly grew to dozens of providers in the U.S. alone, as payroll providers, card providers, neobanks, and new startups all entered the market, each with their own flavor of how to make the magic happen.
Complaints About Fees
According to the Associated Press, the typical user earns less than $50,000 a year, and some EWA programs charge hefty fees or “tips” for access to earned wages. These types of programs have been called “payday loans with a new tech wrapper.” Some on-demand pay providers charge monthly subscription fees, while most charge fees for instant access to funds. According to the Center for Responsible Learning, the average APR for an advance repaid in 7 to 14 days was 367%, nearly as much as the APR on a typical payday loan (400%).
Payday loans, late fees, and overdrafts were supposed to become a thing of the past because employees had access to their money, but for many employees, EWA has turned into another vehicle to drive a continuous cycle of debt, which has prompted outcries for greater regulation.
Regulation Was Inevitable
With the rise in the number of workers using this benefit and the number of providers offering it, using different models and types of payments for the service, it was inevitable that EWA regulation would need to be addressed. Regulators need to examine on-demand pay with an eye toward ensuring consumers are protected at all costs. It’s the regulators’ job, after all, to safeguard consumers and their money, a task that falls under the purview of the Consumer Finance Protection Bureau (CFPB).
What’s the CFPB Saying?
The CFPB’s July 18th landmark interpretive rule proposal will likely change the administration of employer-integrated earned wage access (EWA) and on-demand pay. This proposal states that paycheck advance products made accessible to employees by vendors and providers are loans, and this creates significant implications for both employers and employees.
It appears that the CFPB strongly prefers a “no-fee” model for earned wage access, meaning one in which employees pay nothing to access their earned pay.
This proposal requires EWA providers and employers to consider the following questions, for which there are no immediate answers at this time.
- Will existing EWA offerings align with the new CFPB interpretive rule?
- Will EWA providers need to adapt to be fully compliant with the Truth in Lending Act (TILA) as interpreted by the CFPB?
- When might this proposed rule become effective?
- What implications does the CFPB’s proposal have on the states?
- If there is a potential “industry lawsuit” against the CFPB, how will that affect rule implementation?
- Can providers consider any changes or adjustments to their EWA offerings to reduce fees that might be considered finance charges?
Zero-Fee EWA & What Comes Next
The CFPB’s proposal could signify a significant shift in the employer EWA benefits space due to its concern that employees pay a fee for early access to their earned pay. Whether or not it actually becomes law, it’s clear that zero fees for EWA are in our not-too-distant future.
Employers who offer on-demand pay are already planning for this transition to zero fees. Providers have begun the process of thinking more critically about how to adapt to a no-fee environment.
While Earned Wage Access will continue to garner the attention of regulators, one thing is clear: it appears to be here to stay. The rapid growth in the industry and reliance upon the benefit of everyday workers to meet their needs make it a strategic tool for workers when they find themselves in a pinch for cash.
As market participants brace for the coming change, there is a broad consensus that earned wage access, provided in a compliant and consumer-centric manner, can be a transformative tool for hourly workers.
