[US] Flexible Wage Access Bar Would Be Raised by Watchdog Agency

Analysis by Michael Baer 

A rapidly growing pay practice in the United States, earned wage access, could be significantly altered under the Consumer Financial Protection Bureau’s (CFPB) proposed interpretive rule that generally would group the programs as consumer loans.   

Within the past decade, the use of earned wage access (EWA), also called on-demand pay or daily pay, has grown exponentially; 90% from 2021 to 2022 alone, according to the CFPB.  The voluntary programs are set up by employers with third-party vendors to provide at least some already-earned pay to workers on-demand before payday—if they want it that way. 

In the July 18 proposal, after years of a relatively hands-off approach to EWA programs, the Bureau announced it intends to characterize many of the arrangements as covered by the Truth in Lending Act.  

This would mandate that providers of these services follow criteria for providing a consumer loan when allowing early access to wages already earned.  

Contrast this position with the five states that have passed laws defining EWA as different from a loan, allowing providers to avoid the costlier, more burdensome requirements associated with consumer loan practices like payday loans. (Without passing any law, California and Connecticut have determined most EWA programs are loans).  

Two Schools of Thought on EWA Status 

As the technological ability to provide money earned to employees before the scheduled payday developed in the last decade, proponents of EWA promoted the benefits.  

EWA advocates say it is a new financial tool and not a loan because it is based on the employee’s accrued earnings, money that already is the employee’s but simply has not been disbursed.  

Most businesses facilitating EWA work with employers to collect real-time data on earnings so they can present to employees amounts that could be made available. Like popular personal money transfer applications, many providers charge a fee for near-instant transfers, but, if the employee can wait a business day or so, or use a preferred debit card, there often is no transaction charge.  

Popularity for EWA rose because users saw an increased ability to pay bills or needed expenses that arise unexpectedly before a scheduled payday, allowing them to avoid using predatory short-term payday loans that can have interest rates exceeding 500%, exorbitant bank fees for insufficient funds, and running up credit card debt.  

Several research studies confirm that a large majority of users who previously relied on costly payday loans no longer had to; those suffering bank overdraft charges and other fees saw them reduced or eliminated. Many programs tout micro-saving opportunities and provide personal finance resources designed to move workers out of a cycle of debt. 

Advocates of EWA also point to the increasing popularity of the programs among the growing digital-savvy work population. Since payments can be made almost instantly, sometimes with small fees, workers ask why pay cannot be accessed in the same manner.   

Employees voluntarily signing up do not experience the hassle of applying for a loan product. The programs have no recourse in collecting for mistakes or overpayments, and will not report users to consumer credit agencies, unlike traditional consumer loans. 

Consumer advocates from the start had serious reservations over whether EWA is a true benefit for employees, however. 

Primarily, there is the claim that since the technology allowed employees to receive money (albeit, based on their earned wages) prior to employers sending out pay on payday, this was not access to wages, but simply a unique way of providing loans to cover individuals until payday.  

According to this school of thought, EWA is a consumer loan, and the CFPB, in its proposed interpretive rule, agreed, rejecting outright the claim that EWA is an innovative financial tool that is different from a loan. 

Director Chopra said the proposal “would not impose any new requirements,” but simply characterizing these arrangements as loans creates additional burdens on EWA providers. 

Providers currently disclose fee amounts in dollars. Should the CFPB proposal get finalized, it would mean more burden in providing conversions to interest when presenting the costs under the law.   

And the interest rate would wildly vary with each transaction, depending upon how much an employee accessed, the fee amount, and how many days to payday the access occurred. An amount accessed five days from payday would have an interest rate less than the same amount accessed two days before payday.   

Several groups already said they could demonstrate that the CFPB rule would hurt employees benefitting from the existing arrangements. Others contend that the CFPB needs to do the difficult work of regulating this as a new consumer financial product, and not try to shoehorn it into the dated existing loan regulatory regime.  

Comments on the proposal are due to the CFPB on August 30.  

Author: Michael Baer

Michael Baer is president of Baer Unlimited, an independent research, analysis, and communications provider that helps Payroll modernize operations, stay compliant, and improve the use and security of their data. For more on these issues discussed above, contact him directly at mike.baer@baerunlimited.com, or book Michael as a mentor through the GPA Mentor page. 

Analysis by Michael Baer 

A rapidly growing pay practice in the United States, earned wage access, could be significantly altered under the Consumer Financial Protection Bureau’s (CFPB) proposed interpretive rule that generally would group the programs as consumer loans.   

Within the past decade, the use of earned wage access (EWA), also called on-demand pay or daily pay, has grown exponentially; 90% from 2021 to 2022 alone, according to the CFPB.  The voluntary programs are set up by employers with third-party vendors to provide at least some already-earned pay to workers on-demand before payday—if they want it that way. 

In the July 18 proposal, after years of a relatively hands-off approach to EWA programs, the Bureau announced it intends to characterize many of the arrangements as covered by the Truth in Lending Act.  

This would mandate that providers of these services follow criteria for providing a consumer loan when allowing early access to wages already earned.  

Contrast this position with the five states that have passed laws defining EWA as different from a loan, allowing providers to avoid the costlier, more burdensome requirements associated with consumer loan practices like payday loans. (Without passing any law, California and Connecticut have determined most EWA programs are loans).  

Two Schools of Thought on EWA Status 

As the technological ability to provide money earned to employees before the scheduled payday developed in the last decade, proponents of EWA promoted the benefits.  

EWA advocates say it is a new financial tool and not a loan because it is based on the employee’s accrued earnings, money that already is the employee’s but simply has not been disbursed.  

Most businesses facilitating EWA work with employers to collect real-time data on earnings so they can present to employees amounts that could be made available. Like popular personal money transfer applications, many providers charge a fee for near-instant transfers, but, if the employee can wait a business day or so, or use a preferred debit card, there often is no transaction charge.  

Popularity for EWA rose because users saw an increased ability to pay bills or needed expenses that arise unexpectedly before a scheduled payday, allowing them to avoid using predatory short-term payday loans that can have interest rates exceeding 500%, exorbitant bank fees for insufficient funds, and running up credit card debt.  

Several research studies confirm that a large majority of users who previously relied on costly payday loans no longer had to; those suffering bank overdraft charges and other fees saw them reduced or eliminated. Many programs tout micro-saving opportunities and provide personal finance resources designed to move workers out of a cycle of debt. 

Advocates of EWA also point to the increasing popularity of the programs among the growing digital-savvy work population. Since payments can be made almost instantly, sometimes with small fees, workers ask why pay cannot be accessed in the same manner.   

Employees voluntarily signing up do not experience the hassle of applying for a loan product. The programs have no recourse in collecting for mistakes or overpayments, and will not report users to consumer credit agencies, unlike traditional consumer loans. 

Consumer advocates from the start had serious reservations over whether EWA is a true benefit for employees, however. 

Primarily, there is the claim that since the technology allowed employees to receive money (albeit, based on their earned wages) prior to employers sending out pay on payday, this was not access to wages, but simply a unique way of providing loans to cover individuals until payday.  

According to this school of thought, EWA is a consumer loan, and the CFPB, in its proposed interpretive rule, agreed, rejecting outright the claim that EWA is an innovative financial tool that is different from a loan. 

Director Chopra said the proposal “would not impose any new requirements,” but simply characterizing these arrangements as loans creates additional burdens on EWA providers. 

Providers currently disclose fee amounts in dollars. Should the CFPB proposal get finalized, it would mean more burden in providing conversions to interest when presenting the costs under the law.   

And the interest rate would wildly vary with each transaction, depending upon how much an employee accessed, the fee amount, and how many days to payday the access occurred. An amount accessed five days from payday would have an interest rate less than the same amount accessed two days before payday.   

Several groups already said they could demonstrate that the CFPB rule would hurt employees benefitting from the existing arrangements. Others contend that the CFPB needs to do the difficult work of regulating this as a new consumer financial product, and not try to shoehorn it into the dated existing loan regulatory regime.  

Comments on the proposal are due to the CFPB on August 30.  

Author: Michael Baer

Michael Baer is president of Baer Unlimited, an independent research, analysis, and communications provider that helps Payroll modernize operations, stay compliant, and improve the use and security of their data. For more on these issues discussed above, contact him directly at mike.baer@baerunlimited.com, or book Michael as a mentor through the GPA Mentor page.