I am a big fan of earned wage access. When I last wrote about it in 2019, I made the observation that regulators were starting to get involved. We have seen renewed interest from both federal and state regulators on this industry in recent weeks.
Here is my definition of earned wage access. It is a mechanism for employees to get access to wages they have already earned. It breaks up the weekly, biweekly, or monthly pay cycles so workers can receive money that is rightfully theirs before payday. So, in this way it is not a loan, it is simply taking possession of money that is owed by an employer. It also a way for workers to avoid having to go to payday lenders and pay the exorbitant financing costs.
The entire payroll system was created at a time when calculating pay and withholding taxes was a complicated and manual task. Today, even tiny companies have sophisticated payroll systems where all the work is done in an automated way. The only reason we are not paid every day is because we have always done payroll on a delayed cycle. But it would be a relatively trivial change for payroll systems to actually pay people every day. This will likely happen one day but for now we have earned wage access.
Every worker builds up a receivable with their employer as they work towards pay day. It makes logical sense that they should be able to access a portion of this receivable whenever they want. Hence, the earned wage access industry with companies like PayActiv, Earnin, Even, Brigit, DailyPay, Branch, Instant Financial and FlexWage. Several of these companies are now quite large, with millions of customers, and they have started engaging with regulators.
The CFPB Gets Involved
Back in November the CFPB issued an advisory opinion on earned wage access that stated it is not credit so long as a program meets certain criteria. Some of this criteria is the provider had to recover the advance through a payroll deduction and it needed to be offered as an employee benefit.
Then in December the CFPB issued a compliance assistance sandbox (CAS) approval order to PayActiv regarding its earned wage access product. Under the approval PayActiv can offer its product for two years with regulatory certainty as long as it complies with the terms of the approval.
I talked with PayActiv’s Chief Legal Officer, Dave Reidy, soon after the CFPB approval. He said that PayActiv reached out to the CFPB proactively last January to ask them to look at their earned wage access model. He said that their mantra has been “recognize and regulate”. They want regulators to recognize exactly what they are doing and then to regulate them. The sandbox is the first step in that process.
Earned Wage Access Moves on to the States
In California last week the new finance regulator, called California Department of Financial Protection and Innovation (DFPI), replacing the old Department of Business Oversight, signed a deal with five earned wage access companies based in California – Earnin, Even, Brigit, Payactiv, and Branch.
The deal requires the companies to deliver quarterly reports to the DFPI starting in April and abide by certain limits on their pricing. This is a voluntary agreement but it does provide these companies, all with quite different business models, some regulatory certainty as they move forward. There may be a regulatory requirement at some point but right now the DFPI wants to gather data on how these businesses are impacting consumers.
Dan Quan, former head of Project Catalyst at the CFPB, shared this on LinkedIn about this decision by California:
This is a big deal. Kudos to Manny Alvarez [head of DFPI] for taking this bold step to provide much needed regulatory certainty for the burgeoning earned wage access (EWA) industry. California is setting a great example of fostering innovation and protecting consumers. Hardworking consumers are already voting with their feet to sign up for EWA services. Now is the time for policymakers, consumer advocates, and the industry to heed their voice and work collaboratively to ensure safe and low-cost EWA services are available to everyone living paycheck to paycheck.
There are primarily two categories of earned wage access companies, those that deal directly with consumers and those that provide their services through employers. And within each category there are different approaches with some companies charging nothing but relying on tips while others charge a fee. The CFPB has said is prefers the PayActiv model which is employer-based whereas California is keeping all options open.
I hope that there is a national regulatory framework put in place soon. Millions of consumers rely on earned wage access on a regular basis. If it was legislated out of existence it would have severe negative effects on people who are already struggling to get by.
The California initiative provides hope that a sensible approach can be found and this useful product will become a fully regulated part of the financial landscape.