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Regulators Take an Interest in Earned Wage Access

The last couple of months have seen movement by regulators at both the state and federal level regarding earned wage access

February 4, 2021 By Peter Renton 1 Comment

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.

Earned Wage Access Should Be Available to All Employees

The new niche industry of earned wage access has the potential to benefit millions of employees so long as it can play well with regulators

August 22, 2019 By Peter Renton 4 Comments

Like many areas of fintech, earned wage access (sometimes called earned income access or payroll advances) wasn’t really a thing until recently. Now, it is a thriving niche industry with companies such as PayActiv, Earnin, Even, DailyPay, HoneyBee and others providing offerings in this space.

In a sign that earned wage access is gaining mainstream approval Walmart signed a deal with PayActiv and Even back in 2017 to allow its workers early access to their pay. Currently over 300,000 Walmart associates take advantage of this service.

Before we go any further, I should define 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. Typically, workers will pay a small fee for this service. Earned wage access is not credit and thus it has very little in common with traditional loan products.

Dan Quan, former head of innovation at the CFPB penned an excellent article on this topic in American Banker a couple of months ago. Here is a quote from that article (he calls it Earned Income Access – or EIA): [Read more…]

Moving Beyond Financial Literacy to Financial Empowerment

May 1, 2019 By Peter Renton 1 Comment

Financial Literacy Month ended yesterday (yes, April is officially Financial Literacy Month) and I have been thinking a lot about financial literacy and its link to financial health. Some of my thinking was prompted by this recent column in American Banker by Jennifer Tescher, the CEO of the Center for Financial Services Innovation (CFSI). Jen is one of the most knowledgeable and influential people when it comes to financial health and someone I always pay attention to (you can listen to my interview with her last year here).

I have also just finished listening to the sessions on the Financial Health and Inclusion track at LendIt Fintech USA 2019 that happened in San Francisco just a few weeks ago. I helped put this track together and I was delighted not just by the quality of the speakers we attracted but also by the interest from the attendees. Pretty much every session on this track was packed which was not the case last year or the year before that. The fintech community is becoming more engaged with the topic of financial health and I couldn’t be more pleased about that.

But back to the American Banker op-ed. Jen made the case that financial literacy programs are not working. The reality is teaching people about finance, the goal of Financial Literacy Month, has not made much of an impact on financial health. It does not lead to lasting knowledge gain and it rarely leads to changes in behavior. Here is what she says is needed instead:

What financially vulnerable people need is access to high-quality products and experiences built to help them succeed by people who truly understand their financial situations and foibles.

I want to reiterate this one point. They need “high quality products and experiences built to help them succeed”. This is it in a nutshell. The good news is that there is a new group of entrepreneurs creating high quality products that could really make a difference here.

This brings me back to the LendIt Financial Health track. One session that I thought was super interesting was around employer based financing. Many of the most financially vulnerable people have jobs but often need to take out short term loans to make it through to the next payday. Far better they get this financing through their employer than via a payday lender. There are several companies in this space doing great work in creating high quality products: Even, PayActiv, TrueConnect and HoneyBee all offer options to employers that help their employees who need access to quick financing. Even has a groundbreaking deal with Walmart that has resulted in 300,000 employees using their pay advance app.

These programs all rely on employers signing up for one of these offering. While I think they will become ubiquitous over time we are still a long from that happening. So, people who are struggling need more options and many more companies are tackling financial health issues in different ways.

Another great session at LendIt was focused around products that have financial health benefits built in to their design. Each of these companies are approaching the problem differently but some of them have significant traction and are really making a difference. MoneyLion has four million users and they are focused on ending financial stress for all Americans by taking a holistic approach and being proactive in providing help. Dave helps the 30 million people who are hit by overdraft fees each year by advancing $75 from their next paycheck. Tally is a fully automated debt manager to help consumers get out of credit card debt. Learnlux is a digital financial wellness platform that helps build digital financial plans for the mass market, they are currently offering this through employers.

While we had other great sessions at LendIt on financial health I don’t want this to become a promotional piece. Of course, this is just the tip of the iceberg. There are many other fintech companies attacking the challenge of financial health. One area that is rarely focused on is the income side of the equation. Steady is a fintech company that helps people maximize their income by providing sophisticated tools for finding a second job. Dave has a similar offering called Side Hustle.

The big challenge for the financially vulnerable is that it is expensive to be poor and getting more so. Many of the aforementioned companies are focused on taking away some of these costs. But more needs to be done. Eventually, we need to get to a point where these products become invisible to consumers so the cost of being poor is vastly reduced without these consumers having to be proactive. That is the way well designed products should work, it gives people a sense of control and financial empowerment.

We live in a country where the majority of people experience financial stress on a regular basis. I think the tide has turned and fintech is starting to take this problem seriously. And this gives me reason to be optimistic about the future of financial health.