Why one expert called earned wage access ‘payday lending on steroids’

Big companies such as Dollar Tree, Kroger, Hilton, McDonald’s, Target, Uber and Walmart now also offer employees early access to paychecks.

Companies in the B2B market often tout themselves as a win-win for employers and for their employees who use the services.

High worker demand for such programs makes them a cost-effective way for businesses to retain and recruit employees, according to consultants and academics. Employees can cover any short-term expenses that might arise before payday — maybe an unexpected car repair or medical bill — perhaps for lower fees than they would incur using credit cards, bank overdrafts or other ways to access quick cash.

Fees can add up, particularly for users who frequently access their paychecks early, experts said.

The average user did so nine times a quarter, according to California regulators.

Additionally, 40% of people with employer-sponsored EWA access use the service at least once a week, and more than 75% used money for regular bills instead of emergency expenses, according to the Harvard paper. Liquidity issues most often affect low-income households, which have less savings and less access to traditional credit, it said.

The typical user earns less than $50,000 a year, according to the GAO.

High fees and user dependency “are kind of the darker side of the business,” said Peterson of Datos Insights.

However, it’s “the exception, certainly not the rule,” he added.

Consumer risks are generally greater in the direct-to-consumer rather than the business-to-business market, according to both Peterson and Harvard’s Lux.

A chief concern is that consumers can use multiple apps concurrently and take on more debt than they can handle, according to Datos Insights. Among direct-to-consumer app users, 8% had five or more such apps currently on their phone, according to the Harvard paper.

Consumers who overextend themselves “can end up in the black hole of payday lending,” Peterson said.

“You can’t get out of it,” he said.

Since direct-to-consumer companies generally automatically debit user bank accounts, consumers without sufficient funds may also pay unexpected overdraft fees, the GAO said.

Unlike direct-to-consumer apps, the B2B model allows “full transparency” into how much employees have worked and earned, said Stacy Greiner, COO of DailyPay, which has more than 1,000 employer clients.

A MoneyLion spokesperson said direct-to-consumer providers help gig and freelance workers, small business employees, union and public-sector workers and others “smooth out cash flows between pay cycles to gain better control over their finances.”

An EarnIn spokesperson called EWA a “no risk option” that avoids a negative impact to credit scores since it doesn’t require credit checks or credit reporting.

Representatives for Brigit and Dave declined to comment.

The earned wage access industry doesn’t think it’s fair to use APRs and interest rate proxies to describe their fee structures.

“It is inaccurate to compare an optional $1 or $2 fee — whether that’s a voluntary tip or fee to expedite a transaction — to mandatory fees and compounding interest rates charged by other short-term lenders,” said Miranda Margowsky, a spokeswoman for the Financial Technology Association, a trade group.

And while companies monetize their businesses in various ways, they always offer a free option to consumers, Margowsky said.

Branch, a B2B company, for example, makes most of its money from an optional debit card. The card is free for consumers but levies a transaction, or “interchange,” fee on businesses when consumers make purchases, said CEO Atif Siddiqi.

In addition, workers may pay a $2.99 to $4.99 fee if they opt to more quickly transfer cash to a debit card from a digital wallet that stores their early accessed wages, Siddiqi said. They may also pay to access cash from out-of-network ATMs.

Similarly, Payactiv, another B2B firm, makes a “significant portion” of revenue from interchange fees, said CEO Safwan Shah.

Users who opt not to use Payactiv’s debit card pay a $1.99 or $2.99 flat fee per transaction. Since the worker is tapping wages they’ve technically already earned, such a transaction fee is akin to an ATM fee, Shah said.

“We feel we are closer to an ATM. You deposited money in the bank and are taking it out,” Shah said.

Broadly, the EWA industry doesn’t publicly share the percentage of paid transactions relative to those that are free — “but I suspect it’s a lot” that are incurring a charge, said Harvard’s Chung.

“If someone signs up in an emergency, they might not be able to wait and would want to get the money instantly,” she said. “That would typically cost a fee.”

The industry is also loath to refer to early paycheck access as a “loan” or “credit.”

“It’s a common misconception,” said Phil Goldfeder, CEO of the American Fintech Council, a trade group. “EWA is not a loan or an advance. It’s access to the money you’ve already earned,” not future earnings, he said.

There also aren’t credit checks, accrued interest, late fees or debt collection associated with such programs, for example, Goldfeder said.

However, some consumer advocates and state regulators have the opposite view.

While such a distinction may seem like unimportant minutiae, the label could have a significant consumer impact. For example, being regulated as a loan would mean being subject to caps on interest rates and more fee transparency via disclosure of how consumer costs translate into an annual interest rate, or APR, experts said.

“The idea that these advances are not loans is a legal fiction,” said Burks, of the Center for Responsible Lending.

“[These] are agreements to receive money now and pay it back in the future, either without — or much more frequently with — an additional fee paid to the lender,” she added. “In every other context, we call such an agreement a loan, and fintech cash advances are no different.”