Millions of Americans can now collect some of their earnings before payday. But whether they should do so or avoid what could become a financial sinkhole increasingly depends on where they live and work.
Nevada and Missouri this summer adopted laws to protect workers from getting gouged with fees when tapping into money they’ve earned but not yet been paid, commonly called earned-wage access.
But their approach conflicts with regulations in Connecticut—and rules in motion in California—to designate these pre-payday payments as “loans,” with all the payday-lending baggage that classification can carry.
California wants its model to set the national agenda, but eight more states are debating their own regulations in the absence of substantial federal rules, and most of those would follow the Nevada and Missouri non-loan approach.
The growing hodgepodge of state guidance complicates the path forward for gig workers, payroll companies, and some of the nation’s biggest employers, including
“If that starts varying state by state, the concept of uniform, meaningful disclosure becomes less uniform and perhaps less meaningful,” said Catherine Brennan, a partner at Hudson Cook, LLP who focuses on financial technology.
What is Earned-Wage Access?
Earned-wage access products are touted by backers as a way for employees—usually hourly workers—to smooth out pay cycles and avoid costly credit such as payday loans. Popularized in the past decade but jump-started during Covid, they come in essentially two forms: company-offered products, and direct-to-consumer apps.
Some company-offered programs like DailyPay Inc. and Payactiv Inc. partner directly with employers. Those companies often cover any costs employees incur to get access to their money or have the payment expedited to their bank accounts.
“If you’re someone who works paycheck to paycheck and has trouble making ends meet, it’s an incredibly useful product,” said Molly Jones, Payactiv’s vice president for government affairs.
But even some employer-linked programs leave the employees responsible for those extra costs, as do direct-to-consumer apps like EarnIn and Dave Inc., which charge fees and ask for tips from customers.
Both the employer-based models and direct-to-consumer earned-wage access products are nonrecourse, meaning that a company can’t go after other assets if a customer doesn’t repay the cash advance. And there are no late fees or hits to a credit score for getting an advance.
But earned-wage access companies do charge fees for getting advances immediately, rather than waiting for up to three days for the money to clear through the typical payments cycle. There are also high interest rates that can add up, and occasionally subscription or other fees baked in.
Consumer advocates also raise concerns that people can get stuck in a debt cycle where repeatedly relying on earned-wage access products leads to future uses to cover regular bill payments.
‘Garden Variety Payday Loan’
Some workers love the payroll flexibility.
“A hundred bucks here, a hundred bucks there. It really helps you survive until payday,” said Eric Hawn, an EarnIn user in Columbus, Ohio.
But some of the products can trap users in a cycle of debt, with small loans carrying average annual interest topping 330%, according to a 2021 study from the California Department of Financial Protection and Innovation.
“Frankly the direct-to-consumer model is just a garden variety payday loan,” said Andrew Kushner, senior policy counsel at the Center for Responsible Lending.
Melissa Burrola, a Minnesota resident, used the direct-to-consumer cash advance apps Dave and MoneyLion for a year but stopped a couple of months ago. Burrola said she always felt like she was “trapped in a hamster wheel” of borrowing and debt.
“Like myself, some folks don’t have other resources,” Burrola said. “But they should be careful. They don’t tell you the whole story when you’re applying. It’s very fast and underlying small print doesn’t explain things.”
Despite those concerns, earned-wage access products continue to grow in popularity. According to
Some of the nation’s biggest companies including Walmart, Amazon,
A 2021 report from the Financial Health Network found that the fee charged on an earned-wage access product was around 5% of the advance amount, lower than payday loans, and that 97% of users repaid their advances on time.
A March study from the Government Accountability Office found that many consumers were able to safely use earned-wage access products to avoid more expensive overdrafts and payday loans. But there was a risk of repeated usage of products, which the watchdog said can lead to users taking out one advance to cover the costs of a previous one, not to address other costs.
The GAO noted that people using employer-backed earned-wage access products took out advances 10 to 24 times per year on average, while users of one direct-to-consumer provider received advances up to 33 times per year.
State Regulations
Bills signed into law in Nevada in June and Missouri in July require state licensing for providers and ensure consumer protections including no late fees, nonrecourse products, no credit reporting, and no discrimination on consumers who don’t provide tips.
They also mandate a no-fee option for users and make clear tips are voluntary.
The bills largely followed model legislation crafted by the American Legislative Exchange Council, an organization made up of conservative legislators and business groups.
Along with the successful pushes for earned-wage access laws in Missouri and Nevada, lawmakers considered but didn’t pass similar bills in New York, Georgia, North Carolina, South Carolina, Texas, Mississippi, Virginia, and Vermont.
“Speaking on behalf of our [earned-wage access] members, they want the certainty of regulation,” said Penny Lee, president and CEO of the Financial Technology Association, a trade group representing several earned-wage access providers.
Most states are following the Nevada and Missouri models, according to Todd Baker, a senior fellow at Columbia University’s Richard Paul Richman Center for Business, Law, and Public Policy.
Those other bills either didn’t make it to a vote or were put on hold due to concerns from consumer advocates, as was the case in Vermont and Virginia.
In Vermont, lawmakers slowed down the process after consumer advocates, including the Center for Responsible Lending, raised concerns that earned-wage access could be a way to evade the state’s interest rate caps. Vermont caps interest at between 12% and 24% depending on the type of loan issued.
Legislators in Virginia also put a hold on earned-wage access bills after a concerted push from consumer advocates in the state, according to Jay Speer, the executive director of the Virginia Poverty Law Center.
To Speer, earned-wage access products, particularly direct-to-consumer products, are clearly a form of credit.
“Somebody gives you money, and you have to pay it back with a fee,” he said. “That’s a loan.”
Speer said that he and other Virginia consumer advocates are concerned that earned-wage access could be a way to evade the state’s Fairness in Lending Act, a 2020 law that restricted payday and auto title lending in the state.
Covered companies now offer loan products that are safer for consumers, Speer said.
The Virginia legislature is expected to take up earned-wage access legislation in its 2024 session. Speer is concerned that lobbyists will have a better chance at selling industry-sponsored Nevada and Missouri-styled bills this time around.
“We don’t need to go down the road of making exemptions for people just so they can bring their own crappy product online and make a profit doing it,” he said.
Early Pay as ‘Loans’
California’s financial regulator is considering treating earned-wage access as loans. The California Department of Financial Protection and Innovation’s proposal requires providers to register with the state and be subject to examinations when they introduce new financial products. It would allow fees equaling a 213% annual percentage rate for a 10-day loan, instead of the current 330% APR, and treat expediting and other fees and tips as part of a finance charge.
Treating earned-wage access products as loans would also subject them to mandatory disclosures under the federal Truth in Lending Act and give companies the option to charge fees, like late fees, that they don’t currently charge.
“They don’t engage in that conduct already. They’ve never engaged in that conduct,” Kushner said. The Center for Responsible Lending and other consumer groups support California’s approach.
Connecticut also passed an omnibus bill (Substitute SB1033) clarifying that earned-wage access products are loans subject to the state’s credit code.
California wants its approach to become the model nationwide, said DFPI Senior Deputy Commissioner Suzanne Martindale.
The agency is at the start of the regulatory process, taking comments and analyzing them and a final rule is coming next March.
“We like to set models that we are hopeful inspire states and ultimately the federal government to follow our lead,” said Martindale.
Outlier Approach
Financial technology companies oppose California’s approach.
The American Fintech Council, which represents around 50 financial services companies, sent a letter in May to the state’s Department of Financial Protection requesting to clarify that earned-wage access is a non-credit product.
“When California tries to conflate the two, you’re putting apples and oranges together around a square peg in a round hole,” Lee from the Financial Technology Association said. “The main objection is you’re classifying something as a loan that isn’t what the product is.”
“California’s approach is unique and adds a high degree of complexity to EWA regulation with arguably fewer consumer benefits than the Nevada approach,” Baker said.
Because the advances people take out on earned-wage access products tend to range from $40 to $100 and are generally repaid within two weeks, using annual percentage rates to determine how much the products cost may be inappropriate, said Baker, the author of a 2018 Harvard Kennedy School of Government study supporting the use of earned-wage access products.
“I suspect that some of the hostility to the EWA business model among consumer advocacy groups is tied to fears that any breach of the Maginot Line on APR calculations will lead to more damaging workarounds” that also run on a two-week repayment cycle, Baker said. “This is understandable but in practice it leads to ‘kludgy’ solutions like California’s proposal.”
States set their own interest rates, meaning that some states allow payday loans with their interest rates that can reach as high as 500% and other states cap interest rates at 36% or below.
That divide might prove to be decisive in the way states choose to regulate earned-wage access, Kushner said.
“The hardest states for the industry to get any traction are going to be the ones that have already said no to payday lending and have strong protections,” he said.
Earned-wage access companies then have to make a decision about whether business is worth doing in a state.
“If it becomes too burdensome from a cost perspective, there have been states in the past in previous financial services businesses, where the services haven’t been able to be delivered,” said Tal Clark, CEO of earned-wage access provider Instant Financial, which is already a licensed lender in California.
Path Forward
The federal government is still figuring out how to categorize earned-wage access products.
The Treasury Department last year called on Congress to pass legislation clarifying that that “on-demand pay arrangements are not loans.” Such a law is unlikely with potential opposition from Senate Democrats.
The Treasury Department’s determination mirrored a 2020 advisory opinion the Consumer Financial Protection Bureau that exempted some earned-wage access providers from the Truth in Lending Act, a federal law mandating disclosures of fees, interest rates, and other terms.
But the CFPB is reconsidering that advisory opinion, which could lead to some friction with states.
CFPB Director Rohit Chopra said in a July 17 interview that he hopes to have a revised advisory opinion completed in 2024. Chopra would not say whether he views earned-wage access as a loan or not.
“I don’t want to give away the punchline because not all earned-wage access products are structured in the same way,” he said.
Chopra said that federal laws are a consumer protection floor and that states had the option of setting higher standards amid concerns from consumer advocates that the spate of new state laws mirroring Nevada and Missouri could increase the chances of consumer harm.
“If a state is enacting laws that are weaker than federal laws, their citizens will still enjoy the protection of federal law,” he said.
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