Getting paid on a daily basis is not a new concept. Many Americans, including wait staff, taxi drivers, and bartenders are accustomed to getting paid at the close of their shifts. Providing earned wage access (EWA) recognizes that life happens and an employee may need quick access to money they have already earned, before pay day. Life does not always break down neatly into weekly or bi-weekly timelines.
I recently had the privilege to testify before the House Financial Services Committee’s Task Force on Financial Technology on how EWA programs give employees the flexibility to immediately access wages they’ve earned and how it has become an invaluable tool for millions of American wage earners managing their personal finances during the pandemic.
For many workers, the due dates for bills and scheduled paydays do not always align. A 2012 study by the Financial Health Network found that 38% of respondents reported timing mismatches between their income and expenses.
In 2018, before the Covid-19 pandemic began, the Federal Reserve released its Survey of Household Economics and Decision Making, which found that 40% of Americans would struggle to come up with $400 to pay an unexpected bill. EWA provides a low-cost option to employees who need to cover an unexpected expense between paydays. With advances in technology and direct deposit, employers can offer employees access to their earned wages at little or no cost.
Obstacles Can Be Overcome
According to the Consumer Financial Protection Bureau, several obstacles prevent businesses from implementing shorter pay cycles for their employees, including cash flow limitations on businesses that depend on incoming payments and receivables, which need to be processed and deposited.
The Financial Health Network’s April report on EWA found consumers in financial distress may consider a variety of very costly options, including title, payday, or pawn loans. The FHN report, and an earlier study by the Mercator Advisory Group, found that the average amount a consumer paid per EWA was less costly than all of the other options.
Moreover, as many employers know, and numerous studies have found, employees who have access to EWA have more stability at work and are less likely to leave their employment which, in turn, helps employers with employee retention.
EWA Products Are Not Loans or Credit
As with any new product that enters the marketplace, consumers need to be educated so they understand how that product works and its benefits.
First, EWA is generally made available to workers without recourse and the use of the product is not reported to credit agencies.
Second, EWA providers take appropriate steps to validate the hours a participating employee has worked and provide the EWA based on those earned wages. This protects against shortfalls on withholding for things like taxes and benefits. This also ensures that the employee will receive some money on payday.
Last, it is critically important to note that EWA products are fundamentally different from payday loans because EWA is not a loan, nor is it credit. It is a new and distinct product that stands on its own.
I agree with the two former CFPB directors—Richard Cordray and Kathy Kraninger—who didn’t often agree, but each took concrete steps to support EWA when heading the bureau.
In 2017, Cordray exempted employer-sponsored programs from his 2017 payday rule when he said the rule “excludes from coverage some new ‘fintech’ innovations, such as certain no-cost advances and programs to advance earned wages when offered by employers or their business partners.”
In 2020, Kraninger built on Cordray’s foundation when she issued an advisory opinion explaining that certain EWA programs are not credit. Together, they recognized the potential of EWA to help employees manage their personal finances and avoid higher cost alternatives.
Primary wage earners, teenagers, blue collar workers, and single parents don’t always have easy access to credit, or other forms of short-term liquidity. EWA provides an affordable and flexible option for employees of all stripes who want to manage their personal finances in a responsible fashion.
We are still learning lessons from the pandemic, but one thing I hope we can all agree on is that real-life problems demand real-life solutions in real time. EWA solutions empower wage earners by giving them one more tool in their financial toolkit, allowing them access their earnings quickly, efficiently, and with dignity.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Brian Tate is president and chief executive officer of the Innovative Payments Association.