AS EARNED WAGE ACCESS (EWA) CONTINUES RAPID GROWTH MORE TRANSPARENCY, OVERSIGHT NEEDED

EWA offers potential benefits compared to payday loans but may include hidden costs, 
with some APRs as high as 400%; advanced wages triple to $9.5 billion from 2018 to 2020

NEW YORK, June 28, 2023 /PRNewswire/ -- The rapid adoption of Earned Wage Access (EWA) programs holds both potential risks and benefits for the financial well-being of tens of millions of lower wage workers, with higher levels of transparency and greater regulatory oversight the key to supporting further growth, according to a new study out today from Marshall Lux and Cherie Chung of the Mossavar-Rahmani Center for Business and Government at the Harvard Kennedy School of Government.

"To the extent these EWA services replace higher cost options like payday loans, while also encouraging worker retention, they are a positive innovation and offer advantages to both employees and employers," said Lux, a Senior Fellow at Harvard. "But maximizing these benefits while minimizing the risks to the borrowers will require greater transparency from both employers and providers as well as new rules governing costs and program design."

EWA is generally defined as the ability for an employee to access already earned wages outside the usual pay cycle, either directly from the employer or from a third party provider. The new report is Earned Wage Access: An Innovation in Financial Inclusion?

For the report, Lux/Chung interviewed venture capitalists, CEOs, consumer advocates, and payroll providers, reviewed existing literature, and queried over 1,000 low-income employees who had utilized EWA either through employers or directly (B2C) with an app. It found that 40% of the people who had access to an EWA program through their employer were using it at least once a week, while over 75% of respondents indicated that they were using their money to pay for regular bills, rather than emergency expenses. This in turn reflects the reality that over half of Americans are living paycheck to paycheck.

The survey further found that 60% of respondents had used a B2C EWA app – often more expensive than an employer-sponsored EWA program – and the vast majority of those had used more than one, employing 2.45 apps on average. Of those who had used a B2C EWA app before, 8.0% had five or more of these apps currently on their phone highlighting the potential risk of borrowing from multiple sources.

A better way of borrowing?

U.S. employers have shown strong interest in EWA as a tool for retention, which has led to the rapid proliferation, with an estimated nearly 55.8 million earned wage advances, totaling $9.5 billion, facilitated in 2020 — tripling since 2018. For employees, EWA can provide early access to salary with no debt collection, no credit reporting, and no rollovers. In a best-case scenario, EWA could replace payday loans, pawn loans, and banking account overdrafts, says the study.

EWA models are still rapidly evolving in a regulatory grey area. The Consumer Finance Protection Bureau (CFPB) does not at present consider that covered EWA programs involve offering credit under Regulation Z (Truth in Lending Act), therefore exempting them from some regulatory scrutiny and reporting requirements, a circumstance the report's authors believe needs to change.

While EWA programs can be offered at no cost to employees when sponsored by employers, others incorporate a variety of charges including so-called "tips" – a voluntary payment as the transaction is completed. Some providers have engaged in strategies that have led users to tip more than they intend. On small advance amounts, tipping and other charges can lead to extremely high annual percentage rates (APRs). A recent study by the state of California found APRs averaged over 330%. B2C apps that have access to user's bank accounts have been known to cause overdraft fees, which providers do not typically reimburse. Other areas of concern for EWA participants include the potential to overspend and the creation of a "cycle of debt" through serial borrowing.

"In our view, the CFPB needs to act now to remove uncertainty and establish clear standards for employers and EWA providers in both the B2B and B2C marketplaces," said Lux. "This will allow the industry to continue to grow while protecting consumers from the excesses that have historically plagued the payday lending market."

SOURCE Mossavar-Rahmani Center for Business & Government