Salary Advance Service Draws Regulatory Attention

Updated: November 4, 2021— At acongressional hearingheld on Tuesday, industry organizations testified before the Financial Technology Task Force of the U.S. House Financial Services Committee, discussing the pros and cons of new fintech consumer services such as earned wage access (EWA) and buy now, pay later (BNPL). Task force members questioned witnesses and offeredstarkly different interpretations of EWA and BNPL products。

Brian Tate, CEO of the Innovative Payments Association, called EWA services "safer, cheaper, and more efficient," while Lauren Saunders, associate director of the National Consumer Law Center, reiterated some of her concerns. She said: "We have troubling signs that many overdue consumers may be in distress, and I am also concerned that some providers may be building profit models based on these late fees."

-----------------------

The rapidly growing on-demand pay industry is drawing increasing attention from state regulators, and now consumer advocates are pushing for stricter federal scrutiny.

Payactiv, PayDaily, and Even Responsible Finance are among the major companies that have emerged over the past decade to provide employees with access to wages before payday. While these companies offer services through employers, some also provide similar services directly to employees.

Last month, a coalition of 92 consumer protection organizations, including the National Consumer Law Center, the civil rights organization NAACP, and the Center for Responsible Lending, senta letter to the Consumer Financial Protection Bureau (CFPB)challenging the industry. They urged the federal agency to rescind a Trump-era decision that allowed on-demand pay providers to charge fees without restriction, in order to protect consumers.

The coalition wrote in its October 12 letter to the CFPB: "Treating earned wage access (especially fee-based) as something other than credit would lead to the evasion of consumer protection and fair lending laws." It would also "lead to cycles of repeat borrowing similar to other balloon loans and could make it difficult for consumers to pay future expenses or large monthly bills such as rent."

The CFPB responded via email: "We have received the letter and appreciate the coalition's input."

This issue is becoming increasingly important as employees increasingly use earned wage access (EWA) services. According to estimates from research firm Aite-Novarica, U.S. households made nearly 56 million wage withdrawals through such employer-led programs last year, totaling approximately $9.5 billion. Additionally, the firm reported in its February report on this trend that millions more have downloaded cash advance apps that do not require employer involvement.

Lauren Saunders, associate director of the National Consumer Law Center, said in an interview last week regarding the coalition's petition to the CFPB that these services are "just a milder version of payday loans."

Meanwhile, internal industry strife is creating a rift between companies that partner with employers and those that sell directly to employees. The latter lack employer data or oversight. For companies that do not want their reputations damaged by the actions of competitors, the stakes are high, and in an increasingly competitive market, more regulation could bring both benefits and drawbacks.

At the heart of the debate is this question: Does paying wages early constitute a loan?

During the Trump administration, the CFPB issued anadvisory opinionin November of last year, determining that EWA services provided free by employers do not constitute extensions of credit and are therefore not subject to the Truth in Lending Act. The following month, the CFPB alsoexempted Payactiv—one of the pioneers of the EWA industry—from lending laws.

The consumer advocacy coalition disagreed with these decisions and urged the CFPB in its letter to reassess the relevant policies. Saunders said: "When we saw these actions, we were very concerned because we believe they are wrong. We think the legal reasoning is very sloppy."

Payactiv's 'Watershed Moment'

In contrast, Payactiv CEO and co-founder Safwan Shah, according to areportfrom industry publication Pymnts.com, hailed the December decision as a "watershed moment" for the company.

Shah, in a June interview with Payments Dive, criticized predatory payday loans and $35 bank overdraft fees, saying: "The cost of being poor is very high. Someone has to step up and do something."

San Jose-based Payactiv, founded in 2012, is a pioneer in the industry, selling its services through the largest U.S. payroll providers, including Automatic Data Processing (ADP) and Paychex.

On-demand pay providers claim they are democratizing access to income for Americans facing emergency expenses and financial hardship, saving them from the high fees and interest rates of predatory lenders. Their business models vary—some charge employers, some charge employees, and others profit from merchant interchange fees generated by debit cards issued under employee programs.

For employers, they increasingly view such programs as tools for recruiting and retaining employees, especially in the current tight labor market. Given the deadly COVID-19 pandemic has exacerbated some workers' financial needs, this benefit may be even more attractive.

Payactiv's model is: the company advances funds to employees, which are then repaid by the employer on the scheduled payday. If employees transfer funds to a Payactiv debit card that earns interchange fees, the service is free for both employers and employees. If employees transfer wages to another card or account, Payactiv charges a fee of $1 to $1.99 per disbursement. Payactiv also allows employees to use wages directly for specific services,such as rides on ride-hailing alternative Uber。

Shah, an engineer-turned-entrepreneur, says more than 80 million Americans live paycheck to paycheck and need such services to avoid paying $300 a month in late fees and bank overdraft charges. Shah argues: "If you earn less, you should be paid more frequently."

Protecting Workers in 'Vulnerable Moments'

Dozens of companies have entered the industry, many backed by venture capital eager to profit from this growth trend. Branch, Gusto, FlexWage, Instant Financial, andClairare among them.

Steve Barha, COO of Instant Financial, estimates that at least 35 providers in North America offer some form of EWA service. The Atlanta-based company, founded in 2015, has 350 corporate clients, including Carnival Corp. and Bloomin' Brands, parent of Outback Steakhouse.

Instant Financial provides a Visa debit card to employees who opt into its employer-sponsored program, allowing real-time access to earned wages. When employees use the card, Instant Financial receives a share of the merchant interchange fee. Under Instant Financial's model, neither employees nor employers pay for the service. Barha believes this is the "right" approach for the industry.

Barha said in a September interview: "With so many companies now using services like Instant, it has become a focus for regulators." He revealed he spends a lot of time communicating with state and federal regulators. "We feel we have nothing to hide," he said. Some programs are more "nefarious," he said, and regulations should be established requiring clear disclosure of program fees and interest rates. "As long as we protect employees at their most financially vulnerable moments, I think there's no problem," Barha said.

Jon Schlossberg, executive chairman of Even, co-founded the company in Oakland, California, in 2014. He says problems begin to emerge as new players flood in. "They profit from desperation," he said in an August interview, without naming specific companies. "Financial services, especially in payments, are full of good businesses that pretend to be helping people."

Retailer Walmart, digital payments company PayPal, health insurer Humana, and restaurant chain Noodles & Co. are all Even clients. About half of Even's employer clients fully cover the cost of EWA services offered to employees, while the other half charge employees based on usage. Schlossberg says Even's services are aimed at hourly workers who can use its digital tools to manage cash flow.

Payactiv's Rebuttal

Nevertheless, consumer advocates argue that EWA services may burden employees with accumulating fees for early wage access and trap them in a cycle of rising debt as they spend money faster.

The coalition stated in its letter: "Lobbyists for the earned wage access industry are using the CFPB's actions to push for exemptions from state usury and lending laws, claiming that 'broad product categories are not credit regardless of price.' Payactiv has also used the CFPB's order to attack competitors, misleadingly claiming that the CFPB 'has approved Payactiv's program' and that Payactiv's program 'is the only way to remain CFPB-compliant.'"

In response, Payactiv General Counsel Aaron Marienthal issued the following statement via email: "The letter's view that consumers cannot be trusted to access their own earned wages more than once or twice a month runs counter to the goal of protecting and empowering American workers." He also said the letter's description of EWA services is biased. Earned wage access products "allow employees to access wages they have already earned, and through Payactiv, they can do so without paying any fees at all. There is no debt."

Industry Divisions on State Legislation

Lawmakers in California, Utah, New Jersey, New York, Georgia, Nevada, North Carolina, and South Carolina have debated EWA legislation, but only California has passed laws affecting the industry.

In Utah, Republican Rep. James Dunnigan introduced a bill he said would provide guidelines to promote industry growth, although "certain EWA companies don't want it to pass because they think their way is the only right way." Dunnigan explained that opponents claim his proposal would kill the popular new service. "It's plagued by a lot of misinformation," Dunnigan said. When he asked companies why they opposed the bill, the answer was that state regulations could trigger federal action.

Dunnigan pointed to New York-based DailyPay as a leader in the opposition. He said he thought he had enough votes to pass the bill in the House Business and Labor Committee but ultimately gave up a fight that was tougher than he expected. Dunnigan said he does not plan to support an alternative EWA version being considered in the Utah Senate.

Matthew Kopko, vice president of public policy at DailyPay, said in an email statement: "DailyPay has consistently supported all efforts by elected officials, including those in Utah, to protect consumers from harmful and predatory fintech practices." He declined to comment further on the Utah situation.

In anarticlepublished in May on legal website J.D. Supra, Kopko generally favored less restrictive EWA legislation. A new law passed in California last yearestablished the Department of Financial Protection and Innovation (DFPI)to regulate the industry and required EWA providers to submit memorandums of understanding to the state.

Kopko said in an email statement: "California's DFPI has demonstrated excellent leadership through its flexible memorandum of understanding process, and DailyPay has joined that process to help the state better understand this emerging and rapidly changing industry." He again declined to comment more broadly.

In the article, Kopko endorsed the CFPB's advisory opinion. He wrote: "It establishes a framework more compatible with employer-led EWA programs, similar to those offered by leading EWA providers." He called programs that "integrate with employers and are offered as an employee benefit" "true" EWA programs.

Kopko seemed to acknowledge that increased regulation is inevitable. He wrote: "As more Fortune 500 companies offer these programs, employer-led EWA is increasingly seen as a mainstream 21st-century payroll practice, and regulation will continue to catch up with technological developments."

Regulatory Shake-Up?

A key question regulators are studying is whether employees use EWA programs as a supplement to or replacement for predatory payday loans. Leslie Parrish, strategic advisor at Aite-Novarica, authored the February report. In a survey of approximately 1,100 DailyPay users (commissioned by DailyPay), Parrish determined that employees are primarily using EWA programs to replace predatory traditional options.

Parrish, who has worked at the CFPB and the Center for Responsible Lending, says the core issue regulators are grappling with is whether EWA is a service or an extension of credit. The answer will determine whether federal and state regulators promote or restrict the industry. "There are many different business models across the industry, each with pros and cons," Parrish said.

Consumer advocates acknowledge that some EWA programs may be beneficial. The coalition stated in its letter: "Treating earned wage access products as credit does not mean they should not exist. Free or very low-cost programs—fully repaid through payroll deductions, or that do not deduct from bank accounts or delay wage access—may be better alternatives to high-cost payday loans."

A regulatory shake-up could provide clearer guidance on best practices for all parties involved.