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Protocol | Fintech

Is earned wage access predatory payday lending? States will soon decide.

Fintech startups say advances against paychecks just put the money that people have worked for in their pockets faster. Critics see it as a dangerous trend.

Is earned wage access predatory payday lending? States will soon decide.

Tech-enabled access to cash ahead of payday is newly controversial.

Photo: Jose Reyes/Unsplash

A roiling debate over a hot fintech trend that taps into growing anxieties over wealth inequities and concerns over exploitative business practices boiled over into the Georgia legislature recently.

A startup executive defended earned wage access, saying cash-strapped employees now have "options beyond expensive credit and overdraft fees."

"An industry has arisen to provide faster access to money that's already been earned," David Reidy, chief legal officer of PayActiv, told Georgia legislators at a March hearing.

Reidy spoke before the Georgia House Industry and Labor Committee to support a bill that would set rules for services that allow employees to receive some or all of the money they've already earned before payday.

Even the name is controversial: Is earned wage access, as providers prefer to call it, really about access, or is it the extension of credit wrapped in technological marketing?

Fintechs and some employers say it eases the financial burden of people surviving paycheck to paycheck. But consumer advocates are warning against what they see as a new form of predatory financing reminiscent of payday lending.

And the increasing regulatory scrutiny comes amid a heightened focus on income inequality, marked by the push to increase the federal minimum wage to $15 an hour.

"It's not a loan. It's getting away from any kind of payday loans," Republican Rep. Tom Kirby, a co-sponsor of the bill, said at the Georgia hearing.

Democratic Rep. Gregg Kennard pushed back, arguing that earned wage access "opens the door for exploitation. … I'll be open-minded, but at this moment, I don't like this bill at all."

The access debate

Earned wage access has been embraced by a growing number of employers and consumers over the last two years, fueled in part by Walmart's 2017 announcement that it would use two leading earned wage access services, PayActiv and Even.

The total value of wages accessed by employees through these services, which is now offered nationwide by more than a dozen providers, jumped from $3.2 billion in 2018 to $9.5 billion last year, Aite Group, a business and technology research organization, said in a report published in February.

The rise of the gig economy "where people often get their wages on a daily basis" is driving the trend, Aite Group senior analyst Leslie Parrish said. Because most gig workers remain independent contractors, their pay schedules are less regulated than regular employees.

Safwan Shah, founder and CEO of PayActiv, is credited with coining the term "earned wage access." He said the financing is based on "a very basic social contract."

"Why should a person have to ask for money when they have already earned it?" he told Protocol. "It should be accessible to them."

But consumer advocates argue that earned wage access is essentially a form of credit that must comply with laws meant to protect consumers from unfair or deceptive financing. "Just because they put on a fintech label doesn't mean that our basic credit protections, like interest rate limits and ability to pay analysis shouldn't apply," Lauren Saunders, associate director of the National Consumer Law Center, told Protocol.

What makes this debate complicated is that there are different versions of earned wage access. Providers also must navigate a crazy quilt of state laws with different legal definitions of earned pay and rules on managing payrolls.

Some companies — such as PayActiv, Branch and DailyPay — offer the service through employers who give them access to their payroll systems, and send data daily or in real time on the hours employees work.

Elaine Davis, chief HR officer of Continuum, is one of Branch's customers. It runs a contact center with 7,000 U.S. employees and sends Branch a nightly file of hours worked.. Employees who signed up for the program can then access up to half of their pay for the day through the company's app or digital wallet. Whatever they take out is deducted from the funds they were set to receive on the next payday.

PayActiv also offers other services based on vendor partnerships. "If you need a car [ride], you can use two hours of work to buy an Uber ride," Shah, the company's CEO, said. "You can use two hours of work and load it into Amazon Cash. We have created many services around the hours you've worked."

Other companies, such as Earnin, offer wage advances directly to consumers who give the provider access to their bank accounts. The company does not coordinate with their customers' employers. CEO Ram Palaniappan argues that protects employees' privacy.

Making money by fronting cash

The ways earned wage access providers make money also vary. PayActiv and Branch offer employees debit cards and generate revenue from the interchange fees paid by merchants when workers use those cards. Employees also pay fees to send funds to their bank accounts — which also encourages use of the more profitable debit cards.

A Branch customer pays $2.99 to $4.99 for instant delivery to another account, depending on the amount transferred (slower transfers are free). PayActiv users must pay $1.99 for an instant money transfer to a third-party card. DailyPay charges a flat rate for moving funds to any account: $1.99 to receive the funds the next day, $2.99 to get the money immediately.

Earnin, which deals directly with consumers, makes money from voluntary tips.

Davis of Continuum, the Branch client, said the financing made it possible to "get cash in people's hands at the end of every shift. There's no impact on my cash flow."

Kendall Johnson, chief financial officer of Baton Rouge General Medical Center, said PayActiv helped "significantly reduce the number of employees accessing these predatory lenders," he told Protocol.

Earned wage access helps attract and retain talent, and is "a great employee benefit that employees just love," Branch CEO and founder Atif Siddiqi told Protocol. It's actually the second most popular employee benefit at Walmart, behind 401k. A 2018 Harvard Business Review study also found that earned wage access, along with workplace loans, "show tantalizing potential for significantly reducing employee turnover," helping corporations save millions annually.

But the absence of a uniform approach to earned wage access — even an agreed-on definition of what it is — has become a problem, said Jim Hawkins, a professor at the University of Houston Law Center. It "offers a lot of promise for lower income Americans," but "the way that they currently exist, some of the products are more dangerous than others," he told Protocol.

Better Business Bureau reviews feature complaints about errors on the way funds are recorded or transmitted and poor customer service.

A major issue is pricing, Hawkins said. "If employees are having to pay five bucks for having $50 three days early, it's a really high APR, and costly if you do it over and over for somebody making 10 bucks an hour," he said.

That's what led consumer advocates to compare earned wage access to payday loans, where the effective interest rates paid can go as high as 300%. Payday loans, which are heavily regulated in the U.S., are known to be so burdensome borrowers take out additional payday loans in order to pay the first one, leading to a debt trap.

Earnin's tipping model has also raised red flags. It's an ideal system for Swati Polce, who was working part-time while in law school when she started using Earnin. "I don't have to pay anything to get my money," she told Protocol. "If I can afford to help the next person get their money, I'll do it, but if I can't, I don't have to."

But Parrish called that model "potentially very manipulative." Hawkins said Earnin, at one point, had a default tip of 10% which, if users decided to pay it, could translate to a high APR for some employees who want to withdraw $100. An Earnin spokesman said a vast majority of users don't use the default tip on the app.

Earnin has also been accused of deceptive marketing. In 2019, Earnin users accused the company in a class action suit of causing them to be hit with overdraft fees by withdrawing funds "even when it knows that the user does not have sufficient funds to cover the withdrawals." Earnin settled the suit last year.

The company now markets a service called Balance Shield that automatically takes out advances against wages when a customer's bank account drops below a certain level. One of its features includes automatic tipping.

Lisa Stifler, director of state policy at the Center for Responsible Lending, recalled how predatory lenders also claimed that they're not credit companies. "That is what payday lenders did in the 1990s," she told Protocol. "They called themselves 'delayed deposit transactions' or 'deferred deposit transactions' and couched themselves not as credit."

The legislative landscape

The complexity of the debate was underlined in 2019 in California where a bill that would have set rules for earned wage access in the state was defeated, amid strong opposition from consumer advocates. There were also serious disagreements among earned wage access providers themselves, led by a proposed cap on fees.

The bill "sank under its own weight" after it "became bloated with too many things," and "tried to cover every product under the sun," Reidy, the PayActiv executive, told Georgia legislators. Following the defeat in California, PayActiv and its allies pivoted to a different strategy in Georgia with a bill focused only on employer-based providers.

Sangeetha Raghunathan, Earnin's chief compliance officer, protested this at the Georgia hearing: "It's like if the government says we're going to affirmatively state that Pfizer and Moderna are the better vaccines and we're not going to make any statement about Johnson & Johnson."

Matthew Kopko, DailyPay's vice president of public policy, also objected to a proposed cap on fees, calling it a "very concerning precedent for our industry for the nation." That prompted Georgia Rep. Todd Jones to ask him: "Are you suggesting we should remove our usury laws?"

"My view on this, sir, is that there hasn't been any sort of assertion of a need for price controls here," Kopko answered.

The Georgia bill appears to be stuck in the labor committee for now. Other legislative proposals have been filed in other states, including North Carolina, New Jersey and Nevada. In December, the Consumer Financial Protection Bureau said in an "advisory opinion" that certain types of earned wage access products are not essentially a form of credit.

In California, major earned wage access providers, including PayActiv, Earnin and Branch, signed a memorandum of agreement with the state's Department of Financial Protection and Innovation and agreed to provide data on their products, including the fees they charge and customer complaints.

That's an important step, given the dearth in data needed to understand the impact of earned wage access, Parrish said.

A recent Walmart survey of the way earned wage access apps have been used by its employees found a surprising trend: Employees who opted to get paid sooner tended to leave the company sooner. Turnover was lower for those who used the app in conjunction with other tools for saving and budgeting.

"There's not a lot of information so it's hard to make policy decisions," Parrish said. And earned wage access itself is so new it will "definitely evolve so that it doesn't look like it does today," she said.

That could happen with new technology like the soon-to-be-launched FedNow real-time payments system, that could make it possible to offer alternatives to "potentially costly or opaque [earned wage access] programs," a recent Kansas City Federal Reserve Bank report said.

Some fintech leaders even question its viability as a business model. Jason Brown, CEO of Tally, a consumer debt management company, speculated that, given the advances in payments technology, earned wage access companies eventually would "lose their value" as more employers "start providing this directly to their employees as a competitive advantage."

Josh Reeves, CEO of Gusto, even echoed the view that fee-based earned wage access is predatory. Gusto offers employees limited cash advances as a free feature of its platform for managing HR and payroll. Reeves argued that providing people early access to their pay "should not be a [standalone] business."

"I can't say this more directly: People should not make money on that," he told Protocol. "There should not be VCs funding startups to go do that. That's a time when someone is most in need and most in financial distress."

The wage debate

Earned wage access also raises a question: Why not just pay low-wage employees more, so they don't have to borrow against their next paycheck? Major corporations, such as Amazon and Target, have already raised their minimum wage to $15 an hour, a baseline sought by a labor coalition. Walmart, the nation's biggest private employer, said it supports a higher minimum wage and recently raised its average wage to $15 an hour, but it's against setting that as the new minimum wage.

One of Shah's insights suggests how earned wage access can be an option for corporations who want to ease employees' financial stress — without paying them more.

"The less you are paid, the more frequently you should be paid," the PayActiv CEO said. He cited a dieting principle to underscore his point: "If you're going to eat 500 calories, don't eat them in one sitting. Spread them throughout the day."

Consumer advocates scoff at that view. "If you can't pay for an expense at this week's paycheck, you probably can't make it through the next pay period with a hole in your paycheck," Saunders of the National Consumer Law Center said. On employers who sing praises of earned wage access, she also said, "They can also do things like pay a living wage."

But Hawkins of the University of Houston said advocates and regulators "would be mistaken to squelch a potentially beneficial product."

"Most credit problems in America would be solved if everyone had more money," he said. "Earned wage access can't solve that problem. Until we get there, it seems like getting access to wages earlier is a smart step to take incrementally in figuring out how to build a better society."

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