Earned Wage Access: An Ambiguous Concept

As my colleague Lali Shaffer pointed out last month, most of us like getting paid ASAP. For households living paycheck-to-paycheck, waiting to get paid can create problems: Fees for late bills. Deferred medical care. Utility shutoffs. And of course, expedited access to earnings can be helpful for everyone, whatever their financial situation.

Perhaps that's why earned wage access (EWA) is looking like one of the killer applications for instant pay. In September 2023, The Clearing House reported that EWA is the fastest-growing RTP Network use case.

The more I learn about earned wage access, the more I think of prepaid cards 15 years ago. Some cards had useful features and benefits. Others, often sold via celebrity endorsements, were more complicated and costly than it might appear on initial inspection. Standard disclosure requirements-the cereal-box-style presentation describing the nutritional content and costs of prepaid cards-made a real difference in the market. Consumers could compare products more easily.

Earned wage access can be confusing because it is fundamentally two products:

1. A benefit provided by employers where workers can receive the income they already have earned. In some cases, the employer providers this benefit for free. In others, the employee pays for it. The employee's regular paycheck is reduced by the amount of the early pay.
2. A consumer product offered by a fintech. Consumers pay for this product via subscription or fees or voluntary tipping (analogous to the practice of tipping clerks at payday lenders and check cashing stores). The account to which the consumer's paycheck is direct-deposited is debited on payday.

Both products are based on money already earned, either as verified by the employer or as asserted by the consumer. In this way, they differ from the traditional pay advance where employers or a third-party provider make a loan based on salary or wages yet to be earned.

Both products are quite popular. The biggest employers and major payroll processers offer the benefit. Gig platforms enable early pay. A dozen fintechs have crowded into the market. In 2023, the US Government Accountability Office compared EWA products from fintechs to payday loans and found that EWA generally cost consumers less.

Both products could involve a chain of entities-employer, fintech, funds destination (bank or nonbank account, prepaid card, mobile app, even cash in person)-and the time it takes to receive the pay could vary depending on payment rail.

Both products are currently in a regulatory gray space, with different states taking different views on what is and is not an extension of credit. For example, California and Maryland say these products are loans, but Nevada and Missouri say they are not.

Inconsistent disclosure and different concepts of the product and its purpose make me think of prepaid cards, and the state-to-state variability in treatment reminds me of money transmitters.

Broadly applicable standards create efficiencies that are good for good for businesses, good for regulators and, by extension, good for consumers. What are your thoughts about standards for this market?