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As Earned Wage Access Draws Scrutiny, How Does It Differ From Payday Loans?

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What if you didn’t have to wait for payday to get paid? That’s the question that companies like Payactiv, Grit and Instant are addressing. Their solution: earned wage access (EWA). EWA — also called on-demand pay — offers the opportunity for workers to get access to their earned wages before payroll. And companies like Target and Walmart are already jumping on the trend.

But some criticize the option, comparing it to payday loans. And, like EWA, payday loans began as a sort of cash advance for workers who needed money before payday.

Here are five things you should know about EWA.

5 things to know about earned wage access

No. 1: EWA can have financial benefits

Having access to the money you’ve already earned can be useful, especially if you’re someone living paycheck to paycheck. But it’s important to know all the relevant details.

“As with any financial service, it’s vital that you understand the rules, fees, deadlines and other fine print involved with the transaction before you sign on,” says Matt Schulz, LendingTree chief credit analyst.

Some options don’t charge workers, opting to pull the cash out of a company’s payroll, reducing the next paycheck by the appropriate amount. Having that money when needed could be better than taking on debt.

No. 2: EWA can cost workers money

There are fee-based earned wage access products, raising alarms from consumer groups. Payactiv, for example, doesn’t have sign-up and maintenance fees. But there can be fees for workers who want to use the company’s card at out-of-network ATMs (ranging from 50 cents to $2.50 a transaction) or require an expedited card replacement ($25). And program fees can be as high as $3 weekly or $5 biweekly, depending on how workers choose to receive funds and how they’re paid.

Another concern comes from EWA products that aren’t partnered with a worker’s employer. In that case, the amount of money they get may be based on an estimate rather than exact figures. So if they earn less than expected when they repay the amount they advanced, there could be issues like overdraft fees.

No. 3: Financial organizations have concerns about EWA products

In an October 2021 letter to the Consumer Financial Protection Bureau (CFPB), 96 financial organizations and academics urged the bureau to regulate these companies as credit.

That would make these companies subject to the Truth in Lending Act, which protects consumers against inaccurate and unfair credit billing and credit card practices. The letter notes these options can “lead to the same cycle of repeat reborrowing as other balloon payment loans, and may lead to difficulties meeting future expenses or large bills such as rent or other monthly expenses.”

After all, if you always have to access your paycheck ahead of time, that’s a sign your income is not enough to meet your needs. And getting locked into that cycle may make it difficult to seek a higher paying job.

No. 4: There are key differences between EWA and payday loans

Advocates tout EWA as a tool to help workers avoid turning to high cost options, like payday loans. And, despite the similarity in their origins, there are notable differences. For context, payday loans are typically described as a dangerous financial product because they often carry APRs in the triple digits and generally have short, two-week terms. So they can be extremely expensive and lead to a cycle of debt that’s difficult to escape.

EWA, by contrast, doesn’t typically involve paying interest. And because you’re taking out money that you’ve already earned, there isn’t typically a credit check involved to qualify that would impact your credit. So at a basic level, it doesn’t act like a traditional loan, let alone a payday one.

“It makes sense that people would look to compare earned wage access and payday loans,” Schulz says. “Earned wage access is a different animal, in part because the transaction is often done in cooperation with the employer. That’s a very different thing from payday loans, though there are still plenty of questions that an employee should find answers to before using earned wage access services.”

No. 5: The CFPB hasn’t yet made up its mind on EWA

On June 30, 2022, the CFPB issued an order that terminated Payactiv’s Sandbox Approval Order. (A Sandbox Approval Order provides a “temporary safe harbor” from the Truth in Lending Act, among other things.) This came after the EWA company notified the CFPB that it was changing its fee model. And, according to the bureau, Payactiv also made public statements “wrongly suggesting a CFPB endorsement of its products.”

In that same announcement, the CFPB said it’ll issue future guidance for its advisory opinion on EWA products.

“The CFPB under the Biden administration has shown a willingness to take a hard look at many different aspects of consumer lending, being much more active than the agency was previously,” Schulz says. “I think that’s a good thing. Given that these tools are most commonly used among those at the lower end of the income spectrum, whatever can be done to increase, streamline and standardize disclosures for these tools and generally make them more transparent to those who use them, the better.”

Regardless of how the CFPB regulates these products, one thing is clear: They’re just a short-term fix to the problem of low and stagnant wages. And workers will need much more comprehensive solutions to overcome that pervasive problem.
 

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