In the current transformation of financial services, where digital offerings and an “always on/always available” mindset dictates consumers should have access to their holdings — and in some cases, their wages — on demand, some things have yet to be hammered out.
Like regulations, for example.
In the past several months, the increasing popularity of earned wage access (EWA) has been in evidence, as employers and FinTechs have worked together to help consumers tap into their earned income, and in the process break the two-week payroll mindset that has dominated everything from bill payments (on the consumer side of the equation) to accounting (on the enterprise side of the coin).
“Workers are looking for flexibility in everything they do, including employment,” Jonathan David, founder and CEO of U.K.-based FlexEarn, told PYMNTS in a recent interview. “We are increasingly seeing workers who perhaps do a few hours per week for multiple companies. With unemployment so low, these companies have to compete with each other to attract and retain their people. Offering payroll perks, such as earned wage access, can give them a distinct advantage.”
But with those advantages come considerations about how to pay for it all, who bears the cost — and how EWA, as a product and a service, will be classified and treated by regulators.
As David noted during the interview: “Earned wage access is a low-margin business. There will always be a temptation for providers to offer add-ons and other products so they can make more money.”
In one example of how the economics of EWA might be embraced, as PYMNTS reported, FlexEarn’s strategy is to charge the employee a low, flat fee to access their earned wages and not charge their employer.
And in another interview, Ingo Money CEO Drew Edwards said, “If the work is now on-demand, then the worker must also now be paid on demand — it’s got to be an on-demand equation from beginning to end.” He noted, “To do the work and go back home, and then wait to get paid next Saturday, is not the way these workers think. In the gig world, that offering means you won’t attract the driver, the web designer or the freelancer.”
But we note, the regulatory picture is not as crystalline.
As the work is performed, and as the receivable (i.e. what’s owed) accrues, questions swirl as to whether advancing the individuals the money is tantamount to a loan, or if other measures must be taken in the EWA process. As detailed in the space, for example, various measures in various states aim to address the mechanics of EWA. In one example, in New Jersey, companies facilitating the payments must verify the employee’s earned income before making an advance and — and they secure the employee’s consent before obtaining information about them from employers. Employees must also be disbursed funds that are in effect net wages (and not gross wages).
Late last year, the Consumer Financial Protection Bureau (CFPB) said EWA is in fact not an extension of credit and noted that as two-thirds of firms use staggered payroll periods — biweekly, semimonthly or monthly pay periods — “the interval of time between hours worked and receiving a paycheck can contribute to employees’ financial distress.” To avoid being considered extensions of credit, an EWA program must provide funds to accounts of employee’s choice and must not charge fees for delivering those funds. The transactions do not in fact include deferred payments and do not create debt. But it’s a sure bet, we think, that fee structures and other components of EWA will get more examination in the weeks and months ahead.