Earned Wage Access – also known as Earned Wage Advance or On-Demand Pay – has steadily increased. As recently as 2020, almost 55.8 million individuals were using some EWA solutions, as there are both employer-provided and direct-to-consumer options. As EWA solutions become more popular, there is a steady stream of questions as some employers are skeptical about the utility and usefulness of EWA products. While there are certainly issues that need further investigation, EWA solutions seem to be here to stay.
What is Access to Earned Wage?
Short-term liquidity (or the ability to have sufficient cash on hand) has long been a hallmark of financial health. Unexpected financial shocks are almost as certain as death and taxes, and having enough cash can help you weather the inevitable. Yet millions of workers find it difficult, and sometimes expensive, to access adequate liquidity. Payday loans, with interest rates as high as 600% in some states, have long been a scourge of workers’ ability to sustain short-term liquidity needs.
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After the 2008 financial crisis, a wave of new innovations hit the market, including EWA. These platforms allow employees to collect some or all of their earned wages before the next scheduled payday. Initially, they aimed in part to offer a viable alternative to expensive credit products such as payday loans or overdraft fees. Since their inception, many EWA platforms have expanded their range of solutions to include short-term savings, financial education, and many other relevant financial health benefits.
For these and other reasons, we are seeing an ever-growing interest from employers to add EWA solutions to their financial health services. Many employers (60%) recognize that EWA can be an efficient way to attract and retain employees and create goodwill among the workforce. Likewise, 56% of employees who had a free or low-cost service to access their accrued wages indicated that they used the service.
How does access to earned wages work?
All in all EWA products have four basic functions. While there are certainly differences between vendors, these four features make up the core mechanics of EWA:
- Funding EWA access: Access to wages is typically funded through the EWA provider – typically through capital on its balance sheet or through the use of a credit facility. Through payroll integration (if they are not already the payroll provider), providers save timesheet data to verify the earnings that can be accessed.
- payout: Employees receive their earned wages in a number of ways: direct deposit, into a separate bank account that the employee has set up with the EWA provider, or to a prepaid or payroll card. Most EWA providers allow users access to 50% to 100% of earned wages at any given time. Frequency rules and guidelines (eg, number of payouts per pay period) vary by provider and employer.
- Payment to EWA Provider: For solutions where the EWA provider funds the advance, it refunds the advance with the user’s next paycheck, which means the repayment is typically made in less than two weeks from the payout date. It’s also worth noting that the terms “repayment” and “repayment” have certain industry connotations related to loans and debt. However, in the context of EWA, these terms are not intended to equate EWA with credit products.
- Timing of payments to employees: In the case of direct deposits, the payments are usually displayed no later than the next working day. Transfers to external debit or prepaid cards can take up to 48 hours; Transfers can be instant, but can incur a fee of $1 to $5 depending on the provider. Conversely, transfers to bank accounts or cards provided by EWA are often free of charge and possible immediately.
Keep in mind that as more payroll providers add EWA capabilities, the mechanisms may differ as payroll integration is not necessarily required and the funding mechanism may also work differently. Likewise, we have seen private examples of large companies building their own EWA solutions in partnership with their payroll providers. In short, innovation continues to happen around EWA. Therefore, the functions and mechanisms can also evolve.
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Important considerations when evaluating earned wage access options
EWA solutions are still relatively new. As such, it can be difficult to understand how to price an EWA provider. The following should be considered when evaluating EWA solutions:
- Employee needs and feedback: What evidence do you have that employees would benefit from EWA solutions? Do you see examples of workers struggling with day-to-day expenses (eg, payroll requests)? Rooting a solution in the needs of actual employees is the best way to ensure needs and solutions are aligned.
- Existing relationships and related mechanisms: Are you already working with a vendor that has an EWA solution? What additional services does the provider offer that help promote financial health? Does the provider offer a payout mechanism that works for your employees? For example, if you have many employees who are unbanked or underbanked, does your provider offer an affordable bank account or prepaid card?
- Cost and revenue models: There are a variety of cost and revenue models associated with EWA providers. Some providers have a membership model (e.g. usage prices) where employees or employers can pay a certain amount each month. Other providers have a flat-fee model with add-ons for features like instant payment. Fee structures per employee per month (PEPM) are also on the market. Finally, providers offering bank accounts or debit cards can monetize them through interbank fees. In short, there are a variety of cost and revenue models, and understanding which model makes the most sense for your business is critical.
We are still in the early stages of EWA. Consumer Financial Protection Bureau (“CFPB”) regulators are still wrestling with whether to treat and regulate EWA as a credit product. In November 2020 the CFPB has issued an advisory opinion noting that EWA does not see it as a credit product, provided it meets certain criteria, such as B. not to collect fees from employees. This advisory opinion has created some confusion in the market, so the CFPB is examining how to provide more clarity about EWA and whether it should be regulated as a credit product.
Continue reading: Answering questions and misconceptions about access to earned wages
There are still questions about the ultimate impact EWA has on the financial health of workers, particularly those most at risk. The Financial Health Network early research on EWA products show that users access the products over different periods of time and that the costs for using the product vary depending on the fee model and individual usage behavior.
Employers who offer EWA should ensure their employees understand the solution and monitor and adjust the program as needed. Most EWA providers are evolving their solution packages to include broader financial healthcare resources. Finally, minimizing employee fees should be an important consideration for employers. Increasingly, we are seeing more employers assuming the cost of EWA solutions, making them essentially free to their workforce.
After all, no single financial health solution is perfect. Employers adding financial health benefits, including EWA, should ensure that the goal is to improve the financial health of their workers. Having an appropriate framework for assessing the impact of financial health benefits is not just a valuable use of time, but an essential aspect of ensuring that your program actually improves financial health.