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BankThink


DON'T CLASSIFY EARNED WAGE ACCESS PROGRAMS AS CONSUMER LOANS

By  Penny Lee June 20, 2023, 1:26 p.m. EDT 4 Min Read
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California regulators are suggesting that programs that allow workers fee-free
access to their earnings between pay periods should be treated as loan products.
That's wrong and short-sighted, writes Penny Lee of the D.C.-based Financial
Technology Association.
Montri - stock.adobe.com

For the more than 50 percent of Americans living paycheck to paycheck, the end
of the month is a stressful time. Making ends meet and managing bills like
utilities, rent or car payments can often mean dipping into savings,
over-drafting on a bank account or even as a last resort turning to predatory
payday loans.

These scenarios hurt workers and also propagate a broken model where others
profit by extracting exorbitant fees or snaring consumers into ongoing debt
traps.



But now, technology-driven innovation is changing the equation with a better
deal. Earned wage access, or EWA, fulfills a basic promise to American workers:
If you worked today, you should be able to get paid today. You should have
control of your wages and not have to go into debt because your employer only
processes payroll once or twice a month.




Earned wage access allows workers to access funds based on earned wages that
have not yet been deposited into their accounts. Today, millions of Americans
benefit from the flexibility EWA provides to manage their bills while waiting on
a paycheck. Now, we need a regulatory framework that appropriately reflects the
unique structure of EWA products and works for the families who rely on them.

Currently, California's Department of Financial Protection and Innovation (DFPI)
is considering new requirements for EWA that could set the stage for future
national conversations. While the DFPI's proposal includes constructive measures
like a registry to bring providers into a regulatory framework, other aspects
could effectively limit competition and access to EWA.

Credit unions
Credit union loans fueled by growth in auto sales, home equity

Total loans from credit unions increased by nearly 18%, driven in part by car
dealerships rebuilding their inventory. Headwinds in the mortgage market also
fueled interest in home equity loans.

By Ken McCarthy
June 14


Specifically, California is proposing to classify EWA as a loan even though
several other state and federal regulators have recognized that EWA is not a
form of credit. Legislatures in Missouri and Nevada recently passed
comprehensive EWA legislation establishing a framework tailored to its risks and
benefits and exempting EWA from lending laws. In addition, several other states
recognize that lending laws are not suitable for EWA products and are
considering their own EWA-specific frameworks. California's approach is out of
step, and worse, a conflict in legal approaches across the states will create
regulatory uncertainty and confusion and have the de facto impact of limiting
product innovation and consumer choice. Instead, California should follow the
path of other states and defer these policy deliberations to the legislature.

Here's why: Getting paid for the work you have already completed should not
count as a loan or a line of credit. EWA stands apart from credit products
because it is nonrecourse, meaning customers do not face lawsuits or debt
collection; in the event of nonpayment, companies pause service until users can
repay — it's as simple as that. There are no late fees, no interest rates, no
evaluation of creditworthiness and no impact on a consumer's credit score with
an EWA product.

According to a recent Federal Reserve survey, nearly four in 10 Americans
couldn't cover a $400 emergency expense. Workers benefit from early access to
their wages to confidently manage their finances, whether balancing bills at the
end of the month or weathering a short-term financial shock like a hospital bill
or car repair. Earned wage access also benefits members of the growing gig
economy, estimated to make up 36 percent of the American workforce and the
nearly half of American workers that are employed by small-to-medium size
businesses, by offering a direct-to-consumer model so that anyone, regardless of
their employer or employment type, can access their wages on demand.

What's more, survey data makes clear EWA products are popular and working well
for the millions of Americans who already use them. According to a recent
survey, 93 percent say EWA makes them feel more in control of their finances,
and 81 percent say it is the best option to manage their spending.

Take workers like Cesar, who uses EWA to tap into his wages at a grocery
retailer in San Bernardino County, California, and find financial flexibility.
Cesar says that earned wage access "has helped me remain in good standing with
utility providers, which include my daily essentials such as water, electricity
and gas." Without EWA services, Cesar says, "I [would] struggle to make ends
meet, and having to pay high-interest rate loans would worsen my economic
situation."

At the Financial Technology Association, we recently outlined a proactive view
that would help consumers maintain access to EWA and continue to benefit from
financial technology innovation that lowers costs, increases choice and drives
competition. When an innovative product is working well for consumers,
regulators should proceed cautiously to avoid actions that might inadvertently
stifle innovation and harm consumers. It is not necessary nor helpful for DFPI
to go further and declare these innovative products as credit or loans, thereby
squeezing a square peg in a round hole. Collectively, we can get it right on EWA
and other consumer-friendly financial products by taking the same approach as
companies operating in this space and putting the customer first.


Penny Lee
CEO, Financial Technology Association.
For reprint and licensing requests for this article, click here.
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