Earned Wage Access Apps Aim to Disrupt Payday Loans, Two-Week Cycle

Payroll News

As much as 72 percent of the company’s U.S. hourly workers were leaving their jobs each year.

The rise of early pay options follows similar moves by gig companies such as Uber and Lyft, which allowdrivers to cash out multiple times per day. It could challenge the traditional pay cycle and help peopleavoid high-interest loans and credit card bills.

But some fear that early pay providers may be payday lenders in sheep’s clothing. Speeding up pay cyclescould mask a larger problem: stagnant wages.

“The smoothing of pay availability over a pay period is advantageous to people who have very little savings,” Chris Tilly, a labor economist at the University of California Los Angeles, told Bloomberg Law. “What it doesn’t address is why those people have very little savings in the first place. Low pay is low pay, and this is being intensified by increasing housing, health care, and other costs in many places.”

Meanwhile, early pay companies are trying to navigate a legal and regulatory minefield. That includes banking, tax, and employment issues that some states including California—where many early pay providers are based—and New York, are just beginning to consider. Those states could be the first to regulate a burgeoning industry that has yet to get the attention of Congress and federal agencies.

‘Major Life Change’

Early pay providers operate under two models. Some, like DailyPay, partner with companies to offer employees advance wages in exchange for a monthly or per-transaction fee. The third-party provider fronts the money—it doesn’t transfer money from the user’s employer—and then takes the cash back from users either directly out of their next paychecks or through a bank account debit on payday. Some companies subsidize part of the cost, but employees in many cases are on the hook for transaction or membership fees.

Others, such as Earnin, Dave, and Brigit, offer services directly to end users. Those providers recoup theadvanced funds directly from user’s bank accounts on a set date.

Certain providers have added an income stream by partnering with prepaid card services. Dave andPayActiv offer reloadable Visa cards on which the users can get advance pay transfers.

Early pay services are similar to installing an ATM in an office lobby, says Jason Lee, the co-founder ofDailyPay. The company has partnered with G4S, Westgate Resorts, Kroger, Adecco Staffing, and others inexchange for a fee of $1.99 to $2.99 per transaction.

“The thesis here is that when employees can access wages when they want, it creates a major life change,”Lee says. “If they can access the money when they want, they can also tap a button and then pay bills ontime. Because it is a benefit attributed to the employer, the employee actually now stays longer.”

DailyPay currently has about 500,000 users, who make 1.2 transactions per week. Users take about $66 inearly wages per transaction, the bulk of which come at the end of the month. That means the averageuser spends a maximum of $3.60 a week in early pay fees.

The primary players in the early pay market have largely targeted low-wage industries. DailyPay’s Lee and Jon Schlossberg, the CEO of Even, say they see the market also moving into the white-collar workforce.

Nearly 40 percent of Americans don’t have $400 in their bank accounts, according to a 2019 Federal Reserve study. That leaves them turning to credit cards and payday loans that often come with high interest rates. For payday loans, the repayment cost is often triple the amount of the money borrowed or more, despite federal and state efforts to cap the rates.

But some are concerned that moving up pay dates doesn’t address the problem of why people are livingpaycheck to paycheck in the first place.

Hitting those workers with new fees for accessing their money early could make matters worse, RachelSchneider, a resident at the Aspen Institute Financial Security Program, says.

State laws were enacted to force employers to pay their workers regularly, but partnering with early pay providers doesn’t cost many of them a penny, Schneider says. Because early pay providers front the money to users and then take it back directly, employers can continue to process payroll on the two-week cycle without losing interest on the money they pay workers or taking on new tax and accounting burdens.

“It’s not a gold standard to pay every two weeks,” Schneider says. “It’s just that employers would otherwisebe delighted to delay paying their workers.”

Regulatory Playing Field

Lawmakers in California are tinkering with legislation that would set some basic rules of the road for earlypay providers.

Ibarra questioned PayActiv’s practice of allowing users to get advances of money they haven’t yet earned,according to the lawsuit. He said that made PayActiv a traditional lender, subject to federal and staterestrictions and required to disclose fees as interest charges.

“Doing that has the potential to create an ecosystem of users that are trapped in there because they keeptaking money out that they have to pay back later,” Ibarra says.

New York’s Department of Financial Services in March reportedly subpoenaed another early pay provider —Earnin—seeking information about the company’s business model. Earnin doesn’t partner with employers to offer its services and it takes the money back directly from users’ bank accounts. The company charges a suggested “tip” of up to $14 per transaction.

Laws in California, New York, and a handful of other states tightly limit the deductions that can be made directly from workers’ paychecks. Early pay providers in those states get around those limits by requiring users to sign agreements allowing them to automatically debit the fronted funds from their bank accounts on payday.