At Fingercheck, we have a native Earned Wage Access (EWA) product (aka: Pay-On Demand) that is built into our platform. Most people don’t understand (1) why EWA is such a hot topic (especially from a regulatory standpoint) and (2) how Fingercheck’s EWA model is unique and extremely helpful to small business owners’ recruiting, retention, and cash flow efforts.
Today, we’ll launch a series of blogs on Earned Wage Access. This first part will be more regulatory focused [for our friends in fintech and those who love legal chit-chat]), and then we’ll transition to talking more about the Earned Wage Access benefits for Main Street [for our small business owner friends and us “normal” people who like to converse like salt-of-the-earth humans].
Between 2018 and 2020, the amounts of advanced wages increased three-fold from $3.2 billion to $9.5 billion.
What Is Earned Wage Access?
EWA enables individuals to access a portion of their already earned wages to meet emergency expenses. To deliver superior customer services, while navigating the legal complexities, EWA providers must gain in-depth understanding of the ever-evolving Federal- and State-specific regulations
In the US, financial concerns are the cause of stress for about 57% of employees, says PwC’s 2023 Employee Financial Wellness Survey. Every other American lacks any backup savings or cash cushion that can help meet a financial emergency. Approximately, 75% of the freelancers and gig workers that account for one third of the country’s labor force, do not get paid on time. As a result, many individuals either have to take the debt route or cut back on the necessities.
In recent times, EWA has become a popular fintech service, enabling employees to access a portion of their earned incomes before their regular payday and meet unexpected expenses. EWA is a useful fintech service that helps employees ease a short-term cash flow crunch. In its report “Making Ends Meet: Demand for Pay and Employer-Based Loans,” Aite-Novarica Group states that between 2018 and 2020, the amounts of advanced wages increased three-fold from $3.2 billion to $9.5 billion, which rose further due to financial burden during the COVID-19 pandemic.
Payday loans versus Earned Wage Access
Origins and evolution of EWA in the payroll and Fintech space
The need to address the financial challenges faced by employees waiting for the payroll cycles encouraged companies to explore alternative payment solutions, such as informal payroll advances. However, with the advent of digital payments and mobile banking, it became easier to streamline payroll processes and provide individuals with faster access to their already earned wages.
Over a period of time, EWA solutions evolved to offer diverse models such as the employer-integrated model and the direct to consumer (D2C) model. Federal and State laws and regulatory guidance on fair practices and consumer protection, helped shape the EWA evolution. Today, there are several specialized EWA providers, like Fingercheck, that offer consumer-centric solutions to individuals and businesses to help reduce their financial duress.
The ongoing regulatory debates at Federal and State levels
As EWA continues to evolve in the US, there are ongoing regulatory debates at both the Federal and State levels regarding whether EWA should be treated as a “loan” under applicable law. If EWA is considered a loan under either Federal or State law, EWA products could be subject to extensive regulatory restrictions that apply to loans, such as disclosure requirements, fee restrictions, and licensing.
At the Federal level, the U.S. Consumer Financial Protection Bureau (CFPB) issued guidance in 2020 finding that EWA products which meet certain criteria (such as charging no EWA-related fees) are not loans under the federal Truth in Lending Act, since the employee was merely accessing wages already owed to them by their employer. However, the CFPB has recently signaled it expected to issue new EWA guidance later this year.
At the State-level, many States including Arizona, California, Connecticut, Georgia, Hawaii, Kentucky, Maryland, Missouri, Nevada, New Jersey, New York, North Carolina, South Carolina, and Utah have proposed State-specific EWA laws or issued EWA guidance. Many of these proposals include licensing requirements, in addition to imposing restrictions on the fees that EWA providers can charge.
For example, regulators in California are working on new rules that would classify EWA products as loans, subject to California’s lending laws. Similarly, Connecticut expects EWA providers to adhere to the State’s small loan law if an EWA product’s fees exceed an Annual Percentage Rate of 12%.
Maryland regulators have issued guidance suggesting that EWA products may be loans under state law. Under this guidance, state regulators will weigh whether an EWA product is a loan based on a multi-prong test, paying particular attention to an EWA product’s fees.
On the other side of the spectrum, Nevada recently excluded EWA products from State loan restrictions. However, EWA providers must now obtain a license to offer EWA services to Nevada residents, and are also required to offer a no-fee EWA option.
Missouri has similarly exempted EWA products from the State’s loan laws. However, EWA providers must register with the State. Unlike Nevada, though, Missouri does not require a no-fee EWA option.
With every State having differing views, guidelines, and evolving regulatory requirements for EWA, this widely varying State-by-State legal framework has created complexities for EWA providers.
How Fingercheck navigates regulatory changes
At Fingercheck, we keep a close eye on the ongoing regulatory developments both at the Federal and State levels, as we discussed in our recent podcast with Brian Axell at Axell Law. These include disclosure standards, permitted fees, and consumer protection measures. This up-to-date and in-depth understanding of the dynamic regulatory landscape enables Fingercheck to seamlessly adapt its services according to jurisdiction-specific regulatory and legal requirements and fulfill the EWA needs of its customers.
Fingercheck has successfully enabled consumers to access their earned funds, prior to their pay date, while still moving $1.5 billion in payroll ACH annually. With customer satisfaction paramount, Fingercheck works closely with legal counsel to navigate the regulatory complexity, ensure operational integrity, and deliver superior customer service. We also engage proactively with regulatory bodies and our peers in the EWA space to advocate for regulations that are fair to both consumers and the industry.
To learn why Fingercheck Pay-On Demand services are the most trusted on the market, talk to an expert now.