Illustration: Tiffany Herring/Axios
Once a novel idea, earned wage access shows signs of maturity, as more institutional capital flows in and recent entrants seek to capture market share.
Why it matters: Advocates argue that earned wage access will become a standard employee benefit for workers in most industries.
The big picture: Today, there are two main flavors of how "earned wage access" is delivered:
- First, there's an employer-sponsored model, in which providers integrate with payroll or timekeeping systems and partner with businesses to offer access to wages as an employee benefit.
- There's also a direct-to-consumer model, where lenders use various data sources — such as consumer spending habits, direct deposit history and sometimes location tracking — to determine an employee's likely wages and provide an advance on their pay.
Zoom in: Proponents of the employer-led model say their integrations and partnerships integrations give them visibility into employees' actual wages, which allows users to access a greater percentage of their earnings.
- They also note that by using employers and payroll providers as a distribution channel, they have much lower customer acquisition costs than direct-to-consumer alternatives. And that, they argue, leads to lower fees for the end user.
What they're saying: "Having the employer-sponsored benefit as a model allows us to establish credibility. … That level of partnership is important to build trust with the people that we're reaching," DailyPay chief marketing officer Gino Palozzi says.
The other side: Direct-to-consumer supporters argue their model does not require employer participation to extend some of the same benefits to workers.
- Using other data to determine how much they can advance — typically direct deposit inflows after a consumer links their bank account — workers can access pay early regardless of employer.
- "If [workers] switch employers, it's a benefit they can keep," EarnIn CEO Ram Palaniappan says. "It doesn't tie them as much to their employers and doesn't force them to stay with the employer to have the benefit."
How it works
Earned wage access providers enable workers to get an advance on earnings — to pay bills or make necessary purchases — without waiting until the end of their pay cycle.
Between the lines: Most providers offer the ability to transfer funds for free to a linked bank account via ACH, and those funds can be accessed in one to three business days.
- Many also offer the ability to transfer funds to a branded debit card for no fee.
- If workers opt to access those funds immediately, providers typically charge a small fee of $2 to $5 for an instant transfer to their account.
On the back end, how EWA providers recover funds varies, depending on whether they are employer-sponsored or direct.
- Employer-led providers are paid back by the employer or payroll provider by simply deducting advanced wages from workers' net pay.
- Meanwhile, companies offering direct-to-consumer pay advances will take back the borrowed amount from a user's account when they recognize a direct deposit from an employer.
State of play
Consumer banking app Chime made waves last month when it announced plans to launch a product called MyPay, allowing customers to advance up to $500 of their wages per pay period.
- The neobank positioned MyPay as a natural extension of existing offerings, including an early payday product giving members access to their paychecks two days early and a free overdraft service that lets them go up to $200 negative without charging a fee.
- MyPay was launched to "drive greater engagement among our existing members, who get a lot of value from it. But we're also excited about the role it can play for us at the top of the funnel regarding customer acquisition," Chime CEO Chris Britt told Axios soon after the launch.
Context: Chime isn't the only consumer banking or financial wellness upstart offering pay advances to users:
- Dave, Varo, MoneyLion and Upgrade (among others) offer EWA services alongside banking, automated savings and other financial wellness features, such as credit building.
- Also entering the market are more traditional institutions, including PNC Bank, which partnered with DailyPay, and U.S. Bank, which struck a deal with PayActiv, to extend EWA services to their customers.
Zoom out: Chime's entrance into the space capped off what has been an extremely busy first half of 2024 for earned wage access providers.
- In January, DailyPay disclosed its goal of going public in 2025 after raising $75 million in equity funding and securing a $100 million credit facility.
- Earned wage access platform Rain secured a new $300 million credit facility in February and is reportedly looking to raise $50 million in equity.
- Also in February, EWA newcomer Reset raised $2.3 million in seed funding.
- In March, ZayZoon, an EWA provider for SMBs, raised a $15 million Series B extension.
- Brigit, another EWA startup, told Axios in April that it had hit over $100 million in revenue and reached profitability last year.
👀 What we're watching: Given the proliferation of earned wage access from challenger banking apps, it seems only a matter of time before even more financial institutions get into the game.
- Though ultimately good for workers, making earned wage access more widely available will no doubt increase competition and the cost of acquiring new users.
The intrigue
State and federal agencies are scrutinizing earned wage access models — and providers — more closely as the sector matures.
- In the interests of consumer protection, several states (including Nevada, Missouri, Arizona, Florida, Hawaii and Kentucky) have either passed or drafted legislation to regulate earned wage access providers.
- Under the Biden administration, meanwhile, the Consumer Financial Protection Bureau has yet to fully weigh in on the sector, but many expect it will soon re-examine 2020 guidance to provide further clarification.
Friction point: Most regulators' concerns center on how earned wage access providers extract fees, particularly for instant transfers to consumer bank accounts.
- Though these per-transaction fees are small individually, they add up over time — particularly if workers make a habit of getting instant access multiple times per pay period.
- Regulators also take umbrage with providers that encourage users to leave so-called "tips" to help them offer their services "for free."
- Finally, while most services do not charge for ACH transfers or debit transactions, some take a monthly subscription fee for access to a suite of financial services, of which pay advances might be one piece.
By the numbers: In a study published this year, the Center for Responsible Lending found the average APR on pay advances repaid in 7 to 14 days was 367% (compared with 400% for a typical payday loan).
- Over half of consumers studied (51%) used pay advance products at least once per month, 30% on average used them at least twice per month, 22% took out advances an average of at least three times per month, and 10% averaged at least five advances per month over a six-month period.
- Troublingly, 24% of consumers studied used two pay advance lenders, and another 24% engaged with at least three lenders within the studied period — increasing the likelihood of overdrafts and additional fees.
Yes, but: The CRL study considered only direct-to-consumer options. Employer-sponsored advocates point out that workers pay lower fees and are unable to overdraw their actual earned wages under their model.
Between the lines: Employer-led providers want regulators to distinguish their businesses from direct-to-consumer models, which they say more closely resemble consumer credit offerings.
- "The cash advance apps are consumer credit. They provide cash to a consumer and get it paid back directly by that consumer. That model needs to be regulated just like consumer credit," Rain CEO Alex Bradford says.
Based on some early indications from the CFPB, regulators might begin drawing that distinction more clearly.
- In a comment on a California Department of Financial Protection and Innovation proposal last year, the CFPB supported a clarification that income-based advances should be considered loans.
- Adopting the DFPI approach would mean pay advances could be subject to the Truth in Lending Act and the regulations implementing it.
The bottom line: As earned wage access and pay advances become more readily available and adopted by consumers, regulators will be looking to set up guardrails to protect their finances.
