Regulators recently announced plans to take a closer look at the early wage access industry, but as demand among the workforce for such FinTech solutions continues to rise, experts are encouraging lawmakers to get on board with a new normal of payroll.
In a new survey by PYMNTS and Mastercard, 84 percent of gig economy workers who live paycheck-to-paycheck said they would embrace the option for early wage access, according to the latest Pay Advances Playbook: Breaking The Paycheck-to-Paycheck Cycle. More than 70 percent of the 2,200 gig workers surveyed said they currently live paycheck-to-paycheck, and they view the option to access earned wages before payday as key to covering immediate bills and expenses, and to smooth cash flow.
Gig workers living paycheck-to-paycheck are even willing to switch platforms that connect them to their jobs if it would mean being able to access early wages, while the Playbook also found that these professionals would also be willing to pay fees of between 1 and 5 percent for that early wage access.
While PYMNTS research found a correlation between gig workers living paycheck-to-paycheck and the demand for early wage access, professionals in the gig economy are not the only ones interested in such a solution. Proponents of the option say early wage access supports healthier financial wellbeing and stronger cash flow management for virtually any kind of professional or employee.
Regulators Step In
As demand increases, a new debate is beginning to brew over the early wage access industry as more FinTechs introduce solutions to enable earned wage access before payday.
Regulators intensified that debate when lawmakers from New York and 10 other states revealed their interest in the industry, sending letters to industry players including PayActiv, Even Responsible Finance and Earnin.
“This investigation will help determine whether these payroll-advance practices are usurious and harming consumers,” New York’s chief financial regulator, Linda Lacewell, said in a statement, The Wall Street Journal reported. The letter also noted that some firms “appear to collect usurious or otherwise unlawful interest rates disguised as tips, monthly memberships” and other fees.
The WSJ spoke with Columbia Business School senior fellow Todd Baker, who noted despite its position as a solution to enhance professionals’ cash flow, early wage access solutions have not solved income inequality.
“What it does is replace, for a nominal cost, the $30, $40 people pay today for a single overdraft, or a $200 payday loan,” he told the publication.
Regulators’ concern over early wage access solutions emerges on the heels of federal regulators also intensifying their scrutiny of payday lending.
Now, some critics argue that early wage access is simply payday lending in disguise, or at least too similar to payday lending to be able to promise fair treatment of employees using these products.
“Just because you access it through an app doesn’t mean it’s not a loan,” warned National Consumer Law Center Associate Director Lauren Saunders, according to recent LifeHacker reports.
She added that when it comes to accessing wages early for a fee, “it’s pretty common for people to get into the cycle of needing to do this every pay period. You’ve got this hole in your paycheck, but you also need that money.”
Defenders Weigh In
As regulators and critics elevate scrutiny over early wage access solutions, industry participants are going on the defensive.
PayActiv, one early wage access FinTech that was sent a letter by New York regulators, recently released a short film in support of such products, which, the company’s founder and CEO Safwan Shah said, aims to “shine a light on the colossal cost of waiting to get paid.”
Lend Academy founder Peter Renton also penned a piece in support of early wage access solutions and programs, acknowledging that “earned wage access won’t be a panacea for those people living paycheck-to-paycheck, but it will help them avoid costly overdrafts and payday lending fees.”
He pointed to another article by former Consumer Financial Protection Bureau Head of Innovation Dan Quan in American Banker, who agreed that early wage access tools are “a viable market solution that has the promise of significantly lowering the cost of helping consumers manage short-term cash flow needs and improving their financial lives.”
“Opposing [Earned Income Access], especially efforts to ban the direct-to-consumer model, would be detrimental to consumers and small businesses,” he added, arguing some critics of California legislation — which provides a framework for Earned Income Access (EIA) — are incorrectly interpreting such programs as predatory lending tools.
It’s unclear how regulators will land as this debate rages on, but what’s clear from PYMNTS research and other industry experts is that demand for early wage access is on the rise, and FinTechs are likely to continue to introduce new ways to fill that demand.