When is a loan not a loan?
That is, in one sense, the question at the heart of proposed new federal legislation around earned wage access (EWA) that is coming on the heels of multiple states debating their own regulations in the absence of substantial federal rules around EWA products.
EWA, also referred to as early, instant or on-demand pay, is gaining popularity, granting employees access to their earned wages before their regularly scheduled payday. But EWA products, which are not classified as loans and therefore are not subject to state consumer lending and usury laws, have drawn scrutiny for their fees and opacity.
And EWA regulation is now top of mind for the collective FinTech landscape, as on Wednesday (April 17) the U.S. House Financial Services Committee (HSFC) advanced “Earned Wage Access Consumer Protection Act,” a bill that aims to provide a regulatory framework and establish consumer protections for services that offer workers access to their paychecks before their scheduled payday.
“I am proud of our bills that foster innovation in financial services, safeguard consumers and protect the financial system in the United States,” Rep. French Hill, vice chairman of the HFSC and an original cosponsor of the EWA legislation, said in a statement. “Together, we will continue to lead in this space by crafting policies that ensure America remains at the forefront of the financial technology ecosystem.”
“The protections in my bill will help to ensure consumers that they can safely use EWA nationwide, and they will be able to provide industry with regulatory clarity to innovate and expand product offerings,” said Rep. Bryan Steil, who co-sponsored the bill.
It was advanced on Wednesday over the objections of some house members, who noted that the EWA Act would exempt EWA products from disclosures required by the Truth in Lending Act.
Read more: Wisconsin Law Fuels Ongoing Earned Wage Access Debate
Per its draft text, the EWA legislation proposes several measures intended to protect consumers while supporting the growth of EWA services.
The act defines EWA providers and sets strict operational boundaries, specifically regulating both employee-sponsored programs and direct-to-consumer offerings.
A notable feature of the bill is the requirement for EWA companies to provide a fee-free option for accessing earned wages, aiming to enhance the financial wellbeing of workers who use these services. Additionally, in a move to protect consumers, the bill prohibits EWA companies from using debt collectors. This provision aims to prevent aggressive repayment practices and ensure that the services do not lead to additional financial burdens on customers.
The advancement of this bill is seen as a significant win for the EWA industry, which has argued that federal regulation would validate their business models and provide clarity that could spur further growth.
For consumers, particularly low-income workers who often rely on EWA services to bridge gaps between paychecks, the legislation promises greater security and transparency. The provision of a fee-free option is particularly impactful, potentially reducing the overall cost of accessing earned wages early.
Read more: The Rise of Instant Payroll Payments
The concept behind EWA is to address the financial challenges faced by many workers who may encounter cash flow shortages between paychecks. By providing access to a portion of their already-earned wages, EWA aims to help employees cover unexpected expenses, avoid high-interest loans and better manage their finances.
This trend is consistent with insights from PYMNTS Intelligence research, indicating that real-time access to wages can be a game-changer for consumers living paycheck to paycheck, a demographic now comprising approximately 60% of the U.S. population.
On Thursday (April 18), Marqeta announced that it was expanding its earned wage access program with assistance from financial wellness provider Rain.
According to “The Rise of Instant Payroll and Early-Access Compensation,” a PYMNTS Intelligence study conducted in collaboration with Ingo Payments, most American workers want their employers to give them access to wages each day.
However, it’s essential to recognize that while EWA can provide immediate financial relief, it’s not a long-term solution to financial challenges. Employers and employees should exercise caution to ensure that EWA usage is responsible and does not lead to financial dependency or cash flow problems in the future.
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