In a country whose workforce is increasingly divided between a few elites, a middle-class trying to keep ahead of the cost of living, and a sea of people struggling to make ends meet, it shouldn’t be surprising that demand exists for products that can grant workers access to their accrued wages.
In the last few years, fintech innovators have brought a diverse set of “early access to wages” products to market. A few of the top names in the space: Earnin, PayActiv, FlexWage, DailyPay, and Even are among the most well-known.
These products differ from one another. They differ in significant ways. In some, the employer pays, whereas in others, the onus falls to the worker. Some use a system of tipping. Some charge on a per-use basis, whereas others earn revenues through subscription fees. Some distribute funds through the employer, whereas others gain direct access to a worker’s bank account. Some require extensive integration with a company’s internal payroll system and thus are only being utilized by larger businesses. Others are capable of working with small businesses and freelancers.
While the aim of all the services that give workers a chance to access their wages early is largely the same, they differ in style. I would contend that there are essential distinctions across the market.
I evaluate these products through several criteria.
• First, how are funds distributed?
• Second, is there a reasonable basis to claim that the product is a form of credit?
• Third, who pays for the service – the employer or the employee?
• Fourth, is it suitable for a 1099 worker or exclusively for an employee?
• Fifth, does it have safeguards in place to put a limit on the frequency of use?
Distribution of Funds
With most early wage products, funds are advanced by the technology provider to the consumer. On payday, the employer credits an escrow account, held by the tech provider, for the advance plus any related fees.
On the other hand, at least one provider advances the funds to the consumer, with the funds returned on payday.
The critical difference is that in the second model, the technology provider gains access to the worker’s bank account. The company gains access to the record the activity on the account and has the permission to withdraw funds.
Basis for credit
In cases where the employee does not pay a fee to use the service, then it is not a credit product. However, if the employee does pay a fee, then we have to consider the possibility that the product should fall within the definition of credit. If a fee is optional, but paying a fee brings additional benefits, then fee-paying accounts should remain in consideration for categorization as credit. If the tech provider has access to the worker’s bank account – and there is a fee – then we should probably give some consideration to the question of this product's status as an instrument of credit.
If defined as credit, then it should be regulated as such. Tech providers should be held accountable for honoring the Truth in Lending Act (“TILA”), the Fair Debt Collection Practices Act (“FDCPA”), the Equal Credit Opportunity Act (“ECOA”), the Consumer Credit Protection Act (“CCPA”), and the Fair Credit Reporting Act (“FCRA”). State laws would also be appropriate.
One of the first things to know about an early wage service is the cost, but immediately following that aspect comes to the question of who bears it. I hesitate to preference systems that bill the employer versus those that put the obligation on the consumer, but I do think it is an important distinction. In theory, it should be the case that from the perspective of the consumer, it would always be better to use a service whose expenses are borne by the employer, but that may not be true in practice. More likely, we should be concerned about services that give cross-subsidies to employers as a contractual benefit.
Suitable, but for whom?
The early wage model may have a different appeal to 1099 gig economy workers than for employees. An early wage product overcomes friction related to invoicing clients. If you have ever freelanced, you probably had an experience with a client with a 90-day payment system. However, at some point in time, a pricing system that applies a fixed fee for each advance may become expensive if the amount of the advance is not that great. If a full-time worker pays $5 to receive $800 early, that is different than if a freelancer pays the same fee to receive $150. The caveat is that a freelancer, who would otherwise face a waiting time of 90 days, might see additional value if the advance would deliver funds as soon as possible after the delivery of the service. It would also be worth asking if a 1099 worker could recoup a portion of expenses ahead of time, as well.
I frequently hear concerns from people about the prospect of an early advance becoming the new normal for low-wealth workers. It is one thing to pay a fee to receive wages occasionally, but another thing entirely if the worker utilizes early pay constantly, week after week or month after month. At a certain point in time, the worker has accepted a lower effective wage.
Another way to think about repeat usage is to consider what it says about the financial state of low-wage workers. Maybe the problem isn’t the speed of payment. Perhaps the real concern is the amount that people earn.
I see a lot of opportunity for early wage apps to help consumers manage their finances. We know that many workers experience fluctuations in income and revenue. Volatility creates problems. When people have more month than paycheck, they face tough decisions. Early access to wages can smoothe the ebb and flow of funds into the accounts of households. In my opinion, a best-case scenario would be for these tools to undermine demand for payday loans. There is no debt trap here. There's no $35 overdraft fee, no loan renewal, no teaser rate that catches up with a person later.
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