Workplace advantage is growing in popularity: wage access applications that provide workers with a portion of their earnings before pay.
Why it matters
The applications help employees avoid the cost of pre-payment loans or overdraft fees during financial distress, but they can still bite the payout.
What will be next
The regulators are set up to clarify the rules for services.
As gas prices rise, Target co-worker Adam Ryan has found that he relies on a workplace benefit that allows him to take advantage of part of his hourly wage before pay: the DailyPay app.
DailyPay delivers what its name promises. The application displays your accumulated earnings in the current payout period and asks how much you wish to send to your bank account. If you wait a day or so, the transaction is free. To receive your cash immediately, you must pay a fee of $ 3.
Ryan usually can’t wait. He drives 30 minutes each shift, four times a week to get to his job in Christiansburg, Virginia. With gas prices hovering close to historic highs, early access to his wages allows Ryan to fill the tank and get on shifts. The DailyPay fee still represents a tax on its total compensation, he says.
“It’s not the whole amount you’d get if you waited,” said Ryan, who runs a union in his business. “But people can’t afford to wait.”
Ryan is not the only hourly worker who uses the employer’s application to pay wages between paychecks. These pay-as-you-go applications, which are largely unregulated, have grown in popularity over the last decade as more employers have offered them to employees as an advantage. EWA applications are third-party services that connect to corporate payroll departments and give employees access to a portion of their earned but unpaid payroll. Large companies, including Walmart, McDonald’s and parent company Outback Steakhouse, offer them as benefits.
Some applications, such as Even, charge a monthly subscription. Others, such as FlexWage, charge a fee for each transaction. Some workplaces pay fees for a set number of advances, others allow an unlimited number of transactions. And some applications, such as Instant Financial, charge neither the employer nor the employee, make money by depositing into a Visa debit card, and deduct part of the interchange fees that merchants pay for debit card transactions.
The popularity of these applications seems to be growing. With inflation running the fastest in four decades, more than 14% of Americans live pay-by-pay and have difficulty paying their bills, according to the Lending Club, a peer-to-peer lending company. Nearly a third of households did not have enough emergency funds to cover an unexpected $ 400 in 2021.
According to Instant Financial estimates, by 2020, about 8 million employees in the United States had access to EWA applications. The company considers more than 50 million Americans to be potential users, earning $ 60,000 or less a year.
Applications are an evolution of long-established formulas for the lowest paid Americans. For years, lenders offered instant access to cash in exchange for annual percentage rates of almost 400%, and employees accrued credit card interest and overdraft fees as they struggled to keep up.
Consumer advocates acknowledge that EWA applications are an improvement over pre-payment loans because they do not charge exorbitant fees or interest. Sohrab Kohli, who heads financial policy research at the Aspen Institute, says the services could be useful for workers who have a few unexpected expenses a year.
“But if they use it with every paycheck,” he said, “it’s not a great solution to meet that need.”
The question of credit
In 2020, the Office of Financial Consumer Protection found that wage access applications are not credit services unless they charge fees (although many do). The lawyers called on the agency to reconsider this position, which it agreed with.
Instant Financial and DailyPay told CNET that their services did not constitute credit because the advances were based on wages already earned.
“We’re changing the way people are paid,” said Instant Financial CEO Tal Clark. “We try to do it responsibly.”
Other services, such as Dave and Earnin, bypass employers’ systems and offer cash advances based on when a customer is at their workplace or cash flows in a person’s bank accounts. They also charge for instant transfers and sometimes charge a “tip”, which is a voluntary amount. Earnin says it’s not a form of credit.
“If you give people their earnings when they earn it, I don’t know why you should call it credit,” said Ram Palaniappan, CEO and founder of Earnin. Advocates argue that the services offer money with the expectation of later repayment, which they say is the definition of a loan. Nevertheless, Palaniappan says the company is open to regulation that has a “railing” for the industry.
Earnings producer Activehours settled a class action lawsuit in 2021 on allegations that its advertisement had misled customers by claiming that the service would reduce overdraft fees. The plaintiffs alleged that their banks charged them overdrafts that occurred when Earnin tried to withdraw funds from their accounts before the funds were available. Palaniappan said customers can choose when to schedule withdrawals, and can also choose to route their payouts through Earnin, who deposits payouts into customers’ accounts after deducting the amount of any down payments.
Dave, another application that offers advances directly to consumers, works with the bank to provide advances similar to an overdraft. The bank is regulated by the Office of the Currency, which is the US Treasury Department that regulates national banks.
Dave charges customers a fee for immediately receiving funds backed through an overdraft to a debit card issued by the company. People can also request a free transfer to an external bank account, which usually takes one to three days. Dave asks for voluntary tips on deposits and also earns money from interchange fees when customers use their Dave debit cards.
While structured as an overdraft fee, Dave CEO Jason Wilk says the company keeps costs much lower for users. “It’s ten times better and friendlier than a traditional overdraft,” he said.
The company is facing a lawsuit for alleged data breach by a third-party service that processed Dave’s customer information. Wilk declined to comment on the ongoing lawsuit.
Even the application that Walmart offers to its staff did not respond to requests for comments. Inland parent company Bloomin ‘Brands declined to comment and McDonald’s acknowledged the request for comment, but did not provide one.
Many employees see access to wages through applications as an advantage.
Meagan Ulberg, who worked at Walmart in the Sacramento area until May, signed up for Even after a misunderstanding about when she would be paid. A co-worker told her about the Even application, which gave her access to some of her earnings on the spot, which allowed her to handle some errands. Ulberg says she was so grateful that she bought her coworker a $ 10 gift card to thank her.
Even also helped Ulberg, whose wages fluctuated according to hours and overtime, track her earnings in real time.
“I realize what my paycheck is doing,” Ulberg said.
Walmart, which has been offering cash advances through Even since 2017, says it provides an application that helps employees budget and overcome financial difficulties. The company pays the cost of the subscription, which means that employees get their full salary.
“In addition to budget planning and savings, access to earnings is another feature available through Even, which helps co-workers navigate responsibly in unexpected expenses,” said Walmart spokesman Josh Havens in a statement. “This app has proven to be extremely popular with our associates and has remained one of the most popular benefits since its inception.”
Cash advances or higher wages
Critics of EWA’s claims say the benefits point to a deeper problem: wages are too low. According to the Financial Health Network, there has been an increase in workers’ wages duringwere almost destroyed by inflation.
Applications became popular at a time when the wave of work organization was hitting the retail and food industries. Starbucks, REI, Target storesthey all face union pressures, with higher wages being a key requirement.
Ryan pushes for union elections at his Target store and says he wants to raise salaries for his colleagues. In his shop, he says he saw salary increases in increments of 8 to 30 cents. Inflation has also significantly reduced the value of these increases, he says.
Target said it was launching the app in 2020, and confirmed that employees paid a fee if they wanted to access the funds on the same day, but declined to comment further.
Trapped in a cycle
Employees’ earnings, whether from low wages or limited hours, are why EWA applications can jeopardize their finances, says Yasmin Farahi, chief policy officer at the Center for Responsible Lending. “At these fringes,” she said, “even what looks like a low fee can be problematic.”
Research from the Financial Health Network shows that employees who use EWA applications tend to do so repeatedly during consecutive pay periods, showing that they do not pay extra cash outages during the pay period after they have taken advances.
Jeanniey Walden, director of innovation and marketing at DailyPay, said the company saw a “curved” trend in which employees take advances on multiple payouts, but eventually move to wage savings after recovering from a shortage of cash. It recognizes that wage access applications cannot overcome external forces such as historical inflation.
“I don’t know we can solve it as much as we can help people,” she said.
Lauren Saunders, associate director of the National Consumer Law Center, said it was important to keep in mind that getting access to cash in time doesn’t mean workers make more money.
“It really shows that a lot of people are struggling from paycheck to paycheck,” Saunders said.