Why fintechs want the CFPB — not states — to rule on earned wage access

As more states consider legislation to regulate payroll advance products as loans, the nascent industry is asking the Consumer Financial Protection Bureau to step in with a formal rulemaking that consumer advocates say could delay state actions. 

The change comes after Connecticut added clarity last year on to how finance charges are calculated in its revised small-dollar loan law. Meanwhile, California  is expected to issue a rule soon that would subject so-called earned wage access products to the same regulatory treatment as loans. 

The industry has been lobbying state lawmakers, regulators and even governors to get income-based advances excluded from state licensing and disclosure requirements that would ensure fees, tips and voluntary payments get calculated into annual percentage rates, allowing consumers to comparison-shop. 

"There's a huge fight nationwide playing out in legislatures across the country in this session to push for what the industry wants," said Joseph Chambers, general counsel and chief of staff at the Connecticut Department of Banking.

Connecticut became the first state to require that tips, subscription fees and expedited transfer fees be treated as finance charges when calculating the APR on a loan, which by the state's definition includes income-based advances. The change by Connecticut, which went into effect January 1, has led many earned wage access companies to pull out of the state, according to the American Fintech Council, a trade group. Because most of the companies have APRs of 300% or more, they run afoul of Connecticut's usury and small loan licensing laws.

The move by Connecticut comes after two states — Nevada and Missouri — passed laws last year that exempted earned wage access products from being regulated as loans. The two states generally prohibit companies from charging late fees or reporting to credit reporting agencies. Nevada mandates that companies provide at least one free option for consumers while Missouri prohibits accepting payments from consumers by credit card. 

In response, a number of other states including California, Georgia, Hawaii, Maryland, New Jersey, New York, North Carolina, South Carolina, Utah and Washington are considering legislation or actions to regulate the industry.  

"We've largely been able to keep the payday lenders from operating in Connecticut because they have to be licensed and adhere to the requirements," Chambers said. "Now the fintechs come along and say they are different because they are online and don't charge fees."

The industry trade groups are lobbying state legislators to adopt laws similar to those in Nevada and Missouri. The lobbying also has been successful in getting state attorneys general to assert that payroll advances are not a form of credit. Last year, attorneys general in Montana and Arizona stated that earned wage access products are not loans, which advocates say has had the effect of halting state banking regulators from taking action.

Last year, the Connecticut General Assembly revised its Small Loan and Related Activities Act to require companies that sell income-based advances to be licensed. The change means that licensed lenders can exceed the state's 12% usury cap, but only if they also refrain from charging consumers finance charges that exceed an APR of 36%. Connecticut lawmakers had amended the small loan law in 2016 to include earned wage access advances and other products in the definition of a small loan. Connecticut's Department of Banking gave the industry extra time to implement changes so consumers were not impacted, said Matt Smith, an agency spokesperson. 

Last week, the American Fintech Council, which represents a majority of earned wage access providers, sent a letter to CFPB Director Rohit Chopra asking for the bureau to open a formal rulemaking process to address what could be a patchwork of state laws.

"There are certain states like Nevada and Missouri that have earned wage access bills that are crafted for the product that it is, whereas we're finding other states are shoehorning earned wage access into existing lending laws," said Phil Goldfeder, the group's CEO and a former member of the New York State Assembly. 

Goldfeder argues that payroll advances are not loans and should not be subjected to APR disclosures because of their unique characteristics: there is no underwriting, no risk-based pricing and no reporting to credit bureaus. Payroll advances, he says, are non-recourse, which means there is no requirement that the consumer repay the advance, though a consumer cannot get another product without repaying. He also concedes that some companies engage debt collectors to get repaid. Defaults are low because consumers provide a company access to their bank account for repayment, which is similar to how payday lenders get repaid. 

Lauren Saunders, associate director at the National Consumer Law Center, said the industry is trying to stall state efforts to classify payroll advances as loans and head off what could be revised guidance from the CFPB. Consumer advocates and Connecticut's banking department refer to earned wage access products as high-tech payday loans. 

"They are trying to get out of interest rate caps that apply to loans," Saunders said. "Decades ago, payday lenders went to states and asked to be taken out of loan statutes and that's exactly what the earned wage access industry is doing right now." 

Earned wage advances — long known as payroll advances that allow workers to get an advance on their wages before payday — have two distinct business models. Some large employers such as WalMart and Amazon market the products as a benefit to employees, providing access to wages halfway through the pay cycle. But such advances typically have no fees and therefore are exempt from state licensing laws. 

"Getting paid once or twice a month is outdated, and workers value a financial tool that lets them access their already earned wages to make ends meet," said Penny Lee, president and CEO of the Financial Technology Association, another industry trade group. Lee said in an emailed response that she applauded the Nevada and Missouri laws that "appropriately define EWA as a non-credit product," and establish what she called "important consumer protections." She said she welcomes federal legislation that follows those states.

But many earned wage access companies that offer employer-based advances charge fees to expedite payments. Most also offer at least one free option that allows the consumer to get an advance payment on their wages through an ACH bank transfer, though it may take a few days.

Under a second model, known as direct-to-consumer, payment companies use cell phone apps to charge fees but call them voluntary tips. Consumer advocates claim that calling the fees tips is a way to evade regulations. 

An important distinction between the two business models is that employer-integrated models grant advances based on verified employment. Large employer-based payments companies — DailyPay in New York; Payactiv, in San Jose, California; and ZayZoon, in Calgary, Canada — get reimbursed by the employer. The companies claim that their products aren't loans because the money advanced is for work already performed within a 14-day pay cycle, with no repayment obligation.

Some providers also have relationships with banks and the advances may get put into a debit account that provides interchange fee revenue that gets shared between the bank and earned wage access provider. Some also have arrangements in which the advances get deposited on an Amazon card or in an Uber account.

However, there are distinctions among the companies. Another large provider, FlexWage Solutions, in Scottsdale, Arizona, partners with employers but the money paid to employees is funded by the employer; FlexWage does not provide the advanced funds itself, nor does it assist employers in securing financing for the payroll advances.

By contrast, with the direct-to-consumer model, there is no verification of employment or of hours worked. Companies such as Earnin, based in Palo Alto, California, and Brigit, based in New York, front the money to the consumer and the amount is automatically debited from an employee's bank account minus fees.  

"When we look at earned wage access we do see some benefits to consumers but the benefits and harms are widely different based on the business models," Chambers said. 

Heather Heebner, vice president of compliance at Instant Financial Inc., an earned wage access provider in Alpharetta, Georgia, said a rule by the CFPB could provide guidance and guardrails for providers while the states could still choose to differentiate between the two business models.  

"Instant's desire is that the federal and state regulations would not contradict each other and reflect the belief that providers are not payday lenders and do not employ predatory practices with their consumer base," Heebner said in an emailed statement. 

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Most earned wage access companies charge fees ranging from about $1.99 to roughly $4.99, while some also ask for tips. Consumer advocates and some state regulators are concerned that, without clear laws, the companies could ratchet up fees. 

Last year Brigit, also known as Bridge It Inc., agreed to pay $18 million in consumer refunds to settle charges by the Federal Trade Commission that the company engaged in deceptive marketing and tactics that prevented customers from canceling monthly $9.99 membership fees. 

The fight at the state level is happening against the backdrop of laws in more than a dozen states and the District of Columbia that currently ban payday loans. Many of those same states are looking to craft legislation that would regulate payroll advances as loans.

"Certainly in states that don't have payday loans, there is no excuse to authorize a new class of payday loans," said Saunders. 

Going forward, all eyes are on California, which issued a proposal last year that would update the definition of a loan to include income-based advances. 

Seth Frotman, general counsel and a senior advisor at the Consumer Financial Protection Bureau, wrote in a comment letter to California's Department of Financial Protection and Innovation that some of the payroll advance products share fundamental similarities with payday loans. The CFPB appeared to agree with the state agency that any tips and expedited fees would be considered finance charges, subject to the Truth in Lending Act that generally applies to extensions of credit.

"The CFPB believes that it is consistent with this long standing practice to subject providers of income-based advances marketed as 'earned wage access' to state oversight — as providers of other income-based advance products, such as payday loans that have long been offered in some states, are," Frotman wrote. 

Industry trade groups and consumer advocates also are at odds over a CFPB advisory opinion in 2020. Some experts suggest that industry is trying to delay state regulations by calling for the CFPB to issue a formal notice-and-comment rulemaking. If the bureau instead opts to revised its guidance, the agency would be subject to challenge.

Goldfeder at the American Fintech Council said that as the industry has changed dramatically in recent years and so should regulations. 

"While we think the 2020 advisory opinion was the right move at the time, now that the industry is more developed we think a more formal rulemaking process is in order," he said. "Responsible earned wage access participants recognize that they need to be regulated, they just want it done in the right way."