Transcription:
Chana Schoenberger (00:10):
From American Banker, I'm Chana Schoenberger and this is Bankshot, a podcast about banks, finance, and the world we live in. If you go to work every day, why don't you get your paycheck immediately? Kate Fitzgerald, senior editor for payments at American Banker, has been covering this industry for many years. She's written a lot about a new type of payday advance that sprung up in recent years known as earned wage access. Depending on who you ask, this is either a revolutionary new tool for workers to deal with financial stress or a predatory product that victimizes employees by charging them high percentage fees to get their money. Kate's reporting looks at who benefits and how when workers get paid faster.
Kris Patmos (00:57):
I would get many requests for pay advances and because all of our caregivers, none of them work in the office, so it was always that they would have to drive to the office to pick up a check. So for me, it was extra work and then it was, oh, planning when they're going to get here, when they can pick up their check. And if they needed something on the weekend, we're not available on the weekends. So this was an opportunity for them to get their money right away and we don't even have to know about it.
Kate Fitzgerald (01:25):
That was Kris Patmos, co-owner of Amada Senior Care in Mesa, Arizona. Her employees provide in-home care for seniors. In this economy, a lot of these caregivers are living paycheck-to-paycheck and they sometimes need an advance on their wages. As you've heard Kris say, she could write them a check in those cases, but it was always really inconvenient for her, the business, and for the employee who had to ask for it.
Fintechs aim to solve problems like this and several innovators in the digital payments industry have an answer. It's called earned wage access or EWA. Quite a few fintechs have sprung up in the last few years offering streamlined digital ways for employees to get about half of their paycheck, at least a week in advance. And businesses say EWA helps them retain employees. But regulations are starting to take shape around EWA and there is some controversy about the direction it's going to go.
(02:21)
Some critics call EWA a digital payday loan that may hurt an employee's ability to effectively plan and save money. Fintechs say EWA is the wave of the future, and as more gig workers get paid at the end of every shift, soon we'll all be thinking of getting paid immediately, rather than waiting for our paycheck to show up twice a month. It's true, many users want instant early access to their wages and they will typically pay a fee of about $2 to $5 every time they request it. But nearly all EWA providers have a free option. One free option tends to be slow; it usually takes a couple of days for the funds to arrive by traditional ACH transfer, and another free option requires the user to link their wages to a debit card provided by the EWA company, who makes money on the debit card interchange and other fees.
(03:11)
A couple of states recently finalized laws providing the first official legal framework for EWA, but debate is already raging between the providers and consumer advocates over whether these EWA products should be called loans,or not. Banks are starting to get on board with EWA. Santander, PNC and TD have each partnered with an EWA provider to extend these services to their corporate customers who can then make it easy for their employees to access it. There's also a direct-to-consumer version of EWA where third-party apps front the funds from an employee's next paycheck to them. But in this podcast, we're only talking about the employer-sponsored model, where many fintechs are working directly with large and small businesses to offer EWA, which is sometimes called early wage access or just EWA.
(04:02)
You may ask, why don't employees who want their money early just use the free option? People I spoke to who are living paycheck-to-paycheck tend to have just one bank account. It's already attached to direct deposit, set up for recurring payments and credit cards and other obligations, and they say it's tricky to make changes. Well, you might wonder, aren't we moving into an era of faster payments, when all money will move instantly? Aren't there innovative ways where employees could get their wages early for free, to the benefit of all parties? It's a good question and we'll get to that.
So I went out in the field to talk to some workers who use EWA services, including people who take the instant option for a fee, and why they do that.
Kris Patmos, who kicked off this podcast, explains more about how quickly things can spiral into chaos at her company when one of her several dozen employees can't get to work and they can't get out there to help frail seniors with everyday tasks and non-medical issues.
Kris Patmos (05:01):
A lot of times we have caregivers who can't pay their auto insurance, they don't have money for gas, and they are required to drive to their client's home—and a lot of them drive their clients—and so they have to have that. And if they don't have money and they have to wait till the next pay period, they're not going to work. So now they're caught in a Catch-22, and so for them to get money for either paying for their car insurance or to pay for gas, it allows them to go to work so they don't get further behind in their bills. We have a lot of single moms with multiple kids and it's, it's difficult, and a lot of times they don't have family in the area, they don't have anybody else to rely on, so they're just trying to figure it out on their own.
Kate Fitzgerald (05:43):
So Kris' company connected with ZayZoon, an EWA provider that extends services through employers, she noticed that absenteeism declined.
Kris Patmos (05:52):
When our employees call and they need a pay advance and I have to write them a check, they are extremely embarrassed, apologetic, and very, very embarrassed. With ZayZoon, nobody knows. Nobody knows that they've taken any money out.
Kate Fitzgerald (06:06):
Previously, Kris was manually writing checks about two or three times a month altogether for employees who needed an advance on their paycheck. Since the firm started offering EWA through ZayZoon, the employees just go directly to the ZayZoon app when they need a pay advance.
Kris Patmos (06:23):
Honestly, I don't know who signs up, I don't know when they sign up. It is something that happens in the background that I don't even have to be aware of, which is wonderful because it doesn't require us to do anything.
Kate Fitzgerald (06:36):
Lori Pappin is a caregiver support supervisor at the same company. Lori explains to new employees how ZayZoon works.
Lori Pappin (06:44):
It's a good resource. I think that having that money deposited, like that option to have that deposited right away, helps them with their daycare, their gas money, car issues, groceries and things like that.
Kate Fitzgerald (06:56):
Lori uses ZayZoon herself. She has a full-time job and she's disciplined about her spending. She doesn't use credit cards or payday loans, but she says it's not uncommon for her to run out of cash before payday.
Lori Pappin (07:09):
I mean, I have a pretty good budget. I mean, I have four kids and they're expensive, but things always come up. So it doesn't matter how easily or how best I budget myself, something always comes up.
Kate Fitzgerald (07:21):
ZayZoon charges a fee of $5 for people to get instant early access to their wages or they can take that free option in their bank account, if they're willing to wait a day or two. Or they can get their wages early any time, instantly, free of charge, if they link their paycheck by direct deposit to ZayZoon's Visa debit card. But Lori likes to keep her finances simple. Currently, she only has one bank account. She has not opted to use ZayZoon's free direct deposit approach. She sees ZayZoon as an emergency fund, not something she's going to lean on every month, and that's how she advises her colleagues and other caregivers to use it.
Lori Pappin (07:59):
And so I let them know that if you're going to need to take money out, you don't want to take it out every day. Like use it for emergencies, keep your bank in there and make sure you're just budgeting that money, because it can cost each time you take out. However, yeah, you need to plan it. I always suggest that they plan for it.
Kate Fitzgerald (08:16):
Consumer advocates are worried about people getting caught up in negative financial cycles when they're using EWA services. Nevada recently became the first state to finalize an EWA law. Nevada requires EWA providers to have a license and provide at least one free option for people to get their wages early with no fee, among other safeguards. Significantly, Nevada does not classify EWA products as loans. Missouri, shortly after Nevada, passed its own EWA law. It's very similar. Providers must obtain a license and EWA is not classified as a loan.
Some say these laws don't go far enough. Consumer advocates are saying California has proposed regulations that do classify EWA products as loans, and federal laws regarding EWA haven't even been formally proposed yet. What consumer advocates worry about is that not classifying EWA as loans could give providers wiggle room for exploitation.
(09:14)
Payday lenders, for example, tend to be classified as loan brokers, not loan originators, which in some cases gives them a way to dodge some of the traditional consumer loan protections that are in place. Arizona's attorney general early this year ruled that EWA products are "fully non-recourse," meaning there's no requirement to repay the advance, no collections clause, no reports to credit bureaus, and they're not consumer loans.
Lauren Saunders, an attorney and associate director at the National Consumer Law Center in Washington D.C., handles federal legislative and regulatory work there. She's been following the evolution of EWA fairly closely with her colleagues for a few years.
Lauren Saunders (09:55):
In general, I think that earned wage advances are not a helpful financial product. Their premise is you can't afford to pay something out of this week's paycheck, so I'm going to take from next week's paycheck. It's immaterial the fact that you worked those hours. You are not entitled to your pay until payday, so it's an advance on your pay. And what happens is, you end up with a gap in the next paycheck, which causes you to have to borrow again, and you end up on an even more vicious cycle than traditional payday loans. Well, if earned wage advances are a benefit, then companies should for pay for them as a benefit and offer it for free. And Walmart does. It's completely free to the consumer. There are other companies that pay for it. Now, at the end of the day, I think it might be useful for consumer to use, occasionally. Earned wage providers portray themselves as an alternative to payday loans and a way of weaning people off of payday loans. I don't think we yet have the research to know whether that's actually happened. I think a lot of people are probably using these advances and spending their pay early when previously they're getting by on their current paycheck. Some might be using earned wage instead of payday loans. This is just another form of payday loan. In some respects, it's a little friendlier, but still high-cost and still problematic in some respects, and we need to be honest about what it is and prevent it from exploding into a big problem.
Kate Fitzgerald (11:26):
Saunders clarified that EWA technically is different than a payday loan, but the effect might not be that much different for an end-user. I asked her about the fact that most EWA products offered through employers have a way for people to get it free, at no cost. That's true, she said, but her research suggests most end users find the free EWA methods to be too slow and inconvenient when they're in a rush and they want a paycheck advance right now,
Lauren Saunders (11:55):
And for most people, that's not a convenient way to receive their money. Most people want to get their money in the bank account where they get their direct deposit. They don't want to have to set up some other account and some other card.
Kate Fitzgerald (12:05):
EWA providers reject the comparison of their products with payday loans. They believe they're offering a real benefit, a tool giving employees access to money they've already earned. It's theirs. And because it has none of the technical features of a loan, there's no way it could be defined as a loan.
Justin Hosie is a partner at the law firm of Hudson Cook, specializing in regulatory compliance for alternative financial services providers. I asked him to explain this disagreement between the EWA providers who say their service is not a loan, and the consumer advocates who say it should be.
Justin Hosie (12:38):
I think both sides have legitimate arguments. On the one hand, you will hear the industry, I think rightfully, say this can't be a loan. And the reason they'll say that is, in a consumer's 14-day pay cycle, a consumer actually has an employer who is indebted to them. If the consumer, the employee, works for 14 days each day, they work and the employer hasn't paid them, the employer owes them for a given day. So a consumer who says on Day 5, "Geez, I'd, sure like those first five days of payment today." Arguably according to the industry, they're not getting a loan. They're just saying, "give me, employer, what I've already earned and I'll take it today. Instead of sitting around and waiting, I'm tired of my employer owing me money." On the other hand, what you will hear the consumer advocates say, and I think they have a reasonable point too, is employers don't have any obligation to pay employees until Day 14.
(13:46)
As an employee works through the pay cycle, the employer only has an obligation to pay on the payday, and if they pay money early, if they do what I said a second ago, and pay on Day 5, they are advancing money on Day 5. And when they get to Day 14, they're no longer going to pay for 14 days. Instead, they're going to pay for the nine remaining days. They're going to settle up the five days they've already paid. And so by advancing money on Day 5 and settling up on Day 14, if you listen to the consumer advocates, they've got a point that an EWA company has effectively done what a payday lender might do,—advance money on Day 5 and settle up on Day 14, and that sure could feel like a loan to a consumer. And a regulator might say it should be regulated like a loan.
Kate Fitzgerald (14:34):
What about that worker who just wants the money early that they know is coming in their next paycheck? Where's the harm in not calling that a loan?
Justin Hosie (14:43):
What I think the consumer advocates are going to say is there are some, arguably, some dangers in consumers getting in over their head in the sense that a consumer could decide to spend $1.99 to $5 to get an advance for $50. And if you did annualize that rate, if you tried to do what you do for an APR on a payday loan, it wouldn't be quite as high as a payday loan, but it could end up with a triple-digit rate. Five dollars for 10 days for $100 is going to be 145%, if you try to use the Fed's APR calculator. Now, the EWA industry would say, don't do that. It's not a loan. There's no obligation to pay. But the point is that cost annualized over time is not necessarily cheap.
Kate Fitzgerald (15:30):
Some of the top providers of employer-sponsored EWA include Branch, Daily Pay, Immediate, ZayZoon and Payactiv. Typically, these providers spell out the fact that their services are not loans. For example, Daily Pay says by using Daily Pay, you are simply transferring your own earned income into your bank account or card. You can only transfer money that you have already earned and that has not yet been paid to you.
Banks that are starting to work with EWA providers to streamline connections for their commercial customers should pay close attention to what's happening in this tug-of-war over whether EWA will be considered a loan or not—according to Andrew Kushner, who is policy counsel of the nonprofit Center for Responsible Lending, which analyzes financial practices and works with the industry and regulators to improve the state of lending, especially for marginalized groups. Kushner explained why there's a widespread perception among banks and fintechs that EWA is not a loan and not subject to the Truth in Lending Act, or TILA.
Andrew Kushner (16:36):
I think the thing that banks or other entities should really be careful with in this space is that these companies are operating in—at best—a legal gray area. I mean, maybe not in Nevada and Missouri, because there are laws on the books there for now, but operating at best in a legal gray area. And if they're charging the worker for these products, we think that they're loans in almost in almost every state. And we think that the CFPB is going to provide guidance about the application of TILA to these products. That will mean that TILA applies in at least many cases.
Kate Fitzgerald (17:14):
The couple of states that finalized laws so far stating that EWA is not a loan are getting a tailwind provided by lobbying groups like ALEC, the American Legislative Exchange Council. But Kushner said it's way too early to come to any conclusions about whether or not EWA will ultimately be defined as a loan.
Andrew Kushner (17:33):
This year we saw I think something like 22 bills advanced by industry. These bills were based on a model bill put out by ALEC, the conservative legislative group. We saw those introduced in 22 states. They passed the bill passed in two states. That means that much of the country is still a battleground on these issues. California, it's obviously a huge market, is taking a very different tack and regulating these products as loans. And then you also have, of course, the federal government. The CFPB has not yet provided significant guidance in this area, but it has said it will, and so there's a lot still to come.
Kate Fitzgerald (18:15):
The CEO of Payactiv is Safwan Shah. He founded Payactiv about 11 years ago, and it's one of the biggest EWA providers in the U.S. and works with many companies. Shaj says it's illogical to call his company's service a loan, and he spells out the key ways Payactiv's services are different than a payday loan.
Safwan Shah (18:35):
I'll start with saying that we don't call it early, we call it earned. The reason we call it that is because it's already earned. A payday loan may or may not be earned. It's just somebody's underwriting, so you take the amount that you need to take, right? That's earned wage access and that amount has already been earned. And in a B-to-B model like the Payactiv does, it's verified, so it's already yours. It just happens to be with the employer. You get that money, and now you don't have to actually reimburse anything when you get paid. That amount will be automatically adjusted in that payment from the employer. So there are already distinctions between the two that emerge. It's a completely different product. Calling earned wage access a loan is actually illogical. It does not stand the test of what a loan actually is.
Kate Fitzgerald (19:32):
Payactiv users can have their earned wages sent to their bank account for free anytime, if they're willing to wait a day or two. If they can get instant access to the EWA through the Payactiv Visa card for free. And Payactiv customers have other ways of getting EWA directly, to pay bills and buy things from merchants instantly for free.
Safwan Shah (19:53):
Now, when you look at earned wage access through employer sponsorship, at least in the Payactiv model of it, there are a variety of free options. If you are paying a bill, for instance, your electricity bill, you can actually access the money and pay the bill at no cost. If you are calling an Uber at no cost, if you are loading your Amazon cash card and you have whatever reason, that's free of cost. If you are loading with direct deposit as you referred to earlier with a Visa card, no cost. So there are five different ways to get money for free.
Kate Fitzgerald (20:32):
Other EWA providers are also getting innovative in the way they're delivering EWA to consumers. ZayZoon offers a way for employees at companies that use IT services to get their wages in the form of a gift card, usually with a bonus. Tate Hackert, ZayZoon's co-founder and president thinks ZayZoon is the first E W A provider to deliver employees wages. In this somewhat novel way,
Tate Hackert (20:56):
We are partnered with about 250 different merchants ranging from CVS, Target, Red Lobster. What we've realized is that like people are taking money to pay for something.
Kate Fitzgerald (21:06):
Merchants see this as a win because they're getting a guaranteed sale and they're willing to add incentives that can go from about 5% to 20% of the earned wage amount.
Tate Hackert (21:16):
If they are going to a CVS, they can choose to go into the gift card platform, take their money in the form of a CVS gift card, and that gift card is not only free for them to take, but there's actually a bonus attached to it. So CVS typically has a 7% bonus, meaning someone takes a hundred dollars advance, there's $107 in spend that goes to them.
Kate Fitzgerald (21:37):
In its newest twist, ZayZoon is creating categories of spending where users can also direct their EWA funds.
Tate Hackert (21:44):
Now, we've taken out specific gift cards that are used often and a lot, so a gas card's a great example of that, and we've created that into a wallet in and of itself. So now an employee can come into ZayZoon instead of choosing their debit card wallet or their bank wallet, they can just choose their gas card wallet and then they can take money directly to that gas card and it gets sent right to their email, and they can go spend that at any major gas station.
Kate Fitzgerald (22:11):
Despite the regulatory activity that's starting to swirl around EWA, these products still have relatively low consumer penetration. But usage is growing and with it are discussions of the best and the fairest ways to offer it to consumers. The rise of faster payments and accompanying innovation may go a long way toward resolving these questions as earned wage access evolves.
Chana Schoenberger (22:42):
This episode of Bankshot was written and produced by Kate Fitzgerald. Our executive producer is Chana Schoenberger, and our sound engineer is Kellie Malone. Special thanks this week too. Amada Senior Care, Justin Hosie at Hudson Cook, LLP, the National Consumer Law Center, the Center for Responsible Lending, ZayZoon, Payactiv, Jarod Facundo from the American Prospect. If you like the show, please like and subscribe or visit americanbanker.com/subscribe to get some of the best news and analysis out there. For American Banker, I'm Chana Schoenberger and thanks for listening.