Thursday, July 11, 2024

Earned Wage Access: The New Payday Lending

The Trendy Way Workers Get Paid Early

Many American workers are finding themselves in a financial pinch by paying for early access to their paychecks. Known as “earned wage access” programs, these services are gaining popularity as they allow workers to tap into a portion of their wages before payday for a fee.

While many consumers use these programs for benefits like quick access to funds in case of emergencies, experts and consumer advocates warn that these services can share similarities with high-cost debt products like payday loans, which can cause serious financial harm.

Marshall Lux, a former senior fellow at Harvard University, acknowledges that these programs can be beneficial when used properly, but he warns that overuse by consumers and high fees, which can translate into interest rates as high as 400%, can turn these services into “payday lending on steroids,” especially since the industry has grown so quickly.

Earned wage access can go by various names and fall into two general camps: business-to-business models offered through an employer and direct-to-consumer versions. The former uses employers’ payroll records to track accrued earnings and issues the remaining pay on payday, while the latter utilizes estimated or historical earnings and automatically debits a user’s bank account on payday.

The labor market for these programs is a growing industry. According to Datos Insights, there was a threefold increase in the amount of wages accessed early from 2018 to 2020, and the number of transactions tripled, emphasizing the popularity and demand for early access to paychecks.

Big companies such as Dollar Tree, Kroger, Hilton, McDonald’s, Target, Uber, and Walmart now offer their employees early access to paychecks as well. Employers often advocate for these programs as a cost-effective way to retain and recruit employees, while it allows employees to cover short-term expenses before payday for lower fees than credit cards or bank overdrafts.

Consumers who use these programs tend to be lower earners, hourly workers, and subprime borrowers. About 28% of users, in particular, said that they turned to alternative financial services such as payday loans less frequently after using earned wage access. The California Department of Financial Protection and Innovation also found that 80% of consumer program transactions were between $40 and $100, suggesting that these programs are often used for everyday expenses.

However, even though the programs serve a real need for workers, it’s crucial to understand the financial costs. The total fees translate to an APR of over 330% on average for the typical earned wage access user, comparable to payday lenders. Early paycheck access users often tend to accrue significant costs, especially when early access to paychecks is frequent.

Fees can come in various forms, including transaction fees, subscription fees, and tipping. Additionally, the earned wage access industry argues adamantly that it is not fair to associate their fee structures with APRs and interest rates, emphasizing that the fees are optional and that there are free options available to consumers.

While the industry insists that earned wage access is not a loan or credit, some consumer advocates and state regulators argue the opposite, claiming that it is a legal fiction to refer to these programs as anything other than loans.

Ultimately, it’s important for consumers to weigh the convenience of early paycheck access against the potential costs and implications to their financial well-being.

In conclusion, early access to paychecks through earned wage access programs provides a convenient solution to financial challenges for many workers, but it’s crucial to be mindful of the potential financial harm that can be caused by high fees and frequent use of these programs.

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