By Jillian Berman
Hello and welcome back to MarketWatch’s Extra Credit column, a weekly look at the news through the lens of debt.
This week we’re once again digging into an obsession of mine: How we define debt or credit and the implications of that definition for businesses and consumers.
Earned wage access products have been at the center of that debate recently. These products, sometimes called on-demand pay and early wage access, allow users to receive income from their jobs before it would normally hit their bank account.
Companies offering these products generally work in one of two ways. In the first model, these companies partner with employers — including some of the biggest and most well-known — and integrate into their payroll system to provide users with money they’ve earned working for the company but haven’t yet received due to the typical biweekly pay cycle. Sometimes the service is offered for free to the employee, in many cases because the employer pays for it. In other cases, users may pay a fee.
Other earned wage access providers don’t work with employers at all. Instead they ask for access to a user’s bank account and determine how much and when an employee gets paid either through information provided by the user or other data, like how much time they spend at work based on their cell phone patterns. Based on that information, they’ll assess whether and how much money makes sense to advance to the user and provide them with the funds.
Boosters of these products say they’re disrupting the payday loan industry, using technology to find a cheaper way to provide workers who may have poor or thin credit with the funds they need, and in many cases, have already earned. But as the sector has grown into a multi-billion dollar industry over the past few years, debate has been brewing around whether these products are credit as defined by law.
How lawmakers and regulators come down in that debate could have major implications for the types of disclosures these types of products are required to provide and the rules, particularly surrounding discriminatory lending, that they may need to follow. It’s a question swirling around a variety of fintech products that supporters say are offering consumers a much-needed alternative to traditional financial services and consumer advocates worry are actually loans trying to avoid the regulations that come with them.
Some states are looking at this question as it relates to earned wage access products. The Consumer Financial Protection Bureau may look too.
CFPB weighed in last year
Last year, the CFPB under Kathy Kraninger, the then-director appointed during the Trump administration, issued an advisory opinion saying that earned wage access products that work through employers and that don’t charge employees to use them aren’t credit products and therefore don’t have to abide by certain lending laws. The agency also said that certain earned wage access products offered by Payactiv, a provider in the space, can operate without worry about being held liable to those lending rules.
Now, a group of consumer advocates is asking the Biden-era CFPB to reverse that decision. Earlier this month, a coalition led by the National Consumer Law Center and the Center for Responsible Lending, wrote to the agency urging officials to regulate earned wage access products as credit.
“These are loans and viewing them as not credit, allows all sorts of evasions and predatory high cost lending,” said Lauren Saunders, associate director at NCLC. “If somebody advances you money ahead of payday and you repay it on payday, that’s a payday loan.”
Aaron Marienthal, Payactiv’s general counsel said, “it’s not surprising that Payactiv disagrees with most of the assertions in the letter.” Payactiv came up with “an innovation that fixes a lot of problems with other alternative liquidity options that are out there on the market,” he added. “And so suggesting that these products are in any way negative or not consumer-friendly is really backwards.”
A CFPB spokesperson said the agency had received the consumer groups’ letter and officials “appreciate this coalition’s input on this issue.”
Some say the question of where the products fit is murky
To some, the question of whether these products are credit is murky. Jim Hawkins, a professor at the University of Houston Law Center, said he started looking at the earned wage access industry more closely in part because he finds products that “don’t fit neatly into the ‘this is credit’ or ‘this not credit’ categories,” interesting.
“Different earned wage access products are structured differently, but some theoretically have no cost,” he said. “Most of the time what people are worried about with credit is that it’s going to be too costly. On the other hand, especially where there’s a third party involved that’s giving the money in advance, that looks like a debt. If you owe a third party — even if it’s going to come directly from your paycheck — it still looks like a debt.”
To Hawkins, this ambiguity means it makes sense to design regulations for these products that are more specific to what they do. For example, he thinks they should be required to be non-recourse, or that earned wage access providers can only get funds from someone’s paycheck and a user isn’t personally liable — or subject to debt collection — beyond that.
In researching these products for a law review article , Hawkins also found that many have terms that are “pretty abusive to consumers,” he wrote, including requiring users to give up their right to trial by jury and their right to sue as part of a class action. Hawkins thinks these kinds of contract terms should be banned as part of regulating the industry.
James Kim, a partner at Ballard Spahr, who co-leads the firm’s fintech and payments team, said depending how the products are structured, they are already regulated under laws governing payroll deduction and wage garnishment. Any effort to treat earned wage access products as credit would have to be mindful of how they interact with those state laws already on the books, he said.
He added that some companies have designed their products carefully so that they’re clearly not credit: by partnering with employers who are the entities responsible for ensuring the companies get their money back and by only providing funds to consumers that they’ve already earned.
“Depending on how the product is designed and structured and delivered there is some regulation around it,” he said. “Therefore there’s no need to rush to judgement. Let’s thoughtfully play this out rather than have this urgency that is false and this desire to paint the entire industry or all products with a broad brush.”
Hawkins worries that categorizing earned wage access products as credit and regulating them as such could wind up pushing consumers towards more dangerous products.
“The reality is we’re living in a society where people don’t have access to cheap credit and sometimes have liquidity concerns,” Hawkins said. “If we regulate this out of existence or create an environment where companies don’t want to experiment with better financial products we’ll be left with the ones we’ve had forever and those are really expensive.”
Worries the products post similar risks to payday loans
It’s true that even when they’re not free, earned wage access products are typically cheaper than payday loans. In some cases, companies will charge a fee, typically $5 or less, for workers to access their pay early multiple times during a certain period of time, sort of like a subscription. In other cases, they may charge a similar fee per transfer. That’s compared to an average of $55 per two weeks for a payday loan, according to a 2016 report from The Pew Charitable Trusts.
Still, the products can pose risks to consumers that are similar to payday loans, said Rebecca Borné, senior policy counsel at the Center for Responsible Lending. For one, just like with payday loans, consumers can end up in a cycle of relying on the advances these products provide.
“Because they accessed that $200 early, then they need to access $200 the next pay period and the next pay period,” she said. “The costs of even low-cost earned wage access loans can really add up. What we don’t want to happen is borrowers end up in this cycle of paying anywhere from $30 to $50 to $100 a month just to have gotten one paycheck early.”
These products also could wind up having high effective interest rates. In his law review article, Hawkins uses the example of a hypothetical employee who makes $80 a day paying $3 to access half of their daily pay seven days early. “The effective interest rate would be close to 390%, the same annual percentage rate (“APR”) as many payday loans,” he writes.
In addition, when earned wage access products don’t work through an employer and instead are sold directly to the consumer, they have access to the user’s checking account. “That is huge,” Borné said.
“They put the lender first in line,” she said. That means the company could put the consumer at risk of triggering insufficient funds fees or overdraft fees if they debit money from the user’s bank account to get paid back for the advance and the funds aren’t there.
“All of those risks are the very same risks we talk about when we talk about payday lending,” Borné said. When a borrower uses a payday loan, they also give the lender access to their checking account either by writing a check dated to the borrower’s payday or by giving the lender electronic authorization to debit the account on pay day.
The CFPB’s advisory opinion only applies to a specific category of products, those that work with employers and are free. “My thought was this covers so little of the market that it’s not that significant,” Hawkins said of the CFPB opinion issued last year.
But consumer advocates worry that the agency’s determination that at least some versions of this product aren’t credit could be — and is already being used — in debates in statehouses around the country to convince lawmakers to exempt the products broadly from regulations surrounding loans and credit, like usury laws. They also worry it could undercut supervisory and enforcement actions by regulators against lenders that violate lending laws with products that do cost money.
Marienthal of Payactiv said the company is “actively working with regulators and legislators” to establish guardrails for earned wage access products, like requiring employer verification of wages and ensuring the products are non-recourse so they don’t impact a user’s credit score or result in the user facing debt collection.
Consumer advocates worry that companies’ push to regulate these products as something other than credit “will lead to evasion of consumer protection and fair lending laws,” they write in the letter .
“We would acknowledge that a free loan against somebody’s wages is a much better option than a really high cost payday loan,” Borné said. “We’re more concerned about making sure these are regulated in a sound way. Today we may be talking about a free earned wage advance and tomorrow we might be something that is 400% APR.”
Some states, like Georgia, New Jersey and North Carolina have considered carve outs from lending laws for these products that are “extremely broad,” Borné said. If those exceptions turn into laws, Borné and other consumer advocates worry that riskier earned wage access products could flood the market and that payday lenders may even start to style themselves as earned wage access providers.
In California, regulators are gathering data
In California, regulators are in the midst of considering how to approach these products. Recently the state’s Department of Financial Protection and Innovation received expanded authority through the legislature, giving the agency broad powers to supervise and regulate consumer finance products, similar to the CFPB at the federal level.
But they want to do it right, said Suzanne Martindale, the senior deputy commissioner of the consumer protection division at the agency, ensuring that they strike the right balance between protecting consumers — “particularly when were talking about some of these small dollar offerings, we know they’re being used by people who may be chronically economically insecure,” she said — and fostering responsible innovation.
One thing that is clear, Martindale says, “it’s not about whether or not to regulate a product, it’s about how.”
To do that, the agency is gathering information. Earlier this year DFPI memorandums of understanding with several early wage access companies to provide the state with data about things like the company’s number of transactions, volume in dollar amount and effective APR. The agency plans to use this data to get an inside look at how these businesses work and determine which laws apply to the companies, regardless of how the companies describe themselves.
The California regulator hasn’t decided yet whether these products fit into the category of credit, Martindale said.
“We have not made a determination yet, we want to have transparent dialogue with the companies and with stakeholders,” she said. “We may, for example, make a determination that we believe needs to be addressed through future regulation. We want to be proactive, but we want to be measured in our approach, because we want to get it right.”