Earned Wage Access: The Anti-Loan

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Currently, more than 60% of Americans are living paycheck-to-paycheck. And for the average American household, emergency expenses don’t always align perfectly with the typical biweekly payday.

This financial strain leads about 12 million Americans to resort to payday loans, incurring an average fee of $55 every two weeks. Despite state-level protections and payment plans, federal research from 2022 indicates that payday loan borrowers still face significant rollover fees. Additionally, a previous federal study from 2016 found that half of online payday borrowers rack up an average of $185 in bank fees over 18 months. Clearly, accessing cash can be an expensive problem, and regulating these products as loans does not alleviate consumers' financial burden.

This is why so many Americans now turn to a low-cost or no-cost innovative financial tool known as on-demand pay or earned wage access (EWA), offered by their employer. EWA allows workers to access wages they have already earned but not yet received, helping them avoid predatory payday loans, overdraft fees, and late bill payment charges. Unlike payday loans, EWA users can access their wages at little to no cost, either waiting 1-3 business days for free or paying around $3 for an instant transfer to a bank account, similar to Venmo's pricing, or using an out-of-network ATM. DailyPay users also have the option for a no-cost instant delivery when transferring earned wages to a DailyPay general purpose reloadable card.

In December 2023, the Financial Health Network released a user study on EWA, which found that people used the service to pay bills due before payday, or cover some other financial shortfall. Importantly, nearly all participants did not perceive EWA as a loan. They viewed it as accessing wages they had already earned, fundamentally different from borrowing against future earnings. The evidence overwhelmingly suggests that the EWA industry is not akin to payday lending, but rather its antidote.

In addition to its low, transparent cost structure, EWA differs from traditional payday loans in crucial ways. Unlike loans, EWA is accessible to all wage earners without a credit check, and it does not charge interest. Instead, users pay a low, one-time flat fee, regardless of their creditworthiness. When you don’t repay a loan you incur late fees, interest, and it negatively impacts credit scores. With EWA, there are no such consequences if a user chooses not to settle the already accessed amount.

Furthermore, while loans accrue interest until repaid, EWA only allows access to already earned wages, preventing debt accumulation. It's the user's money, and EWA simply provides access when needed, rather than waiting for the employer's payday schedule.

Clearly, EWA is not merely a new form of payday loan; employers offer EWA services to help employees avoid costly and predatory financial products.

Because EWA is not a loan, annual percentage rates (APR), which would be misleadingly high even with EWA products’ low fees, are incongruous to how EWA is structured. These rates therefore do not represent the actual cost and potential savings available to EWA users. Instead, with EWA, the small one-time fee you pay for expedited access to your earned wages is flat whether you take $50 of your earned wages or $250. It doesn’t change, it doesn’t compound and it is not added to the amount you accessed.

As we embrace the future of financial technology, the goal is to create affordable options for everyone. With appropriate state and federal regulations acknowledging EWA's non-loan nature, EWA can continue to enhance the financial health of hard-working employees. Categorizing EWA as a loan would deprive people of this valuable tool and worsen their financial situation. The data and research support moving forward with this innovative financial solution.

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