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Understand and evaluate earned wage access solutions

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Access to earned wages – also known as earned payday advance or pay-as-you-go – has grown steadily. As of 2020, nearly 55.8 million people were using some EWA solution, as there are both employer-provided and direct-to-consumer options. As EWA solutions grow in popularity, there has been a steady stream of questions as some employers remain skeptical of the usefulness and benefits of EWA products. While there are certainly issues that need further investigation, it looks like EWA solutions are here to stay.

What is Earned Wage Access?
Short-term liquidity (or ability to have enough cash on hand) has long been a hallmark of financial health. Unexpected financial shocks are almost as certain as death and taxes, and sufficient cash can help weather the inevitable. Yet for millions of workers, accessing sufficient cash is difficult and sometimes costly. Payday loans, with interest rates as high as 600% in some states, have long plagued workers’ ability to sustainably meet short-term cash flow needs.

Read more: The two-week pay period no longer works for employees

Following the financial crisis of 2008, we saw a wave of new innovations enter the market, including EWA. These platforms allow employees to collect part or all of their salary before the next scheduled payday. Initially, they were intended, in part, to provide a meaningful alternative to high-cost credit products, such as payday loans or overdraft fees. Since their inception, many EWA platforms have expanded their set of solutions to include short-term savings, financial education, and many other benefits relevant to financial health.

For these and other reasons, we’ve seen a steady increase in employer interest in adding EWA solutions to their financial health benefits. Many employers (60%) agree that EWA can be an effective way to attract and retain workers, and generate goodwill among the workforce. Likewise, 56% of employees who had a free or low-cost service to access their accrued wages reported that they had used the benefit.

How does Access to Earned Salary work?
Overall, EWA products have four basic characteristics. While there are certainly variations between vendors, these four features make up the core mechanisms of EWA:

  • Funding for EWA access: Salary access is typically funded through the EWA provider – usually through capital on its balance sheet or the use of a credit facility. With payroll integration (if they are not already the payroll provider), providers secure timesheet data to verify accessible earnings.
  • Disbursement: Employees receive their earned wages in one of the following ways: direct deposit, to a separate bank account the employee has opened with the EWA provider, or to a prepaid or payroll card. Most EWA providers allow users to access 50% to 100% of wages earned at any given time. Rules and safeguards regarding frequency (for example, the number of installments per pay period) vary by provider and employer.
  • Payment to EWA supplier: For solutions where the EWA provider funds the advance, it collects the advance on the users’ very next paycheck, which means repayment typically occurs within two weeks from the date of the installment. It should also be mentioned that the terms “recovery” and “reimbursement” have certain sectoral connotations regarding credit and debt. In the context of EWA, however, these terms are not intended to equate EWA with credit products.
  • Schedule of payments to workers: For direct deposit, payments typically appear no later than the next business day. Transfers to external debit or prepaid cards can take up to 48 hours; transfers can be instant, but may incur fees of $1 to $5 depending on the provider. Conversely, transfers to bank accounts or cards provided by EWA are often free and instant.

Keep in mind that as more payroll vendors add EWA functionality, the mechanics may differ as there wouldn’t necessarily be a need for payroll integration and the funding mechanism may also operate differently. Likewise, we’ve seen private examples of large companies building their own EWA solutions in partnership with their payroll vendors. In short, innovation continues around EWA. Therefore, features and mechanics may also continue to evolve.

Read more: Access to earned wages can boost workers’ financial security – and company loyalty

Key Considerations When Evaluating Earned Wage Access Options
EWA solutions are still relatively new. As such, understanding how to evaluate an EWA vendor can be tricky. Here’s what to consider when evaluating EWA solutions:

  • Needs and feedback from employees: What evidence do you have that employees would benefit from EWA solutions? Do you see examples of workers struggling with day-to-day expenses (e.g. salary advance requests)? Grounding any solution in the real needs of workers is the best way to ensure alignment between needs and solutions.
  • Existing relationships and appropriate mechanisms: Do you already work with a supplier who has an EWA solution? What additional services does the provider offer to help improve financial health? Does the vendor offer a disbursement mechanism that works for your workforce? For example, if you have a large unbanked or underbanked workforce, does your provider offer an affordable bank account or prepaid card?
  • Cost and revenue models: There are a variety of cost and revenue models associated with EWA vendors. Some providers have a membership model (e.g., user pricing), where employees or employers can pay a certain amount each month. Other providers have a flat-rate model, with add-ons for features like instant payment. Fee per employee per month (PEPM) structures are also on the market. Finally, providers that offer bank accounts or debit cards can monetize them through interchange fees. In summary, there is a wide range of cost and revenue models, and understanding which model best suits your organization is essential.

We are only at the beginning of the EWA. Consumer Financial Protection Bureau (“CFPB”) regulators are still debating whether to treat and regulate EWA as a credit product. In November 2020, the The CFPB issued an advisory opinion stating that he did not view EWA as a credit product, provided it meets certain criteria such as not charging fees to employees. This advisory opinion has created some confusion in the market, so the CFPB is considering how to provide greater clarity on the EWA and whether it should be regulated as a credit product.

Read more: Answering questions and misconceptions about access to earned wages

There are still questions about the ultimate impact of EWA on the financial health of workers, especially those who are most vulnerable. The Financial Health Network first research on EWA products reveal that users access the products consecutively over varying periods of time and that the cost of using the product varies based on pricing models and individual usage patterns.

Employers offering EWA should ensure their staff understand the solution, and monitor and adjust the program as necessary. Most EWA vendors are evolving their solution sets to include more comprehensive financial health resources. And finally, minimizing personnel costs should be a key consideration for employers. Increasingly, we are seeing more and more employers cover the cost of EWA solutions, making them essentially free for their workforce.

Finally, no financial health solution is perfect. Employers who add any financial health benefit, including EWA, should ensure that the goal is to improve the financial health of their workers. Having an adequate framework for evaluating the impact of any financial health benefit is not only a valuable use of time, but an essential aspect of ensuring that your program actually improves financial health.