Understanding and evaluating earned wage access solutions

Earned Wage Access — also known as earned wage advance or on-demand pay — has steadily grown. As recently as 2020, nearly 55.8 million individuals were using some EWA solutions, as there are both employer provided and direct to consumer options. As EWA solutions have grown in popularity, there has been a steady stream of questions as some employers remain skeptical about the utility and benefit of EWA products. While there are certainly questions that need further investigation, it does appear that EWA solutions are here to stay. 

What is earned wage access?
Short term liquidity (or the ability to have sufficient cash on hand) has long been a hallmark of financial health. Unexpected financial shocks are nearly as certain as death and taxes, and sufficient cash on hand can help weather the inevitable. Yet for millions of workers it is elusive and, at times, expensive to gain access to sufficient liquidity. Payday loans, with interest rates as high as 600% in some states, have long been a scourge on workers’ ability to sustainably address short term cash needs.

Read more: The two-week pay period doesn’t work for employees anymore

Following the 2008 financial crisis, we saw a wave of new innovation enter the marketplace, including EWA. These platforms allow employees to draw some or all of their earned wages before the next scheduled payday. Initially they aimed, 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 relevant financial health benefits.

For these and other reasons, we have seen a steady increase in interest from employers in adding EWA solutions to their financial health benefits. Many employers (60%) recognize that EWA can be an efficient way to attract and retain workers, and generate goodwill among the workforce. Likewise, 56% of employees who had a no or low cost service to access their accrued wages indicated that they have used the benefit.

How does earned wage access work?
By and large EWA products have four basic features. While there is certainly variation between providers, these four features comprise the core mechanics of EWA:

• Funding EWA access: Access to wages is usually funded through the EWA vendor — typically through capital on their balance sheet or use of a debt facility.  Through payroll integration (if they are not already the payroll provider) vendors secure timesheet data to verify the earnings that can be accessed.

• Disbursement: Employees receive their earned wages in one of several ways: direct deposit, to a separate bank account the employee set up with the EWA provider, or to a prepaid or payroll card. Most EWA providers allow users to access 50%-100% of earned wages at a given time. Rules and guardrails around frequency (e.g., number of disbursements per pay period) vary by provider and by employer.

• Payment to EWA vendor: For those solutions where the EWA provider funds the advance, they recoup the advance from the users’ very next paycheck, meaning repayment typically occurs in less than two weeks from the disbursement date. It is also worth mentioning that the terms “recoupment” and “repayment” carry certain industry connotations around credit and debt. In the EWA context, however, these terms are not intended to equate EWA with credit products.

• Timing of payments to workers: For direct deposit, the payments usually show up no later than the next business day. Transfers to external debit or prepaid cards can take up to 48 hours; transfers can be instantaneous, but may carry a $1-$5 fee depending on the vendor.  Conversely, transfers to EWA provided bank accounts or cards are often free and instantaneous. 

Keep in mind that as more payroll providers add EWA features, the mechanics may differ as there would not necessarily need to be a payroll integration and the funding mechanism may also work differently. Likewise, we have seen private examples of large companies that are building their own EWA solutions in partnership with their payroll providers. In short, innovation is continuing to happen around EWA. Therefore, the features and mechanics may also continue to evolve. 

Read more: Earned wage access 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 provider can be tricky.  Here’s what to consider when evaluating EWA solutions:

• Employee needs and feedback: What evidence do you have that employees would benefit from EWA solutions?  Are you seeing examples of workers struggling with daily expenses (e.g. payroll advance requests)?  Anchoring any solution in the needs of actual workers is the best way to ensure you have alignment between needs and solutions.

• Existing relationships and appropriate mechanics: Do you already work with a vendor that has an EWA solution? What additional services does the vendor offer that help advance financial health? Does the provider 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 providers. Some vendors have a membership model (e.g., utilization pricing), where employees or employers can pay a certain amount each month. Other vendors have a flat fee model, with add ons for features such as instantaneous payment. Per employee per month (PEPM) fee structures are also in the market. Last, vendors that offer bank accounts or debit cards may monetize those through interchange fees. The long and short is that there are a wide range of cost and revenue models out there, and understanding what model makes the most sense for your organization is key.

We are still in the early days of EWA. Regulators at the Consumer Financial Protection Bureau (“CFPB”) are still wrestling with whether to treat and regulate EWA as a credit product.  In November 2020, the CFPB issued an advisory opinion indicating that it did not view EWA to be a credit product, provided it meets certain criteria such as not charging employees any fees.  This advisory opinion did set off some confusion in the market, so the CFPB is exploring how to provide greater clarity on EWA and whether it should be regulated as a credit product.

Read more: Answering questions and misconceptions about earned wage access

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

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

Finally, no single financial health solution is perfect.  Employers adding any financial health benefit, including EWA, should ensure that the goal is to improve the financial health of their workers.  Having an adequate framework to evaluate the impact of any financial health benefit is not just a valuable use of time, but an essential aspect to ensure that your program is actually improving financial health.