Several businesses provide a lending service known as Earned Wage Access, including EarnIn. In order to help workers meet their daily necessities and pay their obligations, the applications provide tiny, short-term loans to them between paychecks. (Photo : by Kenny Eliason / Unsplash)
Several businesses provide a lending service known as Earned Wage Access, including EarnIn. In order to help workers meet their daily necessities and pay their obligations, the applications provide tiny, short-term loans to them between paychecks. The user repays the loan with money from their paycheck. Transaction volume increased from $3.2 billion to $9.5 billion between 2018 and 2020, as per Datos Insights.
Although Earned Wage Access applications have been available for more than ten years, their prominence was increased by the epidemic and its aftermath. While some applications, like Empower, FloatMe, FlexWage, and Rain, promise financial independence, others, including Dave, Clio, Albert, and Brigit, have names that seem like friendly human names. The Government Accountability Office reports that the average user makes less than $50,000 annually and has been hit hard by two years of rising inflation.
The applications' supporters claim that they assist those who are living paycheck to paycheck in managing their money and preventing the need for more expensive solutions like overdrafts on bank accounts or payday loans. However, other experts, consumer activists, and legislators contend that the apps are nothing more than payday loans disguised in modern technology, and they have the potential to lock users into a never-ending cycle of debt that consumes all of their income.
Additionally, detractors claim that the loan fees are not always clear. There is usually a free option to receive cash in one to three business days, but most impose required costs for instantaneous transfers of funds and monthly subscription fees. A study by the Center for Responsible Lending found that the average annual percentage rate (APR) for a loan that was paid back in seven to fourteen days was 367%, which is similar to payday lending.
The fact that some businesses have included Earned Wage Access applications into their payroll"with varying prices, models, and fee structures muddies the waters. For example, employees at Amazon and Walmart may not always be charged for early access to earned income outside of typical pay periods.
Pervasive Financial Instability
According to Matt Bahl, a workplace researcher for the Financial Health Network, the expansion of the Earned Wage Access market is a sign of pervasive financial instability.
More individuals are using Earned Wage Access as a convenience that helps them make up for the "disconnect between what the consumer needs to be able to spend... and their pay cycle," according to Penny Lee, director of the Financial Technology Association, an industry organization.
The applications market themselves as interest-free and don't perform credit checks, just like Buy Now, Pay Later loans. Users of the applications are not subject to balloon payments, negative marks on their credit reports, or the risk of losing their car if they are unable to make payments, unlike payday loans or auto title loans, which require borrowers to pledge their automobiles as collateral. Supporters add that the applications don't file lawsuits or dispatch debt collectors in pursuit of unpaid bills.
According to the FTA, an Earned Wage Access app typically costs between $2.59 and $6.27 per use. According to the corporations, the costs are less expensive than overdraft fees, which consumers pay when they don't have enough money in their checking account to pay a payment before payday, and they are similar to ATM fees. Overdraft fees can reach up to $36 and typically cost more than $25.
Nonetheless, the Center for Responsible Lending discovered in its analysis that there was a 56% rise in checking account overdrafts among app users.
Many governments have taken action to control Earned Wage Access by placing price caps on certain goods. The business supports a federal measure that would exclude the applications from the Truth in Lending Act's regulation, which is presently being considered by Congress.
EarnIn ceased operations in Connecticut after the state approved legislation restricting the fees that the applications may charge. Ram Palaniappan, CEO of EarnIn, said that it was no longer "economically viable" when asked why.
Legislation to limit Earned Wage Access fees is presently being drafted in Hawaii and California.
The federal law will "ensure workers across the country can continue to use these services, which help them to better connect work to reward," according to Rep. Bryan Steil, R-WI, one of its supporters.
However, the 300+ % interest rates are referred to as a “modern payday loan scheme†by Hawaii State Sen. Chris Lee, a Democrat who filed a law in the state Senate that targets Earned Wage Access. Lee expressed his desire for greater transparency and worker safeguards.
This is a critical time for regulation, according to Lauren Saunders, an attorney with the National Consumer Law Center.
