To protect consumers from high-cost, unfair, deceptive, and discriminatory practices, FlexWage recommends five crucial recommendations for EWA regulators.
First, lawmakers must ensure that EWA solutions are employer-based instead of direct-to-consumer (D2C) or vendor funded.
Additionally, EWA models must include elements to ensure data accuracy, transparent and capped fees, payroll deduction of EWA transactions, and instant funding to employee’s account of choice.
These five recommended EWA model components protect consumers’ rights while adhering to existing federal and state labor, lending, and money transmitter laws.
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EWA Is A Responsible Solution and Competitive Advantage
Earned Wage Access (EWA), also known as OnDemand Pay, provides low-cost, responsible cash flow management solutions to the more than 60% of Americans living paycheck to paycheck.
EWA is a voluntary financial wellness benefit that allows employees access to their earned wages between pay periods.
A financial benefits package that includes EWA creates a competitive advantage for employers while reducing employee financial stress and increasing employee productivity.
Three Questions To Ask Before Proposing Legislation Of The EWA Industry
The goal of state legislation of the EWA industry is to deliver safe, responsible, and scalable solutions for citizens. Therefore, the questions to ask and critical components to incorporate are as follows:
1. Does the proposed EWA legislation ensure a safe, affordable, no-risk benefit to the state’s citizens and employers now and in the future without diminishing its availability and scalability?
2. Does the proposed EWA legislation meet existing federal and state labor, lending, and money transmission laws?
3. Is the proposed legislation clearly stated and well-defined to eliminate loopholes and prevent unintended consequences?
Five Crucial EWA Model Elements for EWA Regulators
FlexWage believes that the following five EWA model elements are required to ensure a safe, responsible, transparent, and scalable EWA solution:
1. EWA is funded by the employer,
2. Data accuracy in EWA calculations.
3. Transparent and capped EWA fees.
4. Payroll deduction of EWA transactions.
5. Instant funding to the employee’s account of choice.
The factual foundation for the five recommendations is supported by existing legislation, opinions, and government reports, as outlined below.
1. EWA Is Funded By The Employer
Employees and EWA solution vendors (Providers) should remain separate and independent of each other. An EWA solution that is funded by the employer achieves this separation. Alternatively, a licensed Provider may offer a line of credit to assist the employer in funding the EWA solution.
There is no need for any Provider to fund an employee’s account, directly debit an employee’s bank account, or require employees to assign their wages to the Provider.
Insulating the employee from the Provider differentiates the EWA solution from payday lenders and other direct-to-consumer products claiming to be EWA.
Employers spend countless amounts of time and money selecting the best Human Capital Management (HCM) solution to deliver accurate and timely employee pay. Any unlicensed third party standing between an employer and their employee’s pay creates issues of trust and compliance.
Supporting Legislation, Legal Opinions, and Government Reports:
Consumer Financial Protection Bureau (CFPB) Advisory Opinion
“(1) The provider of the Covered EWA Program (Provider) contracts with employers to offer and provide Covered EWA Transactions to the employer’s employees.”
“The term ‘Covered EWA Transaction’ means the transactions between a Provider and an employee that are associated with a Covered EWA Program.”
Consumer Financial Protection Board (CFPB) Acting General Counsel Letter
“Moreover, the advisory opinion says nothing about whether earned wage access products would be “credit” as that term is defined under laws other than the Truth in Lending Act. The opinion addresses only the technical definition of credit under TILA. For example, the advisory opinion does not address whether such products would be “credit” under the Consumer Financial Protection Act (CFPA) or the Equal Credit Opportunity Act (ECOA), much less whether these products would be “credit” under state law. The CFPA, ECOA, and the usury law of many states do not share TILA’s technical definition of credit and creditor.”
California Department of Financial Protection and Innovation (DFPI) Final Ruling OP 8206
“FlexWage’s EWA product is not a loan subject to the CFL. In reaching this conclusion, the DFPI relies upon two necessary elements: (1) employers, not Flexwage, provide EWA funds that do not exceed what they already owe recipients; and (2) the fees charged do not suggest that the product evades California’s lending laws.”
“A third‐party with no financial obligation to the employee could not rely upon this reasoning, because the funds provided would be for the recipient’s temporary use, and the third‐party would presumably arrange to recoup the amounts it advanced.”
Kansas Office of the State Bank Commissioner (OSBC) EWA Opinion
“Loan, in the UCCC is defined as several mechanisms to either create or defer debt; see K.S.A. 16a-1-301 (27) for the full definition. Since access to already earned wages are employer funded, FlexWage is not creating a debt for the employee.”
2. Data Accuracy In EWA Calculations
The connection to payroll and time reporting systems ensures the accuracy of data used to calculate accrued wages at the employee level. In addition, it prevents estimations and any risk assessments by providers that may unfairly discriminate.
Using accurate and current data ensures the same calculations for every employee, eliminating the possibility of any arbitrary or discriminatory practices.
This process also minimizes the chance of employees receiving more than they have earned and aligns with a company’s diversity, equity, and inclusion (DEI) initiatives.
Using a third-party integrator to access employee information via a portal increases the risk of privacy breaches. This gives the third-party access to numerous other pieces of data (i.e., tenure, raises, marital status, gender, ethnicity, and annual salary) that have no bearing on a person’s earned wages and creates privacy concerns for employee data.
FlexWage owns the patent on accurate data integration described and endorsed by regulatory bodies.
Supporting Legislation, Legal Opinions, and Government Reports:
Consumer Financial Protection Bureau (CFPB) Advisory Opinion
“(2) The amount of each Covered EWA Transaction does not exceed the accrued cash value of the wages the employee has earned up to the date and time of the transaction, which amount is determined based upon timely information provided by the employer to the Provider. The Provider may not rely upon information provided by the employee, or on estimates or predictions of hours worked or hourly wage rates. The “accrued cash value of the wages” are wages that the employee is entitled to receive under State law in the event of separation from the employer for work performed for the employer, but for which the employee has yet to be paid.”
California Department of Financial Protection and Innovation (DFPI) Final Ruling OP 8206
“…it is important to note both that the funds come from the employer, not FlexWage, and those funds do not exceed the amount the employer owes a recipient. Thus, it appears that the payment that FlexWage facilitates simply satisfies part of an existing financial obligation from the employer to the employee. Given that the payments that the employer makes satisfy part of the employer’s existing obligation, it does not appear that the employer is providing the recipient with money “for temporary use.” (Black’s Law Dictionary (11th ed. 2019).) Similarly, FlexWage’s product does not appear to involve an arrangement in which the recipient agrees to a repay their employer the amount received. (Civil Code § 1912, Milana v. Credit Discount Co. (1945) 27 Cal.2d 335, 339.) Rather, the recipient has simply agreed to accept a portion of their earned wages from their employer earlier than their regularly scheduled payday.”
U.S. Government Accountability Office (GAO) Financial Technology Report
“Inaccurate wage estimation. Consumer groups raised concerns that companies offering direct-to-consumer earned wage access products may not be accurately estimating consumers’ earned wages. For these products, fintech companies estimate wages from sources such as recurring direct deposits in a consumer’s bank account, prior pay stubs, and GPS location, rather than obtaining time and wage information from employers. If wages are inaccurately estimated, consumers may have difficulty repaying the amount they receive.”
California Department of Financial Protection and Innovation (DFPI) EWA Data Findings
“The number of missed payments ranged from 5 to 16,921 throughout the year, with the average being 5,504 across companies. Three companies had the highest number of missed payments in 2021. This may have been due to their D-to-C business models. The B-to-B model’s integration with payroll systems allows companies to be repaid automatically and may more accurately calculate consumers’ earned wages.”
3. Transparent and Capped EWA Fees
Consumers understand and willingly pay for EWA solutions that provide instant access to funds and charge nominal transaction fees consistent with an ATM withdrawal.
US consumers conduct an average of 3.8 ATM cash withdrawals per month. Consumers pay an average out-of-network ATM fee of $4.67, which they are willing to do for convenience and instant access to their cash.
Charging a per transaction fee and then capping those fees per pay cycle and month (based on the frequency of usage) is the most transparent and responsible way to minimize employee fees.
Subscription fees that include EWA and other services create a confusing and convoluted process that an employee cannot easily understand. It also unfairly charges employees who aren’t using the service regularly.
And “free” EWA options in the market have proven far more expensive when considering additional ancillary fees incurred to use a Provider account/card/wallet and instantly access money.
Supporting Legislation, Legal Opinions, and Government Reports:
Consumer Financial Protection Bureau (CFPB) Advisory Opinion
“The Bureau notes that there may be EWA programs that charge nominal processing fees—and thus differ from the fee structure described in this section B(3)—that nonetheless do not involve the offering or extension of ‘credit’ as defined in § 1026.2(a)(14).”
California Department of Financial Protection and Innovation (DFPI) Final Ruling OP 8206
“2) the fees charged do not suggest that the product evades California’s lending laws. FlexWage’s EWA’s cost also counsels against application of the CFL. Although cost typically does not factor into the assessment of whether a particular transaction is a loan, the DFPI considers in this case whether the Provider’s product suggests evasion of the credit cost protections of the CFL. (See Milana v. Credit Discount Co. (1945) 27 Cal.2d 335, 339 (a product may be a loan “with or without” a charge in addition to the principal advanced); Fin. Code, § 90009, subd. (f)(3).“
“FlexWage’s EWA product is not a loan subject to the CFL. In reaching this conclusion, the DFPI relies upon two necessary elements: (1) employers, not FlexWage, provide EWA funds that do not exceed what they already owe recipients; and (2) the fees charged do not suggest that the product evades California’s lending laws.”
“With respect to the second element, a FlexWage EWA’s cost also counsels against application of the CFL. Although cost typically does not factor into the assessment of whether a particular transaction is a loan, the DFPI considers in this case whether FlexWage’s product suggests evasion of the credit cost protections of the CFL. (See Milana v. Credit Discount Co. (1945) 27 Cal.2d 335, 339 (a product may be a loan ‘with or without’ a charge in addition to the principal advanced); Fin. Code, § 90009, subd. (f)(3). The cost of a FlexWage EWA does not suggest evasion of the CFL.”
U.S. Government Accountability Office (GAO) Financial Technology Report
“Lack of transparency around costs. Stakeholders we spoke to noted that some fintech companies are not transparent about the costs consumers end up paying. Consumer groups raised concerns that consumers may not recognize that tipping is optional and questioned whether a consumer’s decision not to tip would decrease the amount of money advanced or wages that can be accessed in the future. One company told us that tips do not affect future decisions to provide access to earned wages.“
“In addition, consumers may pay unexpected costs if the company directly debits their bank accounts. Specifically, for direct-to-consumer earned wage access products where advanced wages are directly repaid by debiting a consumer’s bank account, there is a risk that the consumer may not have enough money in the account, resulting in the consumer paying overdraft fees unexpectedly. One company stated on its website that it offers reimbursement for certain situations when this happens, but notes that consumers are responsible for maintaining a bank balance that is sufficient to fund any payments they initiate.”
California Department of Financial Protection and Innovation (DFPI) EWA Data Findings
The lack of transparency in fees and charges results in complaints.
“Approximately 34% of complaints concerned settlement issues including claims that a consumer was overcharged for a repayment, or the payment amount exceeded the advance amount.”
4. Payroll Deduction of EWA Transactions
Deducting EWA transactions and any fee amounts from an employee’s payroll and showing them as line-item deductions on the pay statement keeps everything fully transparent and employment centric, clearly differentiating an employer-based solution from other direct-to-consumer or hybrid options.
When deductions are made post-payroll processing, differences between the paystub and net deposit create both questions and compliance issues.
Considering the current economic and regulatory situation, entrusting a third party with accurate and on-time payment to employees is not the best and safest decision.
Supporting Legislation, Legal Opinions, and Government Reports:
Consumer Financial Protection Bureau (CFPB) Advisory Opinion
“(4) The Provider recovers the amount of each Covered EWA Transaction only through an employer-facilitated payroll deduction from the employee’s next paycheck.”
“EWA programs where a Provider obtains any authorization to transfer funds from a consumer’s account, including both electronic payment authorizations and checks and including authorizations that the Provider may not actually utilize, do not meet the requirements of this section B(4).”
5. Realtime Funding to the Employee’s Account of Choice
According to the APA Getting Paid in America Survey 2022, nearly 95% of employees receive their pay directly to their bank account, Paycard, or prepaid card. Additionally, more than 80% of EWA users want their earned wages instantly available in their bank account.
In some EWA models, employees are required to send EWA transfers first to a Provider-owned card or account, and then the employee can transfer the funds back to their bank account. For additional varying fees, Providers allow employees to instantly transfer EWA funds to their own bank account. This creates unnecessary and non-transparent steps and fees for the employee. EWA users should be protected from these non-transparent add-on fees with real-time EWA funding to the employee’s account of choice.
Supporting Legislation, Legal Opinions, and Government Reports:
U.S. Government Accountability Office (GAO) Financial Technology Report
“Lack of transparency around costs. Stakeholders we spoke to noted that some fintech companies are not transparent about the costs consumers end up paying. Consumer groups raised concerns that consumers may not recognize that tipping is optional and questioned whether a consumer’s decision not to tip would decrease the amount of money advanced or wages that can be accessed in the future. One company told us that tips do not affect future decisions to provide access to earned wages.”
“In addition, consumers may pay unexpected costs if the company directly debits their bank accounts. Specifically, for direct-to-consumer earned wage access products where advanced wages are directly repaid by debiting a consumer’s bank account, there is a risk that the consumer may not have enough money in the account, resulting in the consumer paying overdraft fees unexpectedly. One company stated on its website that it offers reimbursement for certain situations when this happens but notes that consumers are responsible for maintaining a bank balance that is sufficient to fund any payments they initiate.”
The Opportunity for Regulators
Earned Wage Access (EWA) was designed to be a low-cost, no-risk, non-loan, transparent, accurate, and instant way for all employees, particularly the underserved, to manage their cash flow needs.
When done as intended, EWA maximizes consumer protections, privacy, equality, and choice while minimizing program mandates, fees, fraud, and risk all in a scalable delivery framework.
Lending and money transmitter laws exist to protect citizens from those trying to circumvent laws by claiming to be EWA providers but not adhering to a defined set of parameters in which to operate. Clearly defining what an EWA provider offers transparency and eliminates loopholes while protecting the state citizens.
By ensuring that EWA solutions follow the five criteria outlined above, lawmakers can guarantee a safe, responsible, transparent, and scalable solution validated by existing legislation, opinions, and government reports.
EWA Done Right
FlexWage delivers “EWA Done Right” because it offers the most compliant, responsible, and transparent Earned Wage Access (EWA) solution in the market today.
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Keep exploring and learning >>>>> GAO 2023 Fintech Products Study And The Implications for EWA