New State EWA Legislation—An Act Of Misplaced Trust and Faith?

New state Earned Wage Access (EWA) legislation can and must do more to protect the users of EWA.

Estimated reading time: 6 min

Image: An illustration of a crack in cement that breaks the word trust into two parts.

Misplaced Trust & Faith

Over the past year, we have witnessed the collapse of four banks, resulting in a combined loss of almost $550 billion in assets. These banks boasted an impressive clientele, including prominent individuals who thought everything was running smoothly, only to be proven wrong.

In the case of Sam Bankman-Fried, he successfully established FTX. This cryptocurrency exchange attracted numerous wealthy and famous investors. However, this success story took a turn for the worse when $8.9 billion worth of assets suddenly vanished into thin air.

What ties these incidents together? 

It is that individuals placed their trust in the information provided by these companies and had faith in the existence of sufficient regulatory measures to safeguard their hard-earned money.

The same scenario of misplaced trust is taking place in the Earned Wage Access (EWA) industry.

What is Earned Wage Access (EWA)?

The industry has seen tremendous growth because of the benefits it can provide both employers and employees. 

By offering EWA, companies showcase that they prioritize their employees’ financial health and happiness. Workers feel more valued and motivated, knowing that their employer has their best interests at heart. 

The benefits of earned wage access extend to employers as well. When employees can access their earned wages early, they can better manage their budgets and avoid costly overdraft fees or high-interest loans. EWA reduces employee financial stress and increases productivity in the workplace. Additionally, EWA has become a sought-after benefit that tips the scale in recruiting and retention of employees in a competitive job market.

Existing Federal and State Regulatory Guidance For EWA

Federal and state guidance for EWA exists within the current lending laws, money transmitter laws, department of labor laws, the CFPB EWA Advisory Opinion, and opinion and guidance statements from California, Kansas, Maryland, and Connecticut:

>>> State lending laws

>>> Local, state, and federal money transmitter laws

>>> Federal labor laws

>>> State labor laws

>>> Consumer Financial Protection Bureau EWA Advisory Opinion

>>> State of California Department of Financial Protection and Innovation Opinion

>>> State of Kansas Office of the State Bank Commissioner (OSBC) Opinion

>>> State of Maryland Department of Labor Industry Advisory Regulatory Guidance

>>> State of Connecticut Department of Banking Industry Guidance 

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Misleading Protections In New State EWA Legislation

Unfortunately, some EWA providers and the trade associations that represent them think they should be exempt from the existing laws and guidance.   

New EWA legislation supported by these EWA providers protects the EWA provider, not the consumer. For example:

1. Exemption from existing lending, money transmitter, and wage assignment laws.  

2. No caps on the fees charged to employees for EWA transactions. 

3. No limit on the number of times an EWA provider can attempt to debit an employee’s bank account to recoup any overpayments

4. Nothing that prohibits an EWA provider from mandating their paycard or e-wallet for both EWA and payroll. (Yet, employers are prohibited from mandating the bank where an employee’s wages are directly deposited into.)  

5. Nothing restricts an EWA provider from taking over an employee’s direct deposit designation and replacing it with the provider-owned account.

Misleading Regulatory Guidance in New State EWA Legislation

These EWA providers hide behind so-called consumer protections, believing legislators will not look closely at how those protections increase consumer risk. The new legislation includes four problematic areas:

1. The non-recourse clause. 

A non-recourse (aka no remedy) clause, present in most EWA provider terms and conditions (and required by the Consumer Financial Protection Bureau to be a “Covered EWA” provider), prevents the provider from pursuing an employee for repayment of an EWA transaction or fees. 

If you look closely, a non-recourse clause only means the EWA provider will not report the consumer to a credit agency or sell the debt to a third party for collection. The EWA provider can attempt to collect (aka claw-back the funds from a consumer’s bank account) as often as they like. The EWA provider can prohibit future use of the EWA service until they are repaid any outstanding EWA transaction and fee amounts.

2. A free EWA access option. 

Some New state EWA legislation tries to protect consumers by requiring a free option to access EWA services. Free EWA access options tend to come in two flavors:  

     (1) Free to a General Purpose Reloadable Card (GPR Card) and 

     (2) Free if you wait one to three days for an ACH transfer

Theoretically, these two options allow consumers the ability to access EWA services at no cost. However, free isn’t always free, and GPR Cards:

>>> Can have hidden fees such as transaction fees, monthly fees, balance inquiry fees, withdrawal fees, bill payment fees, and more! 

>>> Are at risk for fraud and scams.

>>> EWA GPR Card account transfer fees can cost consumers $1.99 to $4.99 per transfer.

And as the saying goes, time is money. The wait time of an ACH transfer (one to three days) is another cost that can result in late fees and overdraft fees if the consumer needs their funds right away to pay bills. 

EWA legislation must recognize that “free” is a loss leader. No business can sustain operations if they are truly providing their services for free. EWA is a valuable benefit that requires fair and transparent fees to operate in a sustainable manner. Regulators must explore and expose the hidden fees and costs behind so-called free options. 

3. Overdraft reimbursement. 

New state EWA legislation seeks to protect consumers by enforcing overdraft reimbursement. If an EWA provider debits a consumer’s bank account for the wrong amount or on the wrong day, and that debit causes an overdraft fee, the EWA provider is required to reimburse the consumer for that fee. 

While this regulation appears fair on the surface, legislators may want to ask, “Why would an overdraft ever happen?” 

Why are EWA providers not confident in their ability to accurately calculate earned wages? 

EWA models that estimate earned wages are prone to overpayment because they do not use actual, accurate employer data to calculate the earned wages

Consumers may report to the EWA app that they worked 10 hours a week when they only worked two. Because the EWA provider cannot access the actual hours worked, they could authorize the overpayment of earned wages. Then, to recoup the overpayment, they cause one, two, or three (or more) overdraft fees on the consumer’s bank account. 

There is no limit to the number of times the EWA Provider can initiate the transaction. (Ouch!) 

Yes, the EWA provider must pay back the overdraft fees, but what about late fees created because the overdraft fees drew down the consumer’s checking account balance? There were no funds to pay bills that were due. Imagine the stress the consumer would feel seeing multiple overdraft fees hit their bank account. EWA models that estimate earned wages can create extreme financial stress. (This is incredibly ironic, given that the vision of EWA is to reduce financial stress!)

Overdraft reimbursement is proposed by certain EWA providers who can’t be bothered to collect actual, accurate data on an employee’s pay, deductions, and hours worked.

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4. EWA Licensing. 

It’s the mantra.

Every EWA provider must be licensed! Licensing will reduce risk! Licensing keeps consumers safe!

Unfortunately, licensing has not prevented predatory lending practices and skyrocketing interest rates in the payday lender and title loan industries. 

We can (and must) demand better than just a licensing requirement! 

New State EWA Legislation Ignores Key Findings In EWA Research

The California Department of Financial Protection and Innovation (DFPI) collected and reported on actual data from EWA providers. 

Their report and other studies of EWA provide excellent insight into the benefits and issues of various EWA models. 

Yet, sadly, EWA providers pushing the new state EWA legislation are ignoring key findings (and these findings come from their own user data!). For example:

1. Overpayments. The less accurate the payroll and time data, the more overpayments and the greater the risk of creating overdrafts.

2. Lack of transparency in fees. Expedited fees, tips, and subscription fees make accessing EWA confusing, time-consuming, and expensive for consumers.

3. EWA funds delivery time complaints. Consumer complaints abound regarding when the EWA funds were to be delivered and when they were actually received.

4. Automatic bank deductions cause confusion and complaints. 33% of complaints were about consumer’s bank account deductions and unknown withdrawals and fees

5. Fast service requests lead to high fees. More than 70% of transfers included expedited fees and tips. 

6. Direct-to-consumer EWA model overuse. Of the direct-to-consumer model users, 24% used more than one provider, increasing the risk of overdrafts when these providers attempt to recoup the funds. 

New State EWA Legislation Should Help Not Harm

Earned Wage Access (EWA) is a Fintech innovation designed to help employees struggling under the weight of high-interest loans.  

This technology is new, and of course, state legislatures want to protect their citizens.

However, when we ignore existing laws and conclusions from the analysis of industry data, we create unnecessary mistrust and suspicions and ultimately harm the very consumers we seek to help.

New state EWA legislation can and must do more to protect the users of EWA.

EWA Done Right

FlexWage delivers “EWA Done Right” because it offers the most compliant, responsible, and transparent Earned Wage Access (EWA) solution.

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Keep exploring and learning >>>>> 22 Urgent Questions To Help You Select The Best EWA Benefit Provider