Companies like the Consumer Financial Protection Bureau (CFPB) have started keeping a close eye on earned wage access programs. These so-called paycheck advance programs have become increasingly popular among workers in recent years.
What analysts initially referred to as earned wage access programs, some felt that they were being put through the guise of offering workers help by tapping into their paychecks prior to payday. Despite this, the CFPB proposed that these programs should be categorized as “consumer loans” subject to the Truth in Lending Act.
It was disclosed in a CFPB analysis that more than 7 million workers had accessed approximately $22 billion in wages before their payday in 2022. This number had increased by over 90% from 2021 to 2022. The use of such services had intensified commonly due to financial difficulties experienced by households as a result of the Covid-19 pandemic and high inflation rates. The analysis also found that the typical earned-wage-access user paid fees that led to a 109.5% Annual Percentage Rate (APR), though the service was often portrayed as a “free or low-cost solution.”
The proposed rule by the CFPB aimed to make companies offering paycheck advances provide more detailed disclosures to users to aid them in making better decisions. Most importantly, they wanted costs or fees incurred by consumers to access their paychecks early to be expressed as an annual percentage rate akin to credit card interest rates. This rule intended to bring clarity to consumers regarding the actual costs associated with using such programs.
While the CFPB’s actions aimed to protect workers and promote transparency in earned wage access programs, the financial industry disagreed with calling these services a loan or advance. They argued that these programs are comparable to using an ATM and being charged a fee. The industry believed that methods like APR did not accurately represent the costs involved with such services. The CFPB is welcoming public comments until Aug. 30 and plans to use the feedback to revise their proposal accordingly.
Earned wage access programs are known by various names such as daily pay, instant pay, and on-demand pay. These programs use payroll and time-sheet records to track users’ accrued earnings and offer them before the designated payday. Companies like Branch, DailyPay, Payactiv, Dave, EarnIn, and Brigit are some of the major providers in this space. Users mostly incur fees for accessing their wages early, with most fees being for “expedited” transfers ranging from $1 to $5.99.
The CFPB’s proposal marked the first explicit statement declaring early paycheck access as a loan, which was supported by consumer advocacy groups but disputed by representatives from the financial industry. The rule required providers to disclose the fees rather than prohibiting them. It enabled the CFPB to take enforcement actions against companies that failed to make the necessary disclosures. Regardless, states, consumers, and arbitration avenues could also pursue legal action against such companies.
Earned wage access programs have gained popularity among workers but have also come under scrutiny for their costs and fees. The involvement of regulatory bodies like the CFPB aims to provide protection to consumers and promote transparency in such services. Understanding the pros and cons of using earned wage access is essential for making informed financial decisions.
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