(The Financial Health Network, 2021)
Persistent lack of liquidity is among the many financial health challenges faced by consumers in the United States. Over the past decade, new financial products have emerged to assist consumers in meeting these liquidity challenges. Earned Wage Access (EWA) and Direct-to-Consumer (D2C) Advance products are designed to help close the gap between a consumer earning wages and accessing their paycheck. Broadly speaking, EWA providers partner with an employer or payroll system to gain insight into earned wage or projected earned wage information, and provide a means for consumers to access those wages before payday or the day funds are accessible. D2C providers work directly with consumers and connect to their bank accounts to observe inflows and outflows, providing a certain amount of liquidity, upon request. There is a spectrum of EWA and D2C Advance models. As this space has grown, various models have emerged and there are variations on how these products are offered.
Thus far, there has been little insight into how consumers use these products. As a step forward in understanding how consumers use EWA and D2C Advance products, and the impact these products have on financial health, the Financial Health Network partnered with a handful of EWA and D2C providers who provided individual and anonymized usage data. These data include transactional details, such as when advances were taken and recouped, the amounts users advanced, if companies were able to recoup the advances, and the costs users paid to use the advance.
Based on its analysis of this data, the Financial Health Network made the following observations:
Most consumers used EWA and D2C Advance products consecutively over varying periods of time.
Advances were recouped successfully at least 97% of the time.
The cost to use an advance was typically less than 5% of the advance amount, but the cost over time can vary based on the company’s fee model and individual usage patterns.
While these findings cover datasets from just a handful of companies, and additional research is certainly needed to draw firmer conclusions, this research does shed light
on key aspects of EWA and D2C Advance usage. Further research is needed to explore the implications of consumers’ consecutive use of such products in order to better understand whether EWA and D2C Advance products help consumers build resilience and pursue opportunities. Additionally, this research highlights the imperative for providers to price responsibly and design recoupment in a way that is not burdensome to consumer financial health. Accordingly, additional research partnerships, with an emphasis on financial health measurement between nonprofits, fintechs, and employers, will be integral for better mapping and understanding the opportunities that EWA and D2C Advance present.
Background on Earned Wage Access and Direct-to-Consumer Advance
User Demand For many U.S. workers, the time between earning and being able to access their wages can create financial distress. Only one-third of private-sector employers pay their workers on a weekly basis, while over 60% are paid on a biweekly or semi-monthly basis, and 5% are paid even less frequently.1 Some workers have a cash buffer in their checking account or liquid savings to help tide them over if their pay schedule does not line up with their expense payments (e.g., a bill due date). However, one in five families has less than two weeks of liquid savings.2 Bills and expenses can be due prior to payday, or unexpected expenses can come up that require immediate payment. This leads many consumers to seek out financial products that will provide them immediate liquidity for short-term needs, overdraw their accounts, defer payments, and risk incurring late fees.
Many of the options available to consumers to deal with liquidity crunches come at a steep cost. Consumers have used some of the following products to provide some form of small dollar liquidity when they’re in a cash crunch:
Overdraft: Many financial institutions will cover a transaction made by a consumer that exceeds the available funds in their account and then charge an overdraft fee. Given that the median overdraft is triggered by a transaction of $50, but usually costs around $35 per transaction, and that more than half of all overdrafts are repaid in three days, this could be viewed as a very high-cost form of credit.3,4 Consumers spent an estimated $12.4 billion on overdraft fees in 2020.5
Pawn Loans: These are non-recourse loans securitized by a pledged good, which the lender returns once the loan is repaid. Loan terms are typically 30 days. Loan sizes are a percentage of the assessed value of the good and typically range from $75 to $100. Interest rates vary by state and are between 2% and 25% per month.9
Generally speaking, EWA providers allow consumers to access a certain amount of their earned wages prior to a payday and recoup that amount by deducting it from a consumer’s subsequent paycheck. D2C providers typically observe inflow and outflow patterns in a consumer’s bank account and provide a certain advance amount based on those patterns, upon the consumer’s request.10 The provider will then recoup that amount from the consumer’s subsequent account inflow, or on a scheduled date. EWA and D2C providers disburse advances via direct deposit or onto a debit card or digital wallet through a partner financial institution.
Providers earn revenue in a number of ways. Some EWA providers offer their service at no charge to the consumer, earning revenue instead through other sources, including fees paid by the employer and interchange on debit cards through which advances are delivered. Other EWA providers charge the consumer a periodic fee or a periodic fee only during periods in which a consumer uses the service. Some EWA providers charge a transaction fee for each advance. In some cases, both the employer and the consumer will share the cost, or the employer will subsidize some or all of the consumer’s fee. D2C providers will charge a periodic fee, a fee-per-use, or invite the consumer to pay a voluntary fee. Some charge both a periodic fee and transaction fee and/or invite the consumer to pay a voluntary fee.
While these models have only emerged within the last 10 years, EWA and D2C Advance platforms have quickly gained widespread attention and the landscape of providers has grown tremendously. While initially the companies entering the space were early-stage startups, the types of providers offering EWA and D2C Advance products have become increasingly diverse, and now include HR platforms and established financial services incumbents.
One industry analyst estimates that nearly 55.8 million EWA totaling $9.5 billion were facilitated in 2020. This compares with 37.2 million EWA totaling $6.3 billion in 2019, and 18.6 million EWA totaling $3.2 billion in 2018.11, 12 As more EWA providers enter the market, employer benefits providers, financial wellness platforms, and payroll platforms have begun to incorporate EWA products as a feature.
EWA and D2C companies operate in a variety of models, and there is a wide variation in how companies offer products within those models. We have developed two broad categories of providers:
Employer and Payroll-Integrated EWA Providers: Providers partner with an employer or payroll processor to integrate with, or otherwise receive information from, the employer’s payroll system, to allow “early access” to wages a consumer has already earned. The portion of earned wages that can be accessed is determined by the employer or provider. When a consumer requests an advance, the money is disbursed to the consumer, subject to whatever maximum the employer or provider has established. This advance is repaid through the consumer’s next paycheck, which is reduced by the advance amount. The fees for this service are sometimes covered by the employer, the employee, or a mix of the two. Based on current players in this space that charge the consumers a fee, monthly employee subscription fees range from $5 - $10/month and individual transaction fees range from $1 - $5.13 Some employers subsidize some or all employee fees. The amount of the transaction fee may vary depending on the method of disbursement selected by the employee. Some providers partner with a card network (such as Mastercard or Visa) to direct deposit consumers' earned wages onto a debit card. In this case, the provider may not charge the employer or the consumer any fees, but earn revenue from the interchange fees. Some HR and payroll platforms that work with employers to provide products such as time tracking, benefits information, employee portals, pay stubs, and other personnel resources, also offer EWA as an additional product. The cost of the EWA is typically folded into the cost of using the HR or payroll platform.
D2C Providers: Providers connect to the consumer’s bank account to monitor cash flow and paydays, or will offer a digital bank account through a partner financial institution. Some providers will use a third-party service to view transaction data. A consumer can request an advance (advance amounts vary by company practices and consumer-provided wage information). iIf the request is approved, the advance is disbursed to the consumer’s bank account. The advance amount is repaid through an electronic debit from the consumer’s bank account upon their next deposit, or on a scheduled date. In addition, some companies offer an overdraft avoidance advance. If a consumer appears likely to overdraft, or if their bank account balance drops below a certain amount, the provider may prompt the consumer to request an advance if a consumer has opted in for that product feature. Advance amount restrictions vary by company, and some are determined by a consumer’s deposit data. Consumers pay for this product through a monthly subscription fee, a fee per transaction, a voluntary fee amount, or a hybrid of a subscription fee plus a per-transaction or voluntary fee. For companies that charge a subscription fee – which in some cases is folded into a broader suite of products – these fees can range from $1 - $9.99 per month. Companies that charge a transaction fee typically charge $1 - $5.14 The size of the transaction fee can vary depending upon the means of disbursement chosen by the consumer. Some providers also offer a suite of products that includes EWA or D2C Advance, and fees for advances are included in a membership fee. Some offer other products on a non-fee basis. Products that are offered additionally or on a non-fee basis can include financial counseling, financial planning, credit-building tools, and savings tools. Some of these companies have noted that the financial health impacts of EWA and D2C Advance cannot be assessed as a standalone product and should be viewed in the context of the other products they offer.
Advance Usage Patterns
Our analysis indicates that most users do not take advances on single occasions, but take two or more advances consecutively across several semi-monthly periods and generally over two months. Across all companies, more than 70% of users took advances in consecutive semi-monthly periods in one year of observed time. The lengths of consecutive use differed by company and user. The average length of time users took advances consecutively was just over two months (4.66 semi-monthly periods), and the median was 1.5 months (three semi-monthly periods).
In addition, 10% of users took advances consecutively for at least five months (10 semi-monthly periods) and 1% of users took advances consecutively for a year (24 semi-monthly periods). Over half of customers who took advances consecutively advanced about the same amount each time they advanced.
Our research showed that 30% of users took advances in every semi-monthly period between their first and last advance during the period covered by the data. On average, these users took advances for three months (6.4 semi-monthly periods). The median length of use by these users was two months. The average and median user took advances consecutively on one occasion. The top 10% of active users took advances consecutively on two separate occasions.
Users of one company took advances consecutively for longer periods of time than the other three companies. Users of this company took advances consecutively for an average of five months, and 10% of the users of this company took advances consecutively for at least 10 months.
Note: The number of consecutive advances, the number of consecutive uses between the first and last advance, and the number of discrete usage occasions could be affected by a loss of eligibility, such as loss of employment or a decision by a company not to provide further advances. Similarly, for companies charging a subscription fee, eligibility may have ended as a result of a decision by the user to cease paying the fee. As noted previously, we are not able to observe any of this with the existing data.
The amount users typically advanced varied by company. The EWA companies both permitted employees to advance up to 50% of their earned wages, so differences in advance amounts were determined either by wage amounts or by the amount users chose to advance. The two D2C companies had different policies with respect to the maximum amount a user could advance (one company set a flat amount and the other varied the amount by user) so that differences in advance amounts may be attributable to these policies, to the size of cash inflows into the users’ accounts, and/or the choices of the users. Across the companies, the average amount advanced was $120. For each individual company, average advance amounts ranged from $78 to $165 and median advance amounts ranged from $100 to $140.18.
Advances were successfully recouped at least 97% of the time. Companies recouped advances through their integration with a payroll system or by debiting a user’s bank account. Users of all companies had the option to stop or delay the recoupment for any reason. This required proactive action from the user. In some cases, companies were unable to recoup if a user had lost their job, closed their account, or blocked the payment. Across all of the companies, the rate at which a company was “unable to recoup” was 3% or less.
Costs by Model
Companies employed one of the following fee structures:
A voluntary fee per individual advance, in which users had the option to pay or not pay a fee, and could choose the amount.
A periodic subscription fee, in which users paid the same periodic fee regardless of whether an advance was taken during the particular time period, though some companies limited the number of advances a user could take to one per pay period.
A set fee users paid during the pay periods in which they took an advance.
To calculate the cost to users for these products, we divided the average number of advances and the average amount advanced in a month by the average fee paid in that month. Using this methodology, the average amount a user paid per advance was $2.59 - $6.27 across the companies. As a percentage of advance amount, the cost was 2.57% - 4.69%.19 These costs are significantly less than the costs for some of the alternative products discussed above.
Depending on factors such as the fee model used, restrictions on the number of advances a user could take, and usage, the total cost over the course of a given period of time could vary. Below are a few possible total costs based on usage. The scenarios assume that the voluntary amount paid is $4.07 and that companies do not restrict the number of advances users can take.
As this illustrates, the voluntary payment model can be more or less expensive than the fixed-fee model, depending on the number of advances the user takes, and the size of the voluntary payment relative to the subscription fee. This illustration also assumes that the customer chooses to pay the same amount with each advance – or pay a fee at all.21 Additionally, if a consumer chooses to take no advances, under the fixed-fee model, the customer would still incur a cost.
The EWA and D2C Advance space is certainly burgeoning and continuously evolving. We can expect to see more growth in this space as providers see opportunities to fill consumer needs or demands. The analysis we have conducted sheds some light into how consumers are using EWA and D2C Advance.
As described, most consumers tend to use EWA and D2C Advance consecutively at least some of the time, advances are almost always recouped. While the costs can vary based on the provider’s business model and the consumer’s usage pattern, the individual cost of EWA and D2C Advance are low relative to some of the alternatives available to cover cash shortfalls. These findings point to the potential financial health implications of EWA and D2C Advance, but more research is needed to explore this. We hope to continue working with providers, employers, and consumers to understand how EWA and D2C Advance are used and to uncover opportunities to impact financial health.
Read the full report by the Financial Health Network here.