Faster wage payments disrupt the traditional payday

(Michael Moeser, Arizent)


COVID-19 economic pressures have pushed more adults living paycheck-to-paycheck to want their income early, calling into question the value of decades-old payroll practices — and highlighting disparities along economic, racial and gender lines



Introduction

Reduced work hours, job losses and other economic stresses have pushed many adults to seek out a new financial product – earned wage access or EWA – in an effort to help them cope. EWA is a third-party service, typically offered through an employer, that allows a worker to withdraw some or all of the wages which they have earned without waiting for the end of their current pay cycle. The cost of the withdrawal is generally a small fee paid by the worker or subsidized by the employer, and the early withdrawal amount is deducted from the worker’s wages when payday arrives.

As with any new financial product, the benefits to users must be weighed against the costs for both users and companies. This white paper will analyze both the costs and benefits, to help financial professionals better understand the big picture.

Key findings

  • There is room for traditional financial institutions that don’t currently offer EWA services to compete in this market, and a majority (77%) of respondents said that they would use an EWA service if offered by their bank or credit union. While employees tend to pay the fees, some employers seeking to recruit job applicants have begun to subsidize the cost, especially when offering shift bonuses or trying to do mass recruitments. The fees are typically fixed and regressive, making low-income users who tend to make smaller requests pay more as a percentage of their withdrawals. Three quarters of users have the funds placed into an account offered by the EWA provider or employer, creating a potential conflict of interest.

  • Significant racial disparities surfaced when users were asked about their payment options had EWA services not been available to them — half (54%) of white users reported that they would have used a credit card to pay a bill compared to only 39% of Black users and 29% of Hispanic users. This lack of access to credit alternatives could influence some users to become more dependent on EWA withdrawals.

  • Men had a greater ability to borrow from credit cards and home equities than women, highlighting a gender inequality that may motivate EWA adoption.

  • Income level influenced how users spent their money. High-income adults primarily used the service to balance cash flow, pay bills before payday and make general purchases. Middle-income users primarily paid unexpected bills, then bills due before payday and to make general purchases. Low-income users first paid rent, followed by balancing cash flow and paying surprise bills. The difference in rent payment usage was significant, indicating that the service is more of a must-have for low-income users.

  • Hispanic respondents used EWA funds first to buy food, followed by rent; while white adults used the funds first to balance cash flow, followed by paying unexpected bills.

  • Hispanic adults had the highest level of instant, on-demand wage requests, indicating a greater urgency to access funds.

  • EWA is a strong job recruiting tool — almost two thirds of Hispanic adults said EWA would significantly improve their interest in a job.

  • EWA could allow employers to avoid paying higher wages. A case in point is Walmart, the nation’s largest employer, has offered EWA since 2017 when most of its workers earned

  • $9 per hour. According to PayActiv, one of its EWA partners, more than 500,00 employees actively use EWA services and it’s the third most popular benefit after healthcare and 401(k) (see EWA defined section for more information), yet Walmart has only begrudgingly raised wages over the years.

  • Most (77%) users choose to receive their funds instantly or on the same day, with the remaining choosing a slower delivery time, indicating a pressing need for fast money.Get Inspired

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The EWA industry: An overview

Earned wage access (EWA) goes by many names — early wage access, on-demand pay, daily pay benefit, instant pay — but essentially refers to the ability for an employee to access the money they’ve earned prior to their scheduled payday. It’s not a loan, but rather an advance payment on funds that are forthcoming in their paycheck. Earned wage access in its current form has been available for roughly a decade, and is promoted largely as a safer and more consumer friendly alternative to high interest payday loans.

PayActiv, one of the largest EWA providers, claims to have invented the term Earned Wage Access in 2012. FlexWage claims that it patented the term “OnDemand Pay” in 2010, yet the term is ubiquitous throughout the industry. Other major providers such as DailyPay, Branch, Earnin (formerly known as Activehours) and Even all claim significant roles in establishing the industry, which had its formative years from 2014 to 2018.

The market opportunity these companies are chasing is massive, as it covers all hourly workers (73.3M in US in 2020), gig workers and anyone living paycheck-to-paycheck (69% of Americans), including salaried workers.

Until recently, the majority of companies offering this service have been fintechs. PayActiv, with a million active users, is one of the largest EWA providers. There is a second tier of smaller players who operate in this market, and in the last two to three years, there have been a slew of new competitors that have either entered the market with fresh capital or pivoted their existing businesses to add EWA products.

Ceridian, a time and attendance human capital management software provider, added EWA as an offering to complement its payroll services and mobile wallet. Comdata, a FleetCor unit known for its payroll cards, jumped into the fray in April 2021. Even, the financial wellness provider working with PayActiv to service Walmart employees, decided it could go on its own with EWA services.

These companies are in addition to more than a dozen other providers including Immediate, Instant Financial, Rain, AnyDay, Earnin and Square (a recent entrant targeting small merchants and gig workers).

Traditional banks and credit unions typically do not participate in this segment, nor do the major payroll providers such as ADP and Paychex, both of whom leverage PayActiv’s EWA services. Some digital-first banks such as Chime, Current and Dave offer early access to direct deposits up to two days early as an inducement to attract new customers. However, this is not considered EWA since it’s only early access to a full deposit. In contrast, EWA customers can request instant access for their wages earned after just working one day into a two-week pay period.

While the EWA services are provided largely by fintechs, they are sponsored and made available almost exclusively through major employers such as CoxHealth, Walmart, Domino’s, PayPal or through payroll providers such as ADP, which allows small companies to offer the service. Earnin and Brigit are among the very few EWA providers that use the direct-to- consumer (DTC) model, because being employer- or payroll provider-sponsored significantly lowers acquisition costs. However, DTC players don’t risk losing a customer if a worker changes jobs.

Employers can offer the service as a benefit, similar to health care, disability insurance or a 401(k), which tends to give it legitimacy in the eyes of employees. Early in the industry’s growth, employees tended to pay most of the transaction fees. However, some employers have begun to subsidize the fees or even pay them entirely for shift bonuses or cash-out of tips, as a way to attract employees or fill undesirable work shifts. Fintechs spend the money to integrate with payroll providers such as ADP to gain access to an employee’s earned wages and generally provide this information through the fintech’s mobile app or website.

Most EWA providers limit access to earned wages to 50% to 60%, as a way to deter employees from becoming dependent on early withdrawals and to protect themselves from surprise wage garnishments or court orders. The early withdrawals are settled on payday and no rollovers are permitted, unlike payday loans.


Walmart and EWA

Walmart stands out in the industry because of its sheer size and heavy use of EWA. It first began offering EWA in 2017, when its associates earned on average $9 per hour. Walmart has been using a partnership between Even and PayActiv, with the former offering a financial wellness mobile app in which associates could make EWA requests and the latter enabling the actual money transfers. When the service first launched, Walmart offered its associates one free transfer per quarter, with the option for employees to pay out of pocket for additional transfers.

PayActiv has reported that over 500,000 Walmart associates are active EWA users, and Even has reported that it has more than 600,000 associates signed up for its app, which is required for EWA access. This means that five out of six associates who have signed up for the mobile app are accessing EWA on a regular basis. Even has reported that the benefit is the third-most popular one used by Walmart employees after health care and the 401(k).

There are three major drivers often cited behind employers offering EWA to their employees. First, it’s about giving workers help in dealing with the financial pressures of the pandemic, as well as for those living paycheck-to-paycheck. That was a key driver behind CoxHealth signing up with Even to offer EWA to its 13,000 employees. Second, it is an important recruiting and retention tool. Domino’s hired Branch to offer EWA services to help it recruit 10,000 pizza delivery drivers at the start of the pandemic, as demand for pizza delivery exploded. EWA is used to cash-out tips to drivers at the end of a shift. Domino’s also used the tool as a way to retain its drivers from headhunters recruiting 30,000 drivers for Pizza Hut and 20,000 for Papa John’s at the same time.

Third, EWA provider Immediate reported companies are increasingly using EWA services to provide spot bonuses to workers to incentivise them to accept unpopular work shifts such as evenings or weekends. In these cases, Immediate noted that some employers have also chosen to pay the entire transaction fee for the bonuses.

However, some may argue that since EWA is a low-cost service to employers, even for those subsidizing transaction fees, it may also be used as a means to reduce pressure to raise wages under the auspices of giving employees greater access to their wages. EWA providers stand firm that the service they are offering is a better alternative to the payday lending and check-cashing industry, as well as the traditional banks that reap billions of dollars in overdraft fees.

As the EWA market has grown, it has also come under the watchful eye of regulators. The CFPB, the California Department of Financial Protection and Innovation, New York and other states’ regulatory agencies have all begun to investigate the industry to make sure that common industry practices are compliant with existing laws and that consumers are well- served by EWA.


New EWA users are flooding the market

More than half (56%) of adults surveyed had used EWA in the last 12 months for the first time, reflecting the early stage nature of this market and demonstrating a newly found appeal among consumers for this emerging product. Additionally, almost three quarters of Asian adults were first-time EWA users

Two factors of EWA’s growing appeal are that the money being accessed has already been earned, so it’s not an advance for hours or days not worked; and the services are often provided to end users at low or no direct cost.

In the American Banker Future of Money Research Report released in November 2020, use of EWA services among the general U.S. adult population was 14%, with higher adoption levels among Hispanic adults and younger generations. White and Black adults had adoption rates of 12% each while Hispanic adults had an adoption rate of 25%. Gen Z consumers and millennials reported EWA usage rates of 22% and 26%, respectively.

Among survey respondents, all of which had used EWA in the last 12 months, 53% had used the service in the last three months and more than eight in 10 had accessed the service in the last six months. Recent usage was higher among Hispanic adults as 66% reported having used the service in the last three months.

High unemployment levels, reduced work hours or needing to spend time at home with children learning remotely are all factors that have prompted many adults to explore new financial products such as EWA to alleviate financial stresses. Previously many of the alternatives involved some level of hardship such as selling something or taking costly payday loans.


Users want faster payments because their need is immediate

Survey respondents overwhelmingly chose to receive their funds using a faster payment method, as more than three quarters (77%) received their money instantly or on the same day. Since the need to use funds often involves food, gas or utility bills before service is cut off, many EWA users don’t have the luxury of time to wait for their funds. The advent and widespread adoption of card network-based push payments from Mastercard and Visa has greatly sped EWA funds availability, although at a higher cost to the end user. Push payments usually come with a fee, but most ACH payments, especially to the EWA-linked bank account, are free to the end user.

EWA providers such as PayActiv and Immediate both reported rapid user adoption of near- instant push payments once the service was launched. Immediate reported in October 2020 that half of its users had switched to using Visa Direct over ACH within the first two months of offering the service. PayActiv reported that four out of five of its users had transitioned

to using Visa Direct for a fee instead of ACH, which is typically free, after the first year of launching the faster payment service.

Hispanics had the highest usage of instant, on-demand pay among all ethnicities at 43%, which represented a statistically significant finding when compared to white respondents at 26%. In contrast, white respondents had the highest usage of same-day funds transfer at 53%, compared to Hispanic respondents at 36% and Black respondents at 30%.


EWA withdrawals are all low value, depending on a user’s income perspective

About 66% of all EWA withdrawals were for less than $300, and 46% were for less than $200, making them of relatively small transaction value. As a comparison, the CFPB reported that the average two-week payday loan is made for $350, costing on average $52.50 and incurs penalty fees if not repaid. About 20% of borrowers default on their first payday loan or first roll-over loan. In states where allowed, as much as 80% of payday loans are rolled-over or reborrowed within 30 days. In contrast, EWA funds are not loans and there are no roll-overs as earned wages advances are settled on payday.

The average amount of withdrawals by income segment were $195 for low-income users, $240 for middle-income users and almost $300 for high-income users. Given these transaction size differences by income, it could be argued that the term “low value” is relative to the income of the recipient.


Conclusions

The demand for EWA services is growing as consumers struggle with their cash flow or face unexpected bills. This represents a strong opportunity for banks, credit unions and fintechs to capitalize on a market served primarily by fintechs, with responsible products that can act as a runway to better financial health and prosperity.

  • The time to enter the EWA segment for banks, credit unions and fintechs is now, as the market is in a liftoff phase with half of all customers using the product for the first time and most doing so in the last three months. There is strong employer support for these programs, so companies are acting as a market growth accelerant. Continued economic pressures will only exacerbate consumer demand.

  • The brand loyalty EWA firms have today is largely as a result of the employer sponsorship of most programs and not necessarily as a result of any effective acquisition marketing campaigns. While unseating an existing EWA program from an employer may appear to be a hurdle, it is not, nor is it the only option to market expansion. Since employers pay little to nothing for the service and the timecard integration is done with the payroll provider (Kronos, ADP, etc.), having an employer add a second EWA provider would be similar to offering a second or third health care option to a benefits package.

  • Providing a bank or credit union-based solution would appease both employers and regulators in the marketplace as there has been ongoing regulatory scrutiny in New York, California and other states regarding conflict of interest issues and consumer safety. Further, there is significant consumer interest in a bank-offered service. Employers may gravitate toward a bank service for the safe harbor it could provide.

  • Banks and credit unions can address the gender, racial and income disparities by waiving fees, much like they do for ATM transactions and suppressing paper statements. EWA could instead be used as a customer acquisition tool, allowing the bank to graduate users to traditional bank accounts and loans.

  • Faster payments should become the defacto EWA standard, leveraging either card-based push payments or an interbank transfer where the customer is using the EWA provider’s bank account. Most transfers today use instant or same-day payments, and among those that do not, many users want that option. In the case of an employer offering two EWA plans, the one offering only a faster payment would have an advantage.

  • Finally, there is a separate opportunity to serve the affluent and older generations, e.g., boomers, who tend to use the service more for balancing cash flow needs, rather than immediate use such as paying rent or purchasing food. Since affluent groups are more willing to pay a fee and older generations are more bank-directed, this could represent a cash management service subscription feature as part of an EWA service.

You can read the full report by Arizent here.