Not all earned wage access products are created equal. Find out how the small differences in EWA providers can have big impacts on your employees
As COVID-19 exposes all the ways in which Americans are struggling financially, many employers find themselves wondering: “How can I help?” After all, data shows that companies that invest in workers’ financial resilience will fare better in the long term. One way to help employees is to offer them earned wage access, also known as EWA or on-demand pay.
By offering EWA, employers can reduce uncertainty for their employees, and help them avoid harmful alternatives like overdraft fees and payday loans. But like most employee benefits, there are lots to choose from. In this post, we’ll provide some guidance for business leaders who know they want to help their employees, but aren’t sure where to start.
Types of EWA
If you’re researching EWA providers for your workforce, one of the first things you’ll notice is that there are multiple provider options—and it can be hard to tell how they differ from one another.
An enterprise-grade financial benefits platform should package EWA alongside automatic budgeting, emergency savings, pay projection and more. Some vendors offer EWA with a few add-ons, and others offer EWA as a standalone service.
The way an EWA product is structured closely relates to the provider’s business model, as well as its pricing. And all these variables have impacts on the people who are using EWA: your workforce.
Employers-sponsored EWA mirrors the way businesses offer traditional benefits like health care or retirement. In this case, employers sponsor EWA as a financial benefit. Employees then access and manage their wages through an app .
The transaction model means an employee pays a fee every time EWA is used. Fees can vary depending on how quickly the employee wants access to their funds (for example, next-day transfer instead of instant). “Tipping” models also fall into the transaction model category, with variable fees and limited transfer options.
A pay card model is sometimes used to characterize EWA as free. While it’s true that taking an advance is free, there are usually hefty fees for receiving EWA funds in an external account or moving money from the debit card to an external account. Not all pay card EWA providers offer cash pick-up options, and some rely on fee-based ATMs for cash access.
What this all means for employees
While there are many differences between these models, there’s one important thing to keep in mind: EWA alone won’t help employees build financial resilience. EWA is better thought of as a strong first step, a tool that helps employees stabilize their finances in the face of emergencies. That stability then makes it possible for employees to budget, plan, and save—if the right tools are in place.
Employer-sponsored EWA is incentivized to reduce reliance on EWA over the long run. That’s why it progresses employees up the financial ladder with tools such as automatic budgeting, emergency savings, and pay projection. The more financially resilient employees become, the more EWA becomes a backstop. Employers reap returns through higher retention, productivity, and engagement.
Employee-paid EWA like pay card and transactional products, however, need to drive up EWA usage because their profits are tied to fees. Plus, they charge your employees when they’re most financially vulnerable. Both realities work against your employees building long-term financial resilience.
Careful not choosing the wrong EWA
When you offer a pay card or transaction model EWA product, your employees pick up the cost. The more help they need, the more they pay—and the less they have to work with when they need the money most.
This is plain to see from the publicly reported data from multiple EWA vendors, which indicates that most employees use EWA about once a week. In this instance, a transaction model vendor would make $14.95 in fees from an employee over the course of the month. A pay card model provider can take as much as $24.95 in fees.
Why are the costs for transaction and pay card model providers so high? It’s a matter of incentives. Providers using the transaction model are incentivized to keep employees taking wage advances as frequently as possible, so they can maximize fees. Transaction model EWA products may also include “tipping,” which gives employees the illusion of choice. But with limited guidance on what an appropriate tip amount looks like, tips can simulate a high fee structure and approach payday loan rates.
Meanwhile, pay card model EWA providers require employees to use the provider-issued debit card in order to access their wages instantly. If the employee wants to receive their wages in a different account, the provider can charge a hefty fee. This creates more hurdles for employees when it comes to spending their wages: To avoid fees, they’re forced to use the EWA provider’s card or experience fees to transfer money to a different location. This adds further complexity to what may already be a tenuous financial situation.
How to find the best solution for your employees
The first step is understanding why you’re looking for an EWA solution in the first place. Most employers are looking to solve for the issue that employees are struggling to make ends meet, and this is negatively impacting the business.
If the goal is to help employees progress beyond a point of financial stress, you’ll want to find the solution that offers just that: progress. To determine which EWA vendors fit the needs of your business and your employees, start with these questions:
Do employees pay more when they use EWA more frequently?
Does it cost workers more money to get their wages faster?
Do employees have to disrupt their financial lives with a new debit card to use EWA?
Will employees be subjected to fees for spending their own money, or transferring it to personal accounts?
Does the provider offer financial planning tools to help employees reduce their dependence on EWA in the long run?
The original article was published here.