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To a hammer, everything is a nail, and so it is with California’s Department of Financial Protection and Innovation (DFPI). Don’t let the “innovation” in the agency’s name fool you – far too many of its regulations deter rather than promote innovative solutions as evidenced by the agency’s recent stance on earned wage access (EWA) companies.
EWA firms leverage technology to provide employees with early access to a portion of their earned wages before payday. It is a financial tool that helps many people more effectively manage their liquidity needs, some of whom may be living paycheck to paycheck.
Surveys confirm that a majority of EWA customers are satisfied with their experience and use this financial tool responsibly. For instance, a survey of customers of three EWA providers (Brigit, MoneyLion and Earnin) conducted in 2021 by FTI Consulting found that
· 92% of respondents said the service helped them to achieve at least one of their financial goals
· 91% said they understand how the service works
· 89% said they understand the associated fees, and
· 82% reported feeling less stressed about their financial situation.
In other words, most customers were well informed about the costs and, once the transaction was completed, were still satisfied with the service they received. Just as importantly, the survey confirmed that, without the EWA service, the respondents would have turned to less financially responsible alternatives including paying their bills late (44%), over drafting their account (38%), and/or turning toward much more expensive payday loans (35%).
A 2023 study by the Financial Health Network confirmed the potential value from EWA services. Specifically, this analysis found that users preferred EWA services to help ensure they would pay their bills on time or cover unexpected costs. Once again, the Financial Health Network analysis confirmed that users were satisfied with the EWA services and would use them again if necessary.
Based on these results, it would seem logical that regulators would want to encourage the responsible development of this industry. Logical, but in the case of California, wrong.
The DFPI has proposed new regulations that would treat EWA services as a lender. Early access to earned wages would, consequently, be considered a loan and EWA firms would be subject to the litany of current bank regulations.
The problem is that EWA services are not loans. EWA enables workers to access the pay that they have already earned, just earlier. Customers are then charged a fee (some services encourage users to leave a voluntary tip rather than charge a mandatory fee) to cover the transaction cost of providing the service.
The regulator’s response that these fees are interest payments in disguise does not ring true. Consumers in these transactions are not receiving money from lenders that needs to be repaid. They are gaining access to their own money without credit checks. Further, the outstanding balances do not accrue interest or late fees, consumers are not subject to debt collection, and people’s credit ratings are not impacted by these transactions.
Since these services are not appropriately categorized as loans, the proposed regulations will harm consumers. As an analysis in the American Banker summarized, imposing the bank regulatory structure on EWA transactions “does not provide any meaningful protections and it is a solution in search of a problem. It would only cause adverse outcomes for consumers, without creating any consumer protections — notably, not even an APR disclosure.”
In fact, requiring APR disclosure would likely create confusion by transforming a simple fee structure into a complex annualized percentage rate calculation that, even when relevant, is confusing to most consumers. In the case of EWA, the APR calculation is particularly misleading because the service is not a long-term loan where an annualized percentage rate has meaning.
Rather than inappropriately classifying the service as a loan, a more fruitful approach recognizes EWA’s novelty. Given that the vast majority of consumers understand the terms, costs, and services provided by EWA firms, it is unclear that a vast new regulatory structure is necessary. To the extent that some new regulations are deemed necessary, it is essential that these regulations tread lightly to ensure that these valued services can continue to meet the needs of consumers.
The development of EWA is another example of the large consumer benefits that can arise from technological innovations. The tech sector’s ability to reduce costs and make previously unachievable transactions possible has the potential to continually improve our quality of life. But achieving this goal requires regulators to broaden their perspectives and see the new innovative services as they are, not as these officials have been accustomed to seeing them.
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