By CORA LEWIS ASSOCIATED PRESS
New York (AP) — EDITORS/NEWS DIRECTORS:
News First – More people are using so-called “earned wage access” apps to get money to pay bills and buy groceries in between paydays. The apps extend small short-term loans repaid by the user on payday out of their wages. They target hourly and gig workers, with some integrated into payroll at major companies, where the employer may take on part or all of the cost.
The typical user earns less than $50,000 a year, according to the Government Accountability Office, and has experienced the pinch of two years of high inflation.
Proponents of the apps say they help people living paycheck to paycheck manage their finances. Some consumer advocates and lawmakers say the fees and “tips” make earned wage access comparable to payday loans and that the costs are not always clear.
While Congress considers a federal bill, some states are taking steps to rein in the fees.
Below is more info on recent state actions along with resources and ideas for localizing the story.
READ AP’S STORY
These apps allow workers to get paid between paychecks. Experts say there are steep costs
WHAT ARE SOME OF THE APPS AND WHAT IS THE COST?
While EWA apps have been around for more than a decade, they grew in popularity before and during the pandemic. Between 2018 and 2020, transaction volume tripled from $3.2 billion to $9.5 billion, according to Datos Insights, a market research group.
Some have approachable human names – like Dave, Albert, and Brigit — while others suggest financial freedom: Empower, FloatMe, FlexWage, Rain. A June 2023 Harvard Kennedy School paper found that just three apps — EarnIn, Dave, and Brigit — had a combined active user base of about 14 million people.
The average cost per use of an EWA app is “between $2.59 and $6.27 per occurrence,” the Financial Technology Association, an industry group, has found. Since many consumers use multiple apps, more than once a month, those costs can add up quickly.
Like “Buy Now, Pay Later” loans, the apps don’t run credit checks and bill themselves as interest-free, but many charge monthly subscription fees and guide users to “tip.” Most charge mandatory fees for instant transfers of funds.
Unlike payday loans or auto title loans, where borrowers pledge their vehicles as collateral, users of the apps don’t face balloon payments, black marks on their credit reports, or the possibility of losing their car if they fail to pay. Supporters also say the apps don’t sue or send collectors after unpaid debts.
The costs of these app loans are not always transparent to consumers, who frequently find themselves stuck in borrowing cycles that “deplete their net earnings and erode their financial stability,” according to a report from the Center for Responsible Lending. The average APR for an advance repaid in seven to 14 days was 367%, the report found, a rate comparable to payday lending.
Earned Wage Access companies say the average app charges are comparable to ATM fees and cheaper than overdraft fees, which people incur if they don’t have enough money left in a checking account to cover a bill before payday. The average overdraft fee is more than $25 and can be as high as $36. They also say earned wage access helps people avoid taking out payday loans to pay their bills.
However, in its report, the Center for Responsible Lending found that users of the apps experienced a 56% increase in checking account overdrafts.
A NOTE ON APRS: The apps use subscription fees, flat charges, and other costs, rather than traditional interest, but consumer advocates and personal finance reporters point out the real cost can be the same or much higher than traditional credit. To illustrate this impact, their reports have translated app costs into Annual Percentage Rates. For example, as mentioned above, The Center for Responsible Lending found the average APR for an advance repaid in seven to 14 days was 367%. NerdWallet also has a breakdown looking at these costs in the context of traditional credit. That guide can be found here. Supporters of the apps say they are not loans or credit but rather cash advance services.
FIND YOUR STATE: LEGISLATIVE OR OTHER POLICY ACTIONS
A number of states have moved to subject earned wage access to the federal Truth in Lending Act, which caps fees and interest for short-term loans and covers payday loans, but other states have enacted laws excluding the apps from this regulation.
The Financial Technology Association backs a federal bill, currently before Congress, that would exclude the apps from being regulated by the Truth in Lending Act. That bill, and others like it that have appeared at the state level, are modeled on legislation written by the American Legislative Exchange Council, a conservative policy group.
Here’s a breakdown of regulatory developments in 10 states:
ARIZONA: Industry groups have pushed an ALEC-model cash advance bill this legislative session, but consumer advocates, labor groups and other organizations have successfully blocked its progress.
CALIFORNIA: In 2023, California’s financial regulator began a rule-making process to classify cash advance app transactions as loans. The current version of the draft rules classifies these transactions as loans but defers for now lenders’ obligation to comply with California lending law for four years. If the regulation makes it through a standard review by the California Office of Administrative Law (OAL), it could be in effect starting July 1.
CONNECTICUT: Last year, the Connecticut Legislature passed a law capping the fees apps could charge under the Truth in Lending Act, the same regulation that covers payday loans. EarnIn, one of the apps, has since stopped operating in the state. Asked why, EarnIn CEO Ram Palaniappan said it was no longer “economically viable.” The Financial Technology Association is lobbying for changes to the legislation.
GEORGIA: For two years, industry members have attempted to pass the ALEC bill in Georgia. Consumer groups have opposed it, and the bill did not pass during the 2024 regular session.
HAWAII: State Sen. Chris Lee, a Democrat, introduced regulation targeting earned wage access in the state Senate in January. The Senate Commerce and Consumer Protection Committee deferred the bill on Feb. 14.
KANSAS: The ALEC model bill was signed into law by Gov. Laura Kelly, a Democrat, on April 19. It will take effect July 1. Like Nevada, Missouri, and Wisconsin where this type of bill became law, Kansas has payday lending. More information on payday lending regulation, state by state, can be found at this site, operated by the Consumer Federation of America.
MARYLAND: The Maryland State Legislature has been considering legislation that would cap transaction fees at $3.50 but would not limit the number of transactions nor the price of other fees, and the bill would explicitly say cash advances are not credit. This means they would not be subject to the state’s strong interest rate cap.
NEVADA: As referenced above, the state passed a law last year treating EWA as cash-advances, rather than short-term loans, excluding them from the Truth in Lending Act and other regulation that would cap fees and interest rates.
MISSOURI: Missouri has also passed legislation treating EWA as cash advances, rather than a short-term loans, excluding them from the Truth in Lending Act and other regulation that would cap fees and interest rates.
WISCONSIN: The ALEC model bill also became law in Wisconsin. Wisconsin, along with Nevada, Missouri and Kansas have or will be adopting similar laws. (The Kansas bill was just signed in April). All four states have weak consumer protections for borrowers, according to some consumer advocates.
ADDITIONAL CONTEXT ON ‘TIPPING’
Consumers are often prompted to provide a ‘tip’ when using these apps, sometimes with a pre-suggested amount, on top of the subscription costs and other fees.
Some users may feel pressured into ‘tipping’ and the language can give the impression that those funds go to helping other users, consumer protection groups say.
“Tips keep us running for millions of members like you,” EarnIn’s in-app copy reads.
An EarnIn spokesperson said that 40% of EarnIn’s revenue comes from tips, during testimony before the Vermont House Committee on Commerce and Economic Development in February 2023. The company says it uses tips to maintain a no-fee option.
In its report, the California DFPI found that borrowers who use earned wage access take out an average of 36 loans a year. On 5.8 million transactions, 73% of consumers paid a “tip,” at $4.09 per tip on average. On three dozen loans, that’s $147 annually in tips alone.
CONSIDER THESE REPORTING THREADS
— Has your state passed regulation permitting the apps to operate with fees and rates comparable to payday loans? Not all states allow payday loans or in some instances companies have chosen not to operate in states with interest rate caps. Find state by state info here.
— If your state isn’t currently considering legislation on this issue, contact elected officials on the relevant committees and see if they’ve heard of earned wage access and if they’ll be taking it up in the future.
— Some employers have integrated Earned Wage Access apps into their payroll, with different costs, models, and fee structures. Amazon and Walmart, for example, do not always charge employees for early access to earned wages outside of regular pay periods. Who are the major employers of hourly workers in your state or in your immediate area? Do they use a version of these apps? What are the costs to the employer compared to the employees?
— Do hourly and gig workers in your community use these apps to make ends meet between paydays? What are the costs?
— Companies argue the apps help workers keep from incurring overdraft fees or using payday loans. They compare the costs to ATM fees. Speaking with users of the apps, what do they say about the usefulness of this kind of fintech compared with the downsides?
— Ask consumers who are using the apps if they have used payday loans now or in the past — and whether they incur overdraft fees, or have in the past. Ask how the experience and costs compare. Ask how they learned about the apps and what made them an attractive option.
— On sourcing: One good way to find hourly workers and users of the apps is to reach out to direct-services organizations that co-signed a letter with the Center for Responsible Lending and National Consumer Law Center to see if they can put you in touch. A link to the letter is here: https://www.nclc.org/resources/nclc-crl-letter-to-cfpb-expressing-concern-about-finding-that-certain-earned-wage-access-products-are-not-credit-under-tila/
Consider messaging people who interact with the apps on different social platforms, including Instagram. You can also reach out to unions that may regularly be in touch with hourly workers, like people employed in retail or fast food, to see if they can connect you with app users.
The Associated Press receives support from Charles Schwab Foundation for educational and explanatory reporting to improve financial literacy. The independent foundation is separate from Charles Schwab and Co. Inc. The AP is solely responsible for its journalism.
