In 2020 the Consumer Financial Protection Bureau (CFPB) finalised its advisory opinion processes and issued its first advisory opinion, including one regarding Earned Wage Access (EWA).
Someone who is very passionate about fintech is Jason Lee, CEO and co-founder of DailyPay, a venture-backed financial technology company that enables employees to access their earned income before payday.
Here, Jason explains what these compliance regulations mean for earned wage access.
In 2020, the ability to access your income as you earn it has shifted from a nice benefit to have to an essential one. Amid the global health crisis, the antiquated way employees have been paid for decades is changing thanks to advancements in technology. With a surge in on-demand pay providers, government agencies are weighing in on which models are optimal for consumers.
On November 30, the Consumer Financial Protection Bureau (CFPB) finalised its advisory opinion process and simultaneously issued its first advisory opinions, including one which concerned Earned Wage Access (EWA). The advisory opinion process, similar to a private letter ruling from the IRS or a no-action letter from the SEC, is specific to a certain set of facts and circumstances, and each opinion has narrow applicability.
In the EWA opinion, the CFPB explains how a new technology called Earned Wage Access, by enabling workers to get paid as they earn money, rather than wait weeks at a time for their employer-scheduled payday, has provided a critical and more consumer-friendly alternative to payday loans and other predatory alternatives.
Generally, the opinion lays out a framework that is strongly supportive of an employer-based approach to on-demand pay, where the provider partners with an employer to provide the service as an employer-sponsored employee benefit. The opinion’s analysis generally distinguishes these employer-based approaches from direct-to-consumer offerings.
On December 30, the CFPB issued a follow-up order in which it provided further guidance to a company called Payactiv, an EWA vendor that utilises wage deductions as a form of repayment. In that order, the CFPB granted Payactiv a limited sandbox approval but specifically left open the question as to whether the vendor’s wage deduction practices violated state wage and hour laws. This is an example of how safe harbour determinations do not necessarily protect vendors and employers equally.
So how can one confirm that a vendor is both compliant and not exposing the employer to wage and hour legal risks? The largest industry player, DailyPay, cites its award-winning non-recourse model as uniquely consistent and compliant in all 50 states for both the employer and itself. “DailyPay pioneered the employer-integrated on-demand pay industry and feels strongly validated by the CFPB’s opinions,” said Jason Lee, CEO of DailyPay. “For years DailyPay has supported employer-based data and payroll integration and warned against consumer account debiting and opaque pricing schemes. DailyPay charges a nominal processing fee for its service, and is pleased the CFPB has not endorsed debiting or wage deductions.”
The CFPB discusses several characteristics of an earned wage access provider, and their framework suggests a strong preference for employer-based models. Indeed, the first factor is whether the provider integrates with an employer directly. Other factors include whether the transactions are limited to net earned pay using employer data, whether there is employee recourse and other details that are broadly compatible with employer-based programs.
The CFPB noted that debiting as a form of payback may be considered an extension of credit. This is bad news not only for direct-to-consumer models but also for those wage deduction models that are forced to debit in states where wage deductions are prohibited. As for the industry as a whole, it can only be positive that the CFPB has officially welcomed on-demand pay as “an innovative way for employees to meet short-term liquidity needs that arise between paychecks without turning to more costly alternatives like traditional payday loans.”