Early wage access providers see usage spike during pandemic

In March, Dana Kreutzer, like many Americans, faced unexpected expenses due to the coronavirus pandemic. Kreutzer’s adult sons, aged 27 and 30, had just lost their jobs and moved in with her and her husband. The strain on the family budget left her looking for new ways to meet financial commitments.

“Oh my gosh, I had to spend a lot more feeding two grown men,”  remarked Kreutzer, 55, a call center worker based in Greeley, Colorado. “I would say my expenses doubled.”

Kreutzer said she needed to find a new source of liquidity to cover unforeseen grocery, gas and utility bills. As a result, she started using PayActiv, an early wage access app offered by her employer. PayActiv, which works exclusively with employers, offers users the capability to take out a portion of an upcoming paycheck prior to payday. For example, if an employee requires funds for an urgent expense (within limits determined by PayActiv and the employer), the staff member can request that amount through the PayActiv app prior to payday, and their forthcoming paycheck is adjusted to reflect that withdrawal. For Kreutzer, a newcomer to early wage access services, receiving a portion of her paycheck early was a necessary means to stay afloat.  

Kreutzer joined millions of Americans who use on-demand pay services each year, a number that’s likely grown since the onset of the pandemic. While payday loans can push consumers into a debt trap if they can’t pay on time, digital early wage access providers differentiate themselves by letting users withdraw a portion of their earned wages early for an upfront service fee (typically under $5). Some of these platforms, including DailyPay and PayActiv, link with employers’ payroll systems, while others, including Dave and Earnin, offer the product directly to consumers.

Among the field of providers, some experienced new demand during the pandemic. PayActiv and DailyPay, which have waived all fees until further notice, told Tearsheet they both saw a spike in usage in recent months.

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Jeanniey Mullen, chief innovation and marketing officer at DailyPay, said the platform experienced a 400% increase in usage around March 17. At the time, customers were using the platform to buy essential goods, she explained. DailyPay serves more than five hundred corporate clients and more than two million employees, including fast food restaurants such as McDonald’s, Taco Bell and Burger King.

“The media hype was so high, and everyone was going to be quarantined and nobody knew how long or why,” she said. “It almost created a panic; people who didn’t traditionally use DailyPay were buying extra diapers, toilet paper and hand sanitizers.”

By early April, users began spending more on groceries and mobile data plans. After a dip in usage after many users received their stimulus checks, DailyPay usage grew again in May as customers used the tool to meet obligations related to the broad economic impact of the pandemic, noted Mullen.

Meanwhile, PayActiv, which serves more than a thousand businesses and four million employees, saw usage grow for employees who work at delivery businesses, companies that provide workers to Amazon and senior living. According to Safwan Shah, PayActiv’s founder and CEO, usage within these categories grew 300% to 500% during the pandemic. 

“We see a tremendous pickup in transactions that are originating from retail POS at grocery stores,” said Shah. In addition, the platform has been seeing growth in conversions of PayActiv funds to Amazon Cash, which users can carry out within the app. 

While companies that link with employers are seeing an uptick in use, the impact of the pandemic on direct-to-consumer early wage platforms is still unclear. Earnin, which offers direct-to-consumer payday advance services, declined to comment on user growth since the pandemic. Since April, however, the company recently rolled out a series of new features to encourage further adoption, including early access to unemployment benefits, tools to track remote work and a savings feature called Tip Yourself. 

For Branch, which offers direct-to-consumer as well as employer-provided early wage access services, the impact of the pandemic has been mixed, as newly unemployed customers pulled back while Branch added new corporate partners, noted CEO Atif Siddiqi.

Each early wage access provider has a different fee structure, and many platforms generate revenue from instant transfer fees and interchange revenue from cards. In addition, some direct-to-consumer tools like Earnin and Dave make money through voluntary tips. 

The growth of early wage access platforms has drawn both praise and heat from industry practitioners. Entrepreneurs suggest early wage access services are better alternatives to payday loans because customers know what fees they’re paying and can access earned wages when necessary. For them, technology has rendered the biweekly pay cycle obsolete and on-demand pay solutions enhance access to earned wages.

“This crisis has accelerated the natural order, and the natural order is that if you’ve earned it, and you need it, you should be able to access it,” said Shah.

By contrast, consumer advocates argue that an early wage access product is simply another type of loan that does not encourage responsible personal finance management. These products have also raised eyebrows among regulators, because fees, when converted to APRs, can be high. For example, one recent industry analysis noted that a $5 fee to access $200 of earned wages seven days prior to payday would be equivalent to a 130% APR.

“Often the interest and the charges are hidden through supposedly voluntary tips or other kinds of fees or charges,” said Lauren Saunders, associate director at the National Consumer Law Center. “They may feel helpful, but they mostly just take money from next week’s paycheck to help with today’s expenses, leaving you a hole in the next paycheck that forces people into a cycle of reborrowing.”

From an investor perspective, however, these products solve a critical need for some customers while minimizing the risk that their debt levels will grow over time. Unlike payday loans, early wage access products don’t allow consumers to push a prior unpaid balance into a new loan and compound the balance over time.

“The consumer harm is relatively limited,” said Tyler Griffin, managing partner of the Financial Venture Studio, which is an investor in Dave. “Take Dave as an example; they’re not going to aggressively collect, and the worst thing is they wouldn’t offer you additional money if you couldn’t pay back.”

Despite the tech and user experience advantages, the onus is still on the consumer to maintain good personal finance practices. Mandi Trumpy, a 24-year-old hospitality worker based in Pekin, Illinois, has used Earnin, Branch and Dave — sometimes concurrently — to cover financial commitments between pay periods. Regular early paycheck withdrawals, she observed, aren’t a substitute for good financial habits.

“[If] you take out that $150 at the end of the pay period, when you have to pay it back, you’re missing that $150 from your next check,” she said. “So you’re just short, and it’s like there’s constantly a shortage.”

Kreutzer, however, said circumstances vary from consumer to consumer, and the consequences of COVID-19 have forced her to use a product she had not considered using before.

“When we weren’t in the COVID-19 [situation] and we weren’t so strapped, I knew about PayActiv, but I didn’t use it,” she explained. “Once this came on, we needed funds daily to make sure that we could stay afloat and keep the house going. It’s going to depend on the person and their home situation if they feel like drawing from it messes them up financially.”