Incoming EWA laws: The regulatory push-pull and how Clair’s current underwriting structure positions it for the future

While still relatively nascent in the US, earned wage access (EWA) has caught the attention of policymakers and regulators, who came to the conclusion that the product goes beyond the scope of established regulatory frameworks and falls into a legal gray area.

What’s the fuss about?

More companies offer EWA services, so their employees can withdraw their accrued wages at any time. Most recently, Santander supports on-demand pay with plans to offer a free or low-cost benefit for its business customers. 

However, the model is met with a fair share of criticism from many consumer advocate groups who are adamant that EWA is an alternative version of predatory payday lending that leads to debt traps.

Nevada was the first US state to come forward in July of this year and propose regulation of the EWA market at a state level. The signed bill, which will come into effect next year, highlights certain requirements for service providers, including the need to obtain a license to operate, in addition to a state exam and audit. In the same vein, Missouri signed into law bipartisan legislation regarding EWA. The state has mandated that EWA providers will be required to register with the Missouri Department of Finance, pay a $1,000 registration fee, and maintain payment records for at least two years.

Most recently, Maryland jumped on the bandwagon and stated that EWA services provided by third parties may qualify as loans, and will be subject to the state’s lending regulations. However, on-demand pay provided directly by the employer to the employee, at no cost to the employee, wouldn’t be considered a loan.

New York, North Carolina, Texas, and Virginia are among other states considering setting their individual legislation related to on-demand pay. And while most of the bills introduced so far do not categorize EWA products as loans, the California Department of Financial Protection and Innovation (DFPI) is seemingly taking a different approach. The state is in the process of finalizing new regulations that would treat EWA products as credit and require providers to obtain licenses, disclose the true cost of the loan, and abide by interest rate caps. This means EWA products will be considered short-term loans that could impact credit scores and narrow providers’ ability to choose what to charge end users. The move essentially came as California’s regulator found that the total cost of using EWA products is close to that of payday loans. 

What does that mean for existing EWA providers?

EWA providers have generally responded affirmatively to the new laws going into effect. 

“This law includes strong, first-in-the-nation consumer protections for Nevada’s earned wage access consumers. It allows DailyPay to advance its mission to empower American workers to improve their financial health by avoiding expensive and predatory financial products and strategies,” said Kevin Coop, CEO of DailyPay in a statement.

Similarly, PayActiv’s VP of government affairs, Molly Jones said, “It [Nevada bill] creates several strong consumer protections that do not exist today, including protections for models that cause overdrafts, numerous safeguards not contemplated in existing credit laws, and numerous limits on fees.”

However, when it comes to situating on-demand pay under small loans provisions, California-based EarnIn is calling the regulation into question, arguing that the new rules will likely bring companies to square one in terms of restructuring their business models. This may eventually narrow down options for customers living paycheck-to-paycheck.

NY-based Clair, a banking app and EWA provider is preparing to adapt to incoming legislation. Nico Simko, CEO and co-founder of Clair is also of the view that the EWA industry will likely establish a better financial footing while operating within authorized regulatory norms.

“Regulation isn’t a concern for us because complying with it has been part of our strategy since the beginning,” he told Tearsheet. 

How Clair is positioning to face incoming regulatory challenges

Clair has worked with partner Pathward, a Federal Deposit-insured bank, since May 2021. The firms work together to ensure the fintech complies with lending regulations. 

Clair facilitates loans that Pathward issues directly to Clair's customers when they take a wage advance. As a result of this direct lending setup between Pathward and Clair customers, the firm is positioned to continue uninterrupted service to customers despite new EWA regulations coming into effect.

Employers can offer Clair’s services to their employees in two different ways that are free of charge. The first option is through Clair’s network of partnerships with various workforce management platforms, including TriNet Zenefits, Gusto Embedded, When I Work, and 7shifts. Employers using these platforms can turn on Clair as a feature.

Companies not using any of the HR platforms that Clair partners with can set up Clair for Employers. Launched in July, Clair for Employers integrates with companies’ payroll providers and offers on-demand pay as an employee benefit. Clair's team handles the setup and integration with their payroll systems and onboarding employees.

Employees can then download the Clair mobile app and create accounts tied to their Clair Debit Mastercards. Users can set up direct deposit for their paychecks to go into their Clair accounts. The Clair app shows the amount of money that’s ‘available for advance’ after a shift is finished. Consumers can then transfer part or all of that amount into their Clair Spending Accounts.

Clair earns money through interchange fees on their debit cards, in contrast to other EWA providers that typically make money through wage advances. 

“We’re never incentivized to pressure them [consumers] to take more advances just to increase Clair’s profits. In fact, after their first couple of months using Clair, the frequency and dollar amount of our customers' advances decline steadily over time, as their financial situations stabilize,” said Simko.

The road ahead

While it mainly depends on what route various states decide to take, EWA providers that are not compliant with lending regulations might be in for a rough ride ahead. They might have to reduce their fees on wage advances – which are core to their business models. 

“We agree with California legislators that EWA is a loan and lending regulations should apply. If you’re paying some amount every time you advance funds, isn’t that similar to interest payments?” asked Simko.

California’s consumer protection laws have been touted as one of the strictest in the United States. The California Consumer Financial Protection Law recently expanded its oversight on debt collectors, debt-relief companies, credit reporting agencies, and consumer credit repair companies to better identify gaps in consumer protection while spurring responsible lending. 

While some states have recently taken a different legislative direction, it remains to be seen if other states will be influenced by California’s decision and follow its lead going forward.