The shifting EWA regulatory framework and its impact on bank partnerships and instant payment adoption

Shout out to our sponsor

This article is brought to you by StrawberryFrog. 
StrawberryFrog has been hailed as the very best in creative marketing, innovations, and transformation for financial brands worldwide. Working with iconic names like Morgan Stanley, Truist, First Abu Dhabi Bank, and many others, they’ve set the standard for excellence.

See how StrawberryFrog launched a unique name and brand for First Abu Dhabi Bank, inspiring employees and igniting a nation and its people to Grow Stronger. View the case study

While the historical arrangement of paying employees bi-weekly remains the norm, around 20% of employers have veered toward a more flexible approach by introducing Earned Wage Access [EWA] as of 2023 in anticipation of increased employee satisfaction and better retention rates.

EWA providers are also establishing growing collaborations with financial institutions. Take, for example, DailyPay. The on-demand pay provider has established partnerships with Santander and TD Bank and most recently with BMO Financial. In these partnerships, financial institutions either brand DailyPay’s EWA service as their own or refer their business clients directly to the fintech company.

Workers have the option to receive EWA funds at no cost within 1-3 days via ACH, or they can opt to have their direct deposit sent to a reloadable Visa debit card, named Friday by DailyPay. Alternatively, DailyPay charges a fee if employees choose to instantly send EWA wages to a card or account. Whether this fee is covered by the employer or the employee depends on the agreement.

Most employees receiving payments through DailyPay opt for faster payouts, according to Rob Nardelli, director of DailyPay’s commercial banking and business development. According to data from The Clearing House [TCH] for the third and fourth quarters of 2022, DailyPay’s transactions make up one-tenth of all RTP payments. This shows that growing on-demand pay services can serve as an incentive for community banks to adopt RTP services, given that they can offer a competitive edge for these banks.

The RTP network has been positioning itself to take center stage when it comes to facilitating on-demand wages. The payments network reached a milestone by processing over 1 million payments in a single day on September 1, 2023, citing EWA and gig worker payments as its most popular use case, exceeding account-to-account [A2A] transfers.

“Many banks and credit unions are moving quickly to offer RTP capabilities to their business clients, who are in turn looking to offer EWA options to employees,” Jim Colassano, SVP of product development and strategy at The Clearing House, told Tearsheet.

“More and more banks and credit unions recognize the importance of instant payments over the RTP network – not only for EWA, but for many other types of payments where 24/7 availability, instant access, and payment finality are important.”

The EWA labyrinth

The EWA terrain is anything but predictable and straightforward.

Regarded as distinct from payday lenders and viewed as a means for 60% of Americans who live paycheck-to-paycheck to break free from debt, financial regulators remain hesitant to fully endorse on-demand pay’s effectiveness. 

Regulators grapple with coming to terms with the fact that this product surpasses existing regulatory boundaries and falls into a legal gray zone, therefore, causing setbacks in its expansion plans. According to them, EWA services provided by third parties may qualify as loans and will be subject to the state’s lending regulations. The decision essentially stemmed from their realization that the overall cost of utilizing EWA products is comparable to that of payday loans.

The ongoing tug-of-war in regulations has left some states at odds regarding the rules governing this still relatively new service in the US. While the Consumer Financial Protection Bureau [CFPB] plans to issue further guidance to provide greater clarity concerning the application of federal law to income-based advance products, several states have taken individual legislative actions targeting EWA in recent months.

Last month, Montana’s attorney general asserted that EWA should not be subject to lending regulations. Wisconsin joined Nevada and Missouri last week, marking it the third state to introduce specific licensing requirements for EWA providers while exempting them from the state’s lending regulations.

However, in some states, EWA has faced severe criticism and has been likened to payday lending because of its fee structure. In the same vein, California is considering a proposal that would mandate EWA providers to register with the state and impose fee caps. A similar proposal was introduced in Connecticut last September. 

Effective January 1, 2024, Connecticut now prohibits most EWA offerings, impacting tens of thousands of customers. Under Connecticut’s new banking guidance, EWA providers will have to adhere to the state’s small loan law provisions. “Although the Department recognizes that each type of transaction must be evaluated on a case-by-case basis, an advance of money on an individual’s future potential source of money of $50,000 or less with an APR greater than 12% will likely be covered by the Small Loan and Related Activities Act,” the Connecticut guidance issued at the time.

The American Fintech Council and consumer advocates have opposed the recent regulatory changes, which have brought EWA operations to a standstill statewide. They express concerns that by eliminating a safer alternative to payday lending, the state has not shielded individuals from predatory loans; instead, it has potentially exacerbated the problem. Moreover, there are fears that individuals living paycheck-to-paycheck may now be pushed into incurring bank overdraft fees when confronted with unforeseen expenses.

“The best case scenario for the consumer is to have banks remove more and more of the junk fees charged by banks,” said Nico Simko, founder and CEO of EWA provider Clair.

However, “In the long run, this will only benefit consumers since it forces fintechs and their employers to seek solutions with clear guidelines on fees being charged,” he said.

Taking a different stance, Clair’s Simko supports the forthcoming EWA laws. Despite new EWA regulations coming into effect, the firm finds itself in a secure position as it facilitates loans that its partner, Pathward, a Federal Deposit-insured bank, issues directly to Clair’s customers when they take a wage advance. 

Connecticut consumers emphasize the importance of achieving a delicate balance between regulation and the practical needs of individuals managing between paychecks. While regulators have the authority to oversee the earned wage access industry, policymakers can explore avenues such as imposing caps on provider fees, restricting the size of advances, or creating a separate category altogether.

Although it’s important to establish clear regulations across the board for providers to operate, Simko doesn’t view EWA as an innovative enough approach to merit its distinct category.

“While the current framework around credit has been tried and tested, we’re still seeing varying approaches take place instead,” he said. 

The influence on bank partnerships and instant payments: These recent developments also reignite the earlier dialogue concerning banks partnering with EWA providers to extend on-demand pay services to their corporate clients. It prompts speculation about whether banks will further grow their partnerships with EWA providers or adopt a cautious wait-and-see approach until laws are firmly established amid a lack of uniform regulations across states. 

“We’ve seen EWA providers partner with larger financial institutions, but as of now, we haven’t seen any of the larger banks respond to the EWA changes,” Simko told Tearsheet. “We expect they’ll wait for more regulators to make decisions in regulation before they take larger stances in the space, given the charged fees associated with these providers.”

EWA providers that are not compliant with lending regulations could be in for a rough ride ahead, particularly when operating in states that classify EWA offerings as loans, as they may need to reduce fees on wage advances, a core aspect of their business models, and potentially adjust their overall business strategies.

This also brings into question whether these regulatory shifts and business reorganizations could curb the potential for increased adoption of instant payments, which may have seen an upswing due to the popular use case of EWA, especially among regional banks. Achieving widespread adoption remains a longstanding challenge for real-time payments in the US. While instant payments volume is expected to grow to 11.4 billion by 2027 from 2.8 billion in 2022, with the addition of FedNow, FedNow is still in the early stages of driving adoption.