For most Americans, payday is an ingrained part of their daily existence that they more or less take for granted. It’s something that almost everyone relies on but doesn’t think much about – unless for some reason it doesn’t happen.
Payday has changed somewhat over the years. Getting paid monthly used to be more common than bi-weekly, and direct deposit has largely supplanted physical paychecks in most places. But the fundamental concept of designating a specific day on which workers will collect all the pay for their most recent labor has remained fundamentally unquestioned.
Or at least until the last decade, when, as Ingo Money CEO Drew Edwards noted in a recent conversation with PYMNTS’ Karen Webster, various digitally-native firms that rely on part-time workers began to move toward another structure. Instead of making workers wait for payday to get paid, it suddenly became possible for those workers to collect their pay instantly upon completing a job – no two-week wait necessary. And once that change was made, he noted, the entire payment DNA of the part-time workplace changed along with it. The idea is now known as earned wage access (EWA), or on-demand pay.
“If the work is now on-demand, then the worker must also now be paid on demand — it’s got to be an on-demand equation from beginning to end,” Edwards said. “To do the work and go back home, and then wait to get paid next Saturday, is not the way these workers think. In the gig world, that offering means you won’t attract the driver, the web designer or the freelancer.”
It’s an idea that has the power to change the payments parameters in the entire payroll industry.
This week, the latest big name to jump in on earned wage access payments is PayPal, which has announced that from now on, their employees will be able to access their earned wages whenever they wish, as opposed to having to wait for payday. Working with Even Responsible Finance, a startup founded to provide an alternative to high-cost payday lenders, PayPal employees will be able to use Even’s app free of charge to access their pay as they earn it.
They can also use the app’s other functions, such as automated savings and projections of earnings and expenses designed to help with budgeting.
The move, according to PayPal, was made as the firm’s executives realized that the financial troubles employees face on a daily or weekly basis simply cannot wait on the two-week pay cycle. A companywide survey confirmed that a vast majority of their workers’ whole paychecks were consumed by taxes and living expenses, leaving only 4 percent behind on average.
“They were financially stressed; they were being forced to choose between full healthcare benefits and putting food on the table for their families,” CEO Dan Schulman noted. The addition of Even is part of a wider effort by PayPal to raise pay and lower expenses such as healthcare for their hourly and entry-level employees.
“Over the past year, we’ve made significant investments to strengthen the financial health of our workforce,” Schulman said in a statement. “We’ve made substantial progress to increase the net disposable income of all our employees, and our work with Even will help drive further improvements.”
And while PayPal is the latest, it is far from the only. Walmart also offers EWA, as do QSR chains Noodles & Company, McDonald’s and Burger King. And its reach is seemingly set to grow, as payroll giant ADP is currently working to incorporate EWA into its offering for the businesses it serves.
“ADP feels that we have a responsibility to develop solutions that will provide greater financial opportunities for workers,” Belinda Reany, DVP/GM of payments at ADP, noted in an interview. “We are exploring a number of new systems through which workers will be able to access their earned wages early, before the next payday. And we’ve had dozens of meetings in the last 12 months with regulators, legislators and customer advocacy organizations to explore how these programs should be designed and overseen for the benefit of consumers.”
Human resources and payroll platform Ceridian also offers an EWA solution. It says part of the need for it has been driven by the pandemic. “The health crisis has really shown us that within the broader workforce, regardless of whether people are salaried or hourly, the majority don’t have enough savings in the bank to last for a week or two-week period,” noted Ceridian EVP and CIO Warren Perlman. “As the pandemic has disrupted the traditional payroll process, Ceridian has embraced this rapid change as an opportunity for value creation with employers and employees alike.”
Clarifying the Rules
As EWA access is becoming increasingly prevalent in the market, regulators and legislators are taking an increasingly sharp look at the practice, concerned that these products may be the second coming of payday loans in new clothing.
The confusion stems from how most EWA arrangements are made between firms like PayPal and startups like Even that support their early pay program. In most cases, the business’ actual backend payroll system is unchanged – officially, paychecks are sent on the day they always have been. In one model, the third-party partner fronts the consumer the money they request based on their earned wages data and then trues up on payday when the actual payment disbursement is made. In another model, this one espoused by the EWA platform Daily Pay, the employee pays a flat fee for a payroll advance, and then the standard paycheck subtracts that amount.
Firms like Even argue that they are not lenders, because the money is being offered contingent on payroll earnings and nothing else. It’s not a loan, they argue, so much as an early payment of wages they’ve already earned. As a result, there is no credit check, interest rate or any of the other typical trappings of a loan along with that payment. But, particularly in direct-to-consumer (D2C) models of EWA products, the customer does pay a (usually quite small) fee – in addition to interest, in some cases – for that early access. This has caught the eye of regulators in California, New York and New Jersey, all states that have EWA legislation pending at present.
Per New Jersey Assembly Bill 3450, which was introduced to require EWA products to have contracts with employers, companies must verify the employee’s earned income before making an advance and to secure the employee’s consent before obtaining information about them from the employer. The law also requires EWA firms to consider giving employees access to net wages instead of gross wages when advancing pay to them.
But while the law has been praised for those provisions, it has also needed to be amended. Other existing provisions, such as banning mandatory fees or banning providers from recouping funds, are widely considered to be destructive to the industry – or at least unfair to firms that seek to cover the higher cost of instant payments with fees, as opposed to firms using voluntary “tips” in their place.
But New Jersey’s legislation, alongside its counterparts in New York and California, is currently stalled with no immediate signs of moving forward, as lawmakers attempt to gain more clarity on the issue.
It seems the beat of EWA access will continue to march on, perhaps even faster as more big-name players decide that the idea of payday should become a thing of the past.