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February 19, 2024 Focus | Banking & Finance

Fintechs urge action after new banking regulations drive ‘earned wage access’ services from CT

PHOTO | YEHYUN KIM/CT MIRROR State Rep. Jason Doucette (D-Manchester) co-chairs the legislature’s Banking Committee, which is likely to consider legislation this year on how to regulate earned wage access providers.

Recent and little-noticed changes to Connecticut banking laws have sparked backlash from financial technology companies, which have stopped providing “earned wage access” services in the state.

Such services allow users to access already earned wages before payday, and have been used by more than 150,000 Connecticut workers since 2012.

Earned wage access programs have grown in popularity in recent years, with U.S. workers annually tapping billions of dollars in early pay, according to consulting firm Datos Insights.

That has stirred the attention of policymakers and regulators in various states, including Connecticut. Critics say the industry is not so different from storefront payday lenders, which were largely driven out of the state by predatory lending restrictions that went into effect in 2016.

However, earned wage access providers insist they aren’t lenders, and offer a no- or low-cost option for individuals who need early access to their paycheck, and might otherwise have to turn to pawn shops, credit cards or other higher-cost alternatives.

The Connecticut Department of Banking in September issued new guidance on the industry — in response to a series of changes adopted by state lawmakers in 2023 — that require earned wage access companies to be licensed and regulated as small loan providers.

More importantly, lawmakers also changed the formula used to determine a small loan’s annual percentage rate, adding tips and subscription or convenience fees into the calculation. Those are key revenue streams for earned wage access providers, and the formula change pushed them well past the 36% small loan APR cap set by state law.

Fintechs argue the changes, which went into effect Jan. 1, make it difficult to operate in the state, and they’re clamoring for legislative fixes that would reopen the door to Connecticut.

Phil Goldfeder

“I think regulators and administrators that have a forward-thinking approach will say: ‘This is a new product, let’s build a new regulatory framework for it,’” said Phil Goldfeder, CEO of the American Fintech Council, which published a letter in September raising “serious concerns” about the guidance issued by the state Department of Banking. “Connecticut’s just not doing that. And because Connecticut is doing what it’s done, most companies have left the state.”

The Washington, D.C.-based trade association represents 10 companies currently engaged in earned wage access, and others exploring it. Goldfeder said he expects to testify before Connecticut lawmakers as they consider adjustments to banking laws this year, following an outcry from the industry and Connecticut residents who use its services.

What is earned wage access?

Earned wage access providers have two primary business models, according to a March 2023 report by the U.S. Government Accountability Office. In the “employer-sponsored” model, a fintech partners with companies to confirm hours worked and provides access to a portion of an employee’s earned wages prior to payday. The advance then gets deducted from an employee’s paycheck.

According to the American Fintech Council, earned wage access providers have established partnerships with over 1,300 businesses in the state.

In the “direct-to-consumer” model, customers provide fintechs direct access to their bank accounts to confirm prior employer direct deposits, which help inform future early wage payments. Individual employers are not involved in the process.

The GAO report noted earned wage access providers may offer underserved consumers benefits, including lower costs and access to credit. But they can also lack cost transparency and pose “fair lending” risks to consumers and “credit risk” to partnering banks, GAO said.

Earned wage access companies that work with the American Fintech Council are required to offer a no-cost option, according to Goldfeder. They also cannot charge late fees, send an unpaid debt to collections, or report to a credit reporting agency — all factors that distinguish the industry from lenders, Goldfeder said.

Essentially, their only recourse for a customer who dodges repayment is to bar them from the service, he said.

“The opponents of earned wage access will try to make you believe this is a nefarious industry, similar to the payday industry, that it is taking advantage of customers,” Goldfeder said. “These are responsible, innovative companies that come up with new technology that makes it easy to calculate how much money you have earned to this point, and how much money you are due. I don’t think it’s unfair — similar to how banks charge fees — to charge a fee for the service that consumers want.”

How it works

California-based EarnIn – a popular earned wage access provider – allows customers to access up to $100 a day, and up to $750 per pay period. Customers who want their funds immediately pay a $3.99 fee for an expedited “Lighting Speed” option.

Those who skip the convenience fee wait one to three days for funds to hit their accounts.

About half of EarnIn’s customers also leave voluntary tips — averaging $1.47 — that do not impact availability or quality of service, according to EarnIn, which responded to several questions from the Hartford Business Journal.

Last year, the company served around 2 million customers nationwide, including about 20,000 Connecticut residents.

But not anymore.

EarnIn withdrew its service from the state as of Dec. 31, a day before the Department of Banking was due to begin enforcing the legislative changes adopted last year.

The changes to the annual percentage rate formula put EarnIn’s fees multiple times over Connecticut’s 36% APR limit.

A subsequent lobbying campaign by EarnIn urged its users to write to regulators and lawmakers, prompting thousands of complaints to the Department of Banking and a smaller number to legislators.

“Earned Wage Access (EWA) has provided a safe and cost-effective way for consumers with short-term liquidity needs to access their own wages without having to utilize high-interest financial products like payday loans, cash advances, and credit cards,” EarnIn said in a statement. “EWA is a no-risk financial solution for consumers, providing access to one’s own earnings. It is not a loan, has no mandatory fees, and avoids negatively impacting credit scores.”

EarnIn has met some legal troubles. In 2021, for example, the company agreed to a multimillion-dollar federal class-action lawsuit settlement, which claimed the company’s marketing misled customers, who ended up with hefty bank overdraft fees when EarnIn attempted to withdraw funds from their accounts.

States weigh in

State Rep. Jason Doucette (D-Manchester), a co-chair of the General Assembly’s Banking Committee, said he convinced Banking Commissioner Jorge L. Perez to delay implementation of the statute changes from Oct. 1 to Jan. 1, after hearing concerns from earned wage access companies and their customers.

He said there will be a bill this legislative session to address confusion about whether earned wage access services constitute a loan.

Doucette said he’s more comfortable with earned wage access providers that act in concert with employers. Direct-to-consumer options are really payday loans and should be subject to Connecticut’s small loan rules, he said.

“Like a payday loan, people may go and use this product frequently,” Doucette said. “When they use the product frequently, they are going to have lots and lots of fees and tips that really add up to a high APR, whether they realize it or not. The point is really consumer protection and providing some reasonable limits on fees and APR. We are going to do that with respect to this product as well. And make the determination of whether what is being done is properly considered a loan or not.”

Some consumer advocacy groups agree with Doucette. They argue that direct-to-consumer earned wage access programs are just a modernized twist on payday lending, attempting to sidestep regulation.

John Earlingheuser, director of advocacy and community outreach for AARP Connecticut, said California-based studies of direct-to-consumer options show charges amounting to more than 300% APR.

A June 2023 Harvard Kennedy School study on earned wage access noted that while tips are voluntary, some providers default users to tip a certain percentage of a transaction.

“So, to claim it’s not a payday loan is just misleading,” Earlingheuser said. “I’m not concerned about losing a product that takes an average worker’s credit situation and just makes it worse.”

Miranda Margowsky

Miranda Margowsky, a spokeswoman for the Financial Technology Association, another Washington, D.C.-based trade association, said earned wage access is not a loan, citing the industry standard of optional fees and no penalties.

“APR is not the right measure for these products because it is a measure of a credit product, and there is no interest rate with earned wage access,” Margowsky said. “So, I would say it’s not accurate to compare a $1 or $2 fee that is voluntary to a mandatory interest rate that might compound over time. It’s just fundamentally different.”

Other state legislatures have recently passed laws impacting the industry.

Nevada and Missouri last summer adopted laws treating earned wage access like a service, not a loan. Providers are required to be licensed in those states. They also face restrictions much like those the American Fintech Council already demands of its members – including no late fees, clarity that tips are voluntary and no recourse against clients who don’t pay up.

California regulators are considering regulating earned wage access providers much like Connecticut.

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