Early access to earned wages vs. payday loans

With the rise of peer-to-peer payment apps and other new technologies, people increasingly expect faster payments, including workers who want more flexibility than the payroll cycle. two-week traditional.

It’s good news that emerging technology and services are giving workers access to a portion of their earnings before payday. However, some service offerings have raised concerns about what is allowed, particularly for providers not tied to an employer to directly verify disposable income.

An investigation into payday advance companies was announced on August 6 by the New York Department of Financial Services. Joining New York in the investigation are banking regulators from Connecticut, Illinois, Maryland, New Jersey, North Carolina, North Dakota, Oklahoma, South Carolina, Dakota South, Texas and Puerto Rico. The investigation should focus on whether the companies are violating state banking laws, including usury limits, licensing laws, and other applicable laws governing payday loans and laws. on consumer protection, the department said in a statement. Press release.

The survey highlights critical differences between payday lending practices that can put individuals in an endless cycle of debt and emerging fintech companies that offer a responsible alternative to managing unexpected expenses that arise in between. paydays, such as car repairs or medical emergencies, at a fraction of the cost of a payday loan or bank overdraft fee.

The need for early access to income is not new. Recent surveys have confirmed that nearly 80% of workers live paycheck to paycheck, with little savings available for emergencies. Many companies have, for decades, accommodated occasional requests for employee salary advances. But if an employer was unwilling to advance wages, workers had few options, such as choosing between high-cost payday loans or defaulting on financial obligations and incurring fees due to delays. payment or bank overdrafts.

Workers who choose a payday loan also risk taking on more debt. For example, workers in California can get payday loans of up to $300 whether the cost of the loan is affordable or not, depending on their income and expenses. Borrowers typically receive $255 after paying a fee of up to $45 and are required to repay the loan within 31 days. Repayment often leaves the borrower short of funds the following month and again in need of a loan to cover expenses. Such situations can create a continuous cycle of expensive payday loans.

Communicate with employers

Fintech companies connected to an employer’s payroll system allow workers to access the money they’ve earned before the next payday. The services are offered without the high costs and risks associated with payday loans, and independent of the willingness of the employer to offer payday advances.

Regulators can also look at factors like credit applications and whether an advance is based on verified income. Unlike payday loans, most payday early access companies do not require a credit application because the funds already represent the employee’s earned salary. Some companies simply rely on consumer confirmation or proof of employment, such as a recent payslip, instead of a direct check of available earnings through the employer’s payroll system.

Salary Early Access companies also do not charge interest. Instead, there may be a small charge for each transaction, similar to an ATM fee (ie often less than $3). Other providers charge a flat membership fee that allows multiple early access to salaries over a period of time. Either way, employers don’t have to change schedules or payroll processing, minimizing involvement.

A research paper from Harvard’s Kennedy School, published in May 2018, studied the early access salary industry and noted that the offers “are more effective than market alternatives and offer clear and compelling benefits. to employees…one-seventh of the typical $35 per overdraft fee charged by banks…16.7% of the cost of a payday loan, for which lenders typically charge $15 per $100 borrowed. also highlighted greater inclusiveness, such as “credit-damaged or credit-invisible employees who lack access to traditional financial products in the market.” As the research paper noted, the direct connection to payroll is what makes the systems efficient.

Not surprisingly, several national employers work with such service providers, offering early access to wages with full disclosure and voluntary consent. Employers recognize that early access to pay alternatives can be a major improvement for consumers, especially when compared to alternatives of payday loans, bank overdraft fees, or other high-cost short-term solutions. To help ensure a responsible alternative for workers, some providers have sought the advice of consumer advocates and adopted protective measures, such as limiting access to a percentage of disposable income and the frequency of such access.

Small steps, potential for big gains

Of course, regulatory review of any new practice involving wage payment laws can take time and increase uncertainty. When payroll direct deposit was first proposed in the 1980s, many state regulators expressed concern that direct deposit was not a recognized method of paying wages under the laws drafted. in the 1940s. Direct deposit is simply the electronic payment of payroll to employee bank accounts, making tedious trips to the bank a thing of the past. In retrospect, direct deposit was a substantial improvement, but the regulatory and legislative debates were fiercely contested, spanning over 10 years.

In California, early wage access providers are working with state legislators on legislation that would codify and recognize these providers and establish safeguards for consumers, such as fee restrictions, limits on the number of accesses, and percentage of gross salary to be advanced, and related disclosures. . Although legislation is not necessary, it can help clarify the regulatory treatment of these services. The California bill could become a model for other states.

State regulators are to be commended for examining whether the practices of early payday access service providers rise to the level of predatory payday lending. The investigation by the New York Department of Financial Services and potential legislation in California may serve to clarify permitted practices. It can also distinguish between providers that offer quick access to earnings through a connection to employers’ payroll systems with responsible consumption guarantees, and alternatives that may expose workers to debt risks similar to loans. on salary.

With proper recognition of these distinctions by regulators and legislators, the long wait for the next payday could also be a thing of the past.

By Pete Isberg

Pete Isberg is president of the National Payroll Reporting Consortium, which represents a group of payroll service providers. He is also Vice President of Government Affairs at ADP LLC.