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Proposed legislation to regulate earned wage access (EWA) in the US state of Connecticut is restrictive and could limit consumers' access to financial products, a payments industry body has warned.
EWA products, sometimes known as on-demand pay, or daily pay, seek to bridge the gap between consumers’ hours worked and the receipt of their paychecks by facilitating advanced access to earned but as yet unpaid wages.
The legislation proposed in Connecticut, SB 1396, imposes strict caps on the fees EWA providers can charge: $5 per transaction, not exceeding $30 per month per user.
Stifling progress
The Innovative Payments Association (IPA), whose membership includes a number of EWA providers, said that, if enacted, the bill could limit consumers' access to EWA products and stifle progress in the industry.
In a letter to state senators, Brian Tate, president and CEO of the IPA, argued that SB 1396 would require providers to make large sums available by mandating that 75% of earned wages be made available, place a restrictive $5.00 fee cap on EWA services, and limit innovation by requiring providers to rely on "verified payroll data" to estimate earned, but not yet paid wages.
“These kinds of restrictions do not reflect how the EWA industry works, or the products offered and would undermine the viability of the product in the state of Connecticut,” Tate said.
He added: “As such, the IPA respectfully urges the Connecticut House to oppose SB 1396 in its current form. We encourage you and your colleagues to engage representatives from the payments industry to amend and improve SB 1396 or develop an alternative solution that will protect and empower consumers in Connecticut.”
In January 2024, Public Act 23-126, which classified EWA services as small loans, came into force in Connecticut.
In addition, the Connecticut Department of Banking determined that EWA service fees had to be included in APR calculations, often pushing the APR beyond the state’s legal cap and making it difficult for many EWA providers to operate in the state.
If enacted, SB 1396 would ease some of these restrictions by removing salary advances from some small loan requirements, mandating a zero fee option for consumers, and limiting finance charges.
The EWA approach
EWA providers have developed a variety of business models and solutions to try to shorten the gap between the number of hours worked and receipt of wages.
Generally, these programmes involve an EWA provider enabling wage earners to request a certain amount of accrued wages, which they can then draw down before their next pay day
A broad range of different parties offer EWA products, including federally regulated banks, payroll providers and processors, employers, and other third parties that either work with the employer to facilitate access on behalf of the employer or companies who work directly with the consumer.
Third-party providers may use APIs from providers such as Plaid, TrueLayer, or Yapily, enabling secure bank data connections that allow them to monitor direct deposits and calculate earned wages precisely.
Controversy
EWA is a topic that excites controversy, with its detractors arguing that it is little different to a payday loan.
They also point out that EWA payments represent an advance on the next pay cheque, which brings the risk that individuals may find themselves unable to meet their financial commitments further down the line, leading to a cycle of repeat advances and escalating fees.
However, its proponents argue that EWA provides flexibility, enabling employees to manage unexpected expenses without having to take on prohibitively expensive loans.
They also suggest that by offering EWA, employers are providing a valuable service to their people, leading to advantages in terms of productivity and retention.
As opinions differ on the nature of EWA schemes, so policies towards them vary.
In November 2020, the Consumer Financial Protection Bureau (CFPB) issued guidance exempting certain EWA products from being classified as “credit” under the Truth in Lending Act (TILA) and Regulation Z.
In July 2024 the bureau issued a consultation on a proposed interpretive rule on EWA; it received around 150,000 responses, but the rule had not been instituted before the Trump administration took over and radically changed the function of the agency.
There is no specific regulation in place in the UK, where EWA programmes are known as Employer Salary Advance Schemes (ESAS).
The Financial Conduct Authority (FCA) broadly welcomes their availability as an alternative to high-cost credit that helps employees cope with unforeseen expenses and occasional short-term cash flow issues.
However, the regulator warns that issues such as a lack of transparency and the risk of becoming dependent on ESAS payments mean employees should tread carefully when considering accessing their wages early.
