What Is Earned Wage Access, and Should You Provide It?

Whether they’re living paycheck to paycheck, experiencing reduced hours, or facing unexpected job loss, 138 million American workers are affected by financial insecurity. The COVID-19 pandemic has exacerbated that uncertainty for millions of families, only 37% of whom could cover an unexpected $500 expense during normal times, according to BankRate.

With so many workers feeling the squeeze, many have used payday loans or high-interest credit sources to cover unplanned, or even everyday, expenses.

If payday comes every two weeks, workers who put in a shift on July 18, for example, may not get paid until August 7, says Sabina Bhatia, Chief Customer Officer for PayActiv. “Ever since the payday cycle was invented, there has been misalignment between a worker’s need to get their earned money and the delays inherent in processing payroll.”

That’s why more HR leaders are taking a closer look at on-demand earned wage access (EWA), which enables workers to retrieve the wages they’ve already earned, rather than wait for an arbitrary two-week payroll cycle. EWA’s first big moment came in 2017 when Walmart made the service available to its more than 1 million workers, allowing them to receive payments for completed work as frequently as every day. Other large employers like Target and McDonald’s followed suit shortly thereafter, and thousands more have since done the same.

As the industry picks up momentum, more EWA providers are jumping into the space, pushing innovation among the existing players. They’re now building peripheral services around saving and planning to help low-income workers escape the interest and fees that create debt and more financial insecurity.

That means now is a great time for employers to consider launching an EWA solution for their employees.

Why Interest in Earned Wage Access Is Growing

The pandemic has made early access to earned wages particularly expedient, enabling millions of workers to bypass payroll cycles and avoid falling deeper into financial distress. In 2019, Gartner research found that less than 5% of large employers offered flexible earned wage access to their hourly workers, but that number is expected to grow to 20% by 2023. Today, a rapidly growing number of employers offer accelerated pay, mostly delivered by smartphone app, and advocates say this represents a long overdue benefit for workers. “I’m kind of enamored with EWA, so I think the whole world should have access,” says Sarah Grotta, Director, Mercator Advisory Group, a global research and consulting firm for the payments industry. “We’re past the bleeding edge—definitely still in the early adopter phase, but it’s certainly gaining a lot of momentum.”

Even though on-demand pay apps and programs are designed to help workers, it’s employers who are reaping benefits across recruitment, retention, and employee engagement. That could be partly because financial insecurity is linked with absenteeism, workplace accidents, and decreased productivity.

That sales pitch is becoming more compelling for a widening set of employers. Healthcare, transportation, retail, and call center companies have been among the strongest early accelerated pay adopters, but any employer with a large hourly, high-turnover workforce should take a look, says Jeanniey Walden, Chief Innovation and Marketing Officer of DailyPay, an EWA provider.

The main downside in offering early wage access may be that it could build reliance on advanced pay, rather than reduce it. “You could end up with employees who are completely dependent on on-demand pay to get from paycheck to paycheck,” says Jon Schlossberg, Co-founder and Executive Chairman of early pay provider Even Responsible Finance Inc.

Wrapping the service around other saving and financial education tools might make it more effective. For example, introducing early pay programs at Walmart was supposed to reduce employee stress while encouraging them to stick around longer. But an internal review found that workers who often chose to get paid sooner without using some of the advanced pay app’s other tools actually turned over faster, according to Bloomberg. When employees paired wage access with other budgeting and saving features, though, retention improved. The app and EWA service are the company’s second most popular employee perk after the 401(k).

How Employers and Workers Benefit From Earned Wage Access

Despite mixed results from Walmart, there’s a growing body of research pointing to positive outcomes for employers and their workers. For example, DailyPay clients saw a 63% improvement in turnover rate among their employees. That’s according to the forthcoming Mercator study, “Modernizing Payroll Through Earned Wage Access: A Focus on Employee Tenure.” The study analyzed more than 1 million anonymized data records comparing tenure of “engaged users of the DailyPay solution versus employees at the same company who do not use DailyPay.”

PayActiv has also published research on recruitment, turnover, and engagement. More than 80% of PayActiv’s 2 million users say they are more likely to stay with their current employer because of the benefit. Organizations that use the app experience 19% less turnover, according to company data.

As a public-benefit corporation and Certified B Corporation with a clear social mission, PayActiv’s service is also helping workers steer clear of high-interest debt. In a survey of more than 2,000 workers at more than 50 companies, PayActiv found that 22% of its users were able to avoid payday loans altogether. Many also eschewed overdraft fees and credit card fees, as well as other loans and sources of cash, like pawnshops.

How to Choose an On-demand Earned Wage Access Provider

With such compelling data to support EWA, it’s important not to overlook a few key factors when selecting a partner. Who foots the bill for transaction costs when a worker accesses their money, for instance? Even Responsible Finance offers a subscription model, often paid by employers, where employees can access earned wages as much as they want. Other players, like PayActiv and DailyPay, charge a fee every time someone uses their service. Many employers pass that transaction fee onto employees, but they can always pick it up themselves as an extra perk.

More important to the vendor selection process is the technical integration between systems, Grotta says. The EWA provider’s digital platform needs to merge seamlessly with an employer’s payroll and other HR systems, accurately tracking time worked, along with other deductions coming out of payroll, such as wage garnishments, individual retirement account contributions, vacation time, and more.

It’s also crucial to get a clear understanding of the on-demand pay provider’s acumen around compliance and regulatory changes. “Because EWA is a fairly new solution, we’re just starting to see regulators pay attention to the space,” which Grotta says may throttle the industry’s growth in the short term. For instance, there are some unanswered questions about what fees can and can’t be charged, and how tax laws categorize these payments.

However, early indications from regulators have been largely positive. The Consumer Financial Protection Bureau recently issued an approval order confirming that PayActiv’s earned wage access program is not credit and therefore is exempt from the federal Truth in Lending Act (TILA) and Regulation Z rules governing creditors. Accessing money through an accelerated pay program is explicitly not borrowing, but rather retrieving one’s own earnings.

The Future of On-demand Earned Wage Access

As financial regulators continue to take a closer look at EWA, providers like PayActiv, DailyPay, and Even Responsible Finance—along with a host of emerging competitors—continue to expand their services. DailyPay recently launched a feature enabling employers to award “spot bonuses.” And employees don’t have to wait for their next paycheck, or pay the usual $2.99 per transaction to access the bonus. DailyPay’s Walden says such tools can be a game changer for call centers, sales teams, and others looking for ways to drive performance.

Employers can also use their on-demand pay program to encourage saving through existing plans like 401(k)s, further embedding the service into a company’s benefits offering and boosting adoption. “I think EWA will become as ubiquitous as 401(k) is today,” says Schlossberg.

That day is still a long way off. Still, for the many companies not currently offering such a perk to employees, there’s ample time to become an early EWA adopter and use it as a potent employee recruiting, retention, and engagement tool.