Recent years have seen a significant increase in the popularity of so-called paycheck advance programs, also known as earned wage access. These programs allow workers to access their paychecks before payday, typically for a fee. The Consumer Financial Protection Bureau (CFPB) has taken notice of this trend and proposed an interpretive rule stating that these programs are essentially “consumer loans” subject to the Truth in Lending Act.
The CFPB’s analysis revealed that more than 7 million workers accessed around $22 billion in wages before payday in 2022. This marked a 90% increase in transactions from the previous year. The agency expressed concerns that these programs, while not new, have gained momentum due to the financial strains caused by the Covid-19 pandemic and high inflation. If the proposed rule is finalized, companies offering these advances will be required to provide additional disclosures to users, including expressing any costs or fees as an annual percentage rate (APR), similar to credit card interest rates.
Despite being marketed as a “free or low-cost solution,” the typical earned-wage-access user pays fees equivalent to a 109.5% APR. In some cases, California authorities found that the fees can exceed 330% for the average user. This has led consumer advocates to draw parallels between earned wage access and high-interest credit options like payday loans. Comparatively, the average credit card user with a balance paid a 23% APR as of May, marking a historic high according to Federal Reserve data.
While the CFPB and consumer advocates view earned wage access as a type of loan, the financial industry disputes this classification. The American Fintech Council, representing earned-wage-access providers, argues that the service is more akin to using an ATM machine and incurring a fee, rather than a loan. The industry has been vocal in its opposition to labeling these programs as loans, citing differences in credit checks, underwriting, and impact on credit scores.
The CFPB is accepting public comments on its proposal until Aug. 30 and may make revisions based on feedback received. This initiative is part of a broader effort by the Biden administration to crack down on “junk fees” in the financial sector. The proposed rule, if finalized, would empower the CFPB to take enforcement actions against companies that fail to make appropriate disclosures regarding fees associated with earned wage access. It could also open the door for legal action by states, consumers, or through arbitration.
Earned wage access programs have gained popularity in recent years, offering workers early access to their paychecks for a fee. While these programs can provide financial flexibility, concerns have been raised about the high costs associated with them and the need for greater transparency in disclosing fees to consumers. The ongoing debate between regulators, industry stakeholders, and consumer advocates highlights the complexity of this issue and the importance of balancing innovation with consumer protection in the financial services sector.