EWA Quick Reference Guide
What is Earned Wage Access? How is it regulated? How does it work?
Earned wage is a pretty hot topic these days with mulitple states passing legislation in the last 60 days. With this guide you should be able to navigate an conversation about Earned Wage Access and understand exactly what it is and is not. Enjoy!
🟢 What is EWA?
EWA allows employees to access a portion of their earned wages before the regular payday at no cost and without recourse. It is not a loan or cash advance.
🏦 How is it regulated?
EWA is not a regulated financial product. Today there are no Federal or State licenses required or available to firms who offer EWA. Recently NV & MO passed legislation requiring EWA firms to register with financial authorities. CFPB issued an advisory opinion in November, 2020 but has since rescinded this order 🤷.
🛑 What is not EWA?
EWA is not a loan, any product that charges a fee for accessing the funds is a lender.
There is nothing wrong with this approach; the firm just needs lending licenses or a sponsor bank to offer the cash advance service.
Example firms that offer a cash advance product but look & feel like EWA?
Empower, Brigit, SeedFi(product shut down post acquisition by creditkarma)
Problems - very difficult to make money due to regulatory oversight, high risk borrowers, and low fee model required by Reg Z.
Most players attempt to solve by charging subscription fees
👋 What is the user experience?
Typically employees can view their accumulated earnings in real-time, enabling them to request a payout for the hours they have already worked. The amounts are usually throttled by a percent of earned wages (40% to 50% is common) combined with a maximum amount which ranges depending on a variety of user profile factors that are determined by the EWA provider.
💰 How do they make money?
Transfer Fees - The Need for Speed! It turns out you can charge for speed of transfer (for now until regulators come after this) when sending a consumer their earned wages. Here’s how it works:
Must offer a free transfer option (standard ACH processing)
Can charge for “expedited” typically delivered instantly via card rails direct to debit card. See Tabapay for a provider of card rail payments.
Example of Instant Transfer Fees:
Klover Express Fees: $75.01 and Up, ($8.49); 50.01-$75 ($6.49); $25.01-$50 ($5.89); $10.01-$25 ($3.99); $0-$10 ($2.99)
Based on industry intel it seems 50-60% of users will opt for the instant transfer fee
Banking Fees - standard consumer fintech revenue model:
If the EWA provider is also a consumer NeoBank they usually offer free instant EWA to users who directly deposit their paycheck. Instant EWA becomes an acquisition tool and leads to additional banking rev streams:
Interchange
Net Interest Margin
Deposits
External transfer fees
Dave is an exception but not clear what their fees are since they are not disclosed outside of a $1 monthly subscription fee & tips.
Tips - many EWA providers ask the user to tip for the service. This practice is controversial since the user may not realize they are over tipping when the amount is low. Regulators are generally not proponents of tipping and it seems most players are moving away from tips.
💼 How do they go-to-market?
Based on our research there are 2 basic models
Traditional B2B2C - Sells services to employers at no fee, business can now offer employees access to earned wages.
Benefits to employer for recruitment, retention, employee happiness.
Benefits EWA firm as free acquisition, connect to employer payroll, time & attendance providers to access real-time data regarding employee status that greatly reduces repayment risk.
D2C - EWA provider sells directly to consumers without employer involvement or consent. To offset risk EWA firms typically gather intel on users from Plaid & other sources to predict risk of repayment failure.
Examples firms: Earnin, Klover, Dave, Chime
Interesting read- learned something new here!