Earned Wage Access: A Guide to Its History and Models

Earned wage access has been around for decades, dating back to the 1970s when paycheck advances were first introduced. These early programs allowed workers to borrow against their future paychecks.

The concept gained momentum in the early 2000s with the rise of payroll advance companies. One such company, PayActiv, was founded in 2012 and offered employees access to their earned wages before payday.

The idea of earned wage access has evolved over time, with various models emerging to cater to different worker needs. For instance, some employers offer earned wage access as a benefit to their employees.

Earned wage access, or EWA, is a company benefit that allows employees to receive part of their paycheck before payday.

Companies like Walmart, Amazon, and McDonald's offer EWA as part of their benefits.

Fees are often a few dollars, and you can receive the money within a day or two — or instantly, for a fee.

The amount you receive early is deducted from your upcoming paycheck.

Earned wage access programs started to emerge in the 2010s due to a decline in Americans with access to credit and traditional banking.

This led to the development of innovative solutions that integrated with payroll to provide a fairer and more inclusive era of personal finance.

Uber pioneered earned wage access in 2016 through a partnership with Green Dot, allowing drivers to request their earnings after each drive for a small payment.

This marked a significant shift in how people could access their earned wages, providing a more flexible and convenient option for those who needed it.

Earned wage access, or EWA, is a company benefit that allows employees to receive part of their paycheck before payday.

Companies like Walmart, Amazon, and McDonald's offer EWA as part of their benefits.

Fees are often a few dollars for this service.

You can receive the money within a day or two, or instantly for a fee.

The amount you receive early is deducted from your upcoming paycheck.

Earned wage access is promoted as bringing income more in line with expenses, helping workers avoid cashflow issues that could result in high-interest debt.

There are two distinct models of earned wage access: the employer-integrated model and the direct-to-consumer model. In the employer-integrated model, EWA transactions are adjusted from an employee's paycheck on payday. In the direct-to-consumer model, users receive their full paycheck at the end of each payroll cycle, but advancements are subtracted from their direct deposit account on payday.

New laws in Nevada and Missouri protect users from potential overdraft risks in the direct-to-consumer model. Some research finds better financial outcomes for users of earned wage access compared to non-users.

Earned wage access can bring income more in line with expenses, helping workers avoid cash flow issues that could lead to high-interest debt.

Research shows that users of earned wage access have better financial outcomes than non-users.

Some argue that staff are entitled to the pay they've already earned, rather than employers benefiting from the cash flow advantages of paying in arrears.

Earned wage access providers claim that the benefits extend to employers, including quicker recruitment and a more motivated workforce.

In some states, like Nevada and Missouri, earned wage access providers are regulated and required to be licensed.

The UK government is optimistic about the sector and appears to be encouraging take-up.

Here are some of the benefits highlighted by earned wage access providers:

These benefits are often cited as reasons for increased shift uptake, with some providers claiming an increase of up to 26%.

There are two distinct models of earned wage access.

In the employer-integrated model, any EWA transactions are adjusted from an employee's paycheck on payday. This means that if an employee accesses their earned wages ahead of payday, it will be deducted from their next paycheck.

The direct-to-consumer model is another way earned wage access exists. Users in this model still receive their full paycheck at the end of each payroll cycle.

On-Demand Payment Processing Time is a crucial aspect to consider when implementing an EWA program. Most EWA programs allow same-day transfers.

The processing time can vary depending on the provider, but generally, employees can expect to receive their on-demand payments quickly. In fact, some EWA programs may take a couple of business days to process.

To give you a better idea, here are some general guidelines on what to expect:

It's essential to communicate the processing time to your employees upfront, so they know what to expect. This will help manage their expectations and reduce any potential issues.

Consumer risk is highly dependent on the specific strategy the EWA provider chooses to take when offering the advances. Some users have been forced into overdraft as they were allowed to advance more than they received in their paycheck.

Most reputable providers cap advances well below total income and charge no interest at all. This means you can access your money without worrying about accumulating debt.

Reputable EWA providers prioritize your financial well-being, so it's essential to research and choose a provider that aligns with your needs. Don't be afraid to ask questions or seek advice if you're unsure.

To minimize risks, look for providers that offer flexible advance limits and transparent fee structures. This way, you can make informed decisions about your finances and avoid unexpected expenses.

As an EWA provider, you face unique risks, but also have a distinct advantage. EWA providers are held responsible for recollecting the advances they make to consumers.

This responsibility comes with a risk, as you may advance too much to a user and risk them defaulting. However, this risk is dramatically lower than other credit providers, as the advances you make are backed by hours the loan recipient has already worked towards.

You must carefully balance the amount of advances you make to users to minimize this risk.

As an EWA provider, you face a unique set of challenges and risks. You're responsible for recollecting the advances you make to consumers, which means you're at risk if they default. However, your advances are backed by hours the loan recipient has already worked, dramatically lowering your risk compared to other credit providers.

To mitigate this risk, you can consider offering flexible withdrawal amounts to your employees. For instance, some services allow employees to take up to 100% of their accrued earnings per pay period, while others may only allow up to 50%. It's essential to find a balance that works for both you and your employees.

In terms of payment, most EWA service providers pay wages directly into an employee's bank account. Some may use digital wallets, prepaid cards, or cash apps to serve unbanked employees. You can also consider offering financial literacy programs, student loan reimbursement, and other creative benefits to support your employees' financial wellbeing.

Here are some key questions to ask before signing up for an EWA service:

By understanding these key factors, you can make informed decisions about your EWA provider and create a mutually beneficial partnership with your employees.

EWA platforms boast robust security to protect your employees’ information.

Sharing sensitive data isn't a risk-free endeavor, so it's crucial to work with a trusted provider that prioritizes safeguards for sensitive data.

A trusted provider will have robust security in place to protect your employees' information, giving you peace of mind.

Robust security measures can give you confidence in the security of your EWA platform.

The UK market presents a unique opportunity for EWA providers, with the typical pay cycle being monthly rather than bi-weekly.

This difference in pay cycle means that employees in the UK are more likely to benefit from EWA, allowing them to access their earned wages earlier.

As recommended by the Financial Conduct Authority, the UK's leading EWA providers have come together to create the world's first 'EWA' Code of Practice, setting a high standard for the industry.