Real-Time Pay is Here to Stay

Emerging Regulatory Framework for Earned Wage Access Comes into Focus

By Matthew Kopko

2020, and now 2021 have brought a host of challenges for working families.  Many speak of a “K” shaped recovery, where those in the middle and at the bottom are finding it harder than ever to make ends meet.  Indeed, nearly 1/2 of all people (including 57% of those 35-44) report that they have had to tap into their savings as a result of the pandemic, according to recent research by DailyPay.

Many households have had to deal with furloughs, reduced hours, and a tough job market when seeking to re-enter the workforce.  Add to this mandatory “virtual” schooling, working families are overwhelmed, and having to stretch every dollar further and further.

Yet in a world of virtual school and instant payments like Venmo, 2 in 3 workers are still getting paid just once or twice a month by their employer.  Being paid once a month or twice a month isn’t just ridiculous, it’s fundamentally unfair.  Workers suffer because of these practices.  From credit card interest, to late fees, overdraft fees and payday loans, it is estimated that the average worker loses $200 per month in hard-earned wages because of the time between paychecks.

New technology has entered the fray to change all that.  What began as a niche employee benefit a couple years ago has now turned into a big business, with serious savings for employees and employers alike.  Large Fortune 500 and 100 companies are rapidly implementing nationwide programs.  It’s called on-demand pay, or earned wage access (EWA).  New tech companies are building custom technology and APIs that enable employers to make payday anyday.  You’d think this is simple, but the amount of moving pieces to run a payroll for a busy company is overwhelming.  It typically takes a team of dedicated HR and payroll professionals days to close books and run payroll.

By integrating time and attendance, payroll, accounting and tax data data directly from employers, these new technology companies can help workers and companies instantly identify at the end of a shift how much pay they are entitled to for that day’s work.  It even can incorporate deductions, taxes and withholdings to show only “takehome” available pay.  And it can be accessed instantly by the employee should she desire.  After all, it’s her money right when she earns it.  She shouldn’t have to wait weeks to get it.

For the cost of just a couple dollars (typical prices run $2-3 per transaction), only when needed, there is a solution to ever having to take out a payday loan, pay a late fee or run up credit card debt again.  And the savings, by being able to eliminate all or most of that lost $200 per month, adds up to serious money in the average working family’s pocket (over $1,000 a year!).

As is the case with many new technologies, on-demand pay was not built when payroll and timeclock regulations were originally enacted decades ago.  Luckily, forward-thinking regulators see the massive promise for this new technology, and are clarifying vague and outdated rules so that this industry continues to be embraced.

The Federal Government, for example, recently issued a series of partial guidance and preliminary determinations regarding the industry.  While there are several documents, each particular to a specific set of circumstances, the thrust of the Federal guidance is that low-fee, non-recourse, employer-based on-demand pay providers are best positioned to continue to deliver real consumer value at low cost.

On November 30, 2020, the Consumer Protection Financial Bureau (CFPB) issued an advisory opinion on EWA.  While the opinion itself is very narrow, it lays out a multi-factor framework for evaluating EWA programs.  The framework is very favorable to the employer-based approach pioneered by DailyPay and other leading companies.  Indeed, the first factor discussed is whether the provider integrates with an employer, and the second factor discussed is whether the provider uses employer-provided data to limit available funds to net earned pay.  While the opinion technically only applies to no-fee programs, the opinion suggests that certain low-fee programs (i.e., those with what it calls “nominal processing fees”) are also likely to not be credit as well.

Given the ambiguity on this key point after the November opinion (what is a “nominal processing fee”?), the CFPB followed up with a sandbox approval order on December 30, 2020 to provide additional clarity.  Building on the unfinished parenthetical in the opinion, the sandbox approval order covered a particular low-fee program, with fees up to $2.99 for an instant transaction.  Critical to note, however, is that both actions were limited to employer-based programs only.

This Federal action is also consistent with emerging state action.  Multiple states have introduced language to bifurcate regulatory regimes for B2B and D2C players.  The reasoning behind this is that employer-based business-to-business (B2B) programs benefit from real earnings verification and employer integration, while direct-to-consumer (D2C) programs cannot do so.  In the employer-integrated context, providers get actual data feeds of timeclock and accounting data from the employer, so they can actually provide verified net earned pay.  D2C providers don’t have privity with (and data from) the employer, so they are left having to estimate or speculate as to the amount of funds that are available, and cannot be sure that these funds are limited to net earned pay.

Additionally, employer-based programs are fully inclusive and don’t discriminate against individual workers based on their credit profile or other personal details.  Without the employer-verified environment, D2C providers have had to resort to individual underwriting, GPS tracking, and other suspect methods from a regulatory standpoint that are not consistent with (or needed under) the employer-based approach.

With Federal regulators, and state legislators and regulators, now speaking more on this issue, It’s great to see new technology not just accommodated by emerging regulation, but welcomed by it.  Additionally, for practitioners, it is critical that the emerging regulatory framework be as consistent as possible across state lines so there isn’t a patchwork of compliance headaches for those looking to implement these services.  HR professionals are busy enough as it is, so for EWA to be a real opportunity for employers, it has to be implemented by the practitioners easily and without additional overhead.

Now, with increased regulatory certainty, these innovative programs can continue to deliver real consumer value, and employers can move forward with increasing faith that they are entering into a regulatory environment that won’t be upended at any moment.  With 2021 now here, America’s working families should never have to worry about making ends meet in between paychecks.  Real-time pay, on-demand pay, is here to fill that gap, and by reading the tea leaves from these recent regulatory actions, it’s here to stay.