These apps are cheaper than payday loans, but the fees can add up

What’s happening

One workplace perk is gaining popularity: earned wage access apps that give workers a portion of their earnings before payday.

Why it matters

The apps help workers avoid the expense of payday loans or overdraft fees during a financial crisis, but they can still get some paychecks.

What’s next

Regulators are ready to clarify the rules for the services.

As gas prices soar, Target employee Adam Ryan leans on a workplace perk that lets him collect a portion of his hourly wages before payday: the DailyPay app.

DailyPay lives up to its name. The app shows your accrued earnings in the current pay period and asks how much you would like transferred to your bank account. If you wait about a day, the transaction is free. To receive your cash instantly, you have to pay a fee of $3.

Ryan usually can’t wait. He commutes four times a week, 30 minutes per shift, back and forth to get to his place of work in Christiansburg, Virginia. With gas prices hovering nearby all-time highs, early access to his wages lets Ryan fill his tank and make it to his shifts. Still, the DailyPay fee takes a toll on his overall compensation, he says.

“It’s not the full amount of what you would get if you waited,” said Ryan, who runs a union organization at his shop. “But people can’t afford to wait.”

Ryan isn’t the only hourly worker using an employer-provided app to pull wages between payslips. Largely unregulated, these Apps to access earned wages have grown in popularity over the last decade as more and more employers offered them as a benefit to employees. The EWA Apps are third-party services that connect to companies’ payroll departments and allow workers to access a portion of their earned but unpaid wages. Big companies, including Walmart, McDonald’s, and Outback Steakhouse’s parent company, offer them as a benefit.

Some apps, like Even, charge a subscription fee every month. Others, like the FlexWage app, charge a fee for each transaction. Some workstations accept fees for a set number of advances, while others allow for an unlimited number of transactions. And some apps, like Instant Financial, don’t burden either the employer or the employee by making money by transferring the advances to a Visa debit card and absorbing some of the interbank fees that merchants pay for debit card transactions.

The popularity of these apps seems to be growing. With inflation is running at its fastest speed in four decadesmore than 14% of Americans live paycheck to paycheck and struggle to pay their bills, according to Lending Club, a peer-to-peer lending company. Almost a third of households had not saved enough emergency money Covering an unexpected $400 expense in 2021.

Instant Financial estimates that as of 2020, approximately 8 million workers in the US had access to EWA apps. The company considers more than 50 million Americans with annual earnings of $60,000 or less as potential users.

The apps are an evolution of tried-and-true patterns for the lowest-paid Americans. for years, payday lenders have offered instant access to cash at an APR of nearly 400%, and workers have incurred credit card interest and overdraft fees to keep up with spending.

Consumer advocates recognize that EWA apps are an improvement over payday loans as they do not charge exorbitant fees or interest. Suhrab Kohliwho leads financial policy research at the Aspen Institute, says the services could be useful for workers who have a few unexpected expenses a year.

“But if they use it for every paycheck,” he said, “it’s not a great solution to fill that need.”

A question of creditworthiness

In 2020, the Consumer Financial Protection Bureau found out that apps for access earned wages are not credit services if they do not charge fees (although many do). Advocates have urged the agency to reconsider this stance it has agreed to clarify.

Officials from Instant Financial and DailyPay told CNET that their services do not constitute credit because the advances are based on wages already earned.

“We’re changing the way people get paid,” said Instant Financial’s CEO Tal Clark. “We try to do it in a responsible way.”

Other services like Dave and Earnin bypass employers’ systems and offer cash advances based on data about when a customer is at their place of work or the cash flow in a person’s bank accounts. They also charge fees for instant transfers and sometimes ask for “tips,” which is a voluntary amount. Earnin says it’s not a form of credit.

“If you give people their earnings when they earn them, I don’t see why you would call that credit,” said Ram Palaniappan, Earnin’s CEO and founder. Proponents counter that the services offer money with an expectation of later repayment, which they say is the definition of credit. Still, says Palaniappan, the company is open to regulation to impose “guard rails” on the industry.

Earning Makers Activehours settled a class action lawsuit in 2021 over allegations that its advertising misled customers by claiming that the service would reduce overdraft fees. The plaintiffs alleged they were charged by their banks for overdrafts that arose when Earnin attempted to withdraw funds from their accounts before funds were available. According to Palaniappan, customers can choose when they want to make withdrawals and they can also route their paycheck through Earnin, which deposits the payment into customers’ accounts after deducting the amount of any advances.

Dave, another app that offers advances directly to consumers, works with a bank to service advances in a manner similar to an overdraft. The bank is regulated by the Office of the Comptroller of the Currency, a US Treasury Department that regulates national banks.

Dave charges customers a fee to receive overdraft funds immediately on a company-issued debit card. People can also request that the money be transferred to an external bank account for free, which usually takes one to three days. Dave solicits voluntary tips for advances and also makes money from interchange fees when customers use their Dave debit cards.

Though it’s structured like an overdraft fee, Dave’s CEO Jason Wilk says the company keeps the cost to users much lower. “It’s ten times better and friendlier than traditional overdrafts,” he said.

The company is faced with a lawsuit about an alleged Data breach of a third-party service processed the data of Dave customers. Wilk declined to comment on ongoing litigation.

Even the app that Walmart offers its employees didn’t respond to requests for comment. Outback parent Bloomin’ Brands declined to comment and McDonald’s acknowledged a request for comment but did not provide any.

Many employees find access to wages via the apps to be an advantage.

Meagan Ulberg, who worked at a Sacramento-area Walmart until May, signed on to Even after a misunderstanding about when she would receive her paycheck. A co-worker told her about the Even app, which gave her direct access to some of her earnings and running errands. Ulberg says she was so grateful that she bought her co-worker a $10 gift certificate as a thank you.

The Even app also helped Ulberg, whose pay fluctuated based on hours and overtime, track her earnings in real time.

“It makes me aware of what my paycheck is doing,” Ulberg said.

Walmart, which has offered cash advances through Even since 2017, says it offers the app to help workers budget and overcome financial difficulties. The company pays the cost of a subscription, which means workers get all of their wages.

“In addition to budgeting and saving, another feature of Even that helps employees manage unexpected expenses responsibly is access to earned wages,” Walmart spokesman Josh Havens said in a statement. “This app has proven extremely popular with our employees and has continued to be one of our most popular benefits since its launch.”

Cash advances or higher wages

Critics of the EWA apps address a deeper problem in the benefits paper: wages are too low. According to that Financial Health NetworkWage increases of workers during the great resignation were almost wiped out by inflation.

The apps have become popular just as a wave of union organizing has swept through the retail and hospitality industries. Starbucks, REI, Target stores and Amazon warehouse are all facing union pressures, with higher wages a key demand.

Ryan is pushing for a union election at his Target business and says he wants raises for his colleagues. At his store, he says he’s seen wage increases in increments of 8 to 30 cents. Inflation has also significantly reduced the value of those increases, he says.

Target said it will start offering the app in 2020 and confirmed workers will pay a fee if they want same-day access to funds, but declined to comment further.

Caught in a cycle

Workers’ earnings, whether from low wages or limited hours, are the real reason why EWA apps can put their finances at risk, he says Yasmine Farahi, Senior Policy Council of the Center for Responsible Lending. “With those margins,” she said, “even a seemingly small fee can be problematic.”

Research from the Financial Health Network shows that workers who use EWA apps tend to do so repeated over successive payment periodswhich makes it clear that after taking advances, they do not fill any liquidity gaps in the payment period.

DailyPay’s Chief Innovation and Marketing Officer Jeanne Walden said the company is seeing a “crooked” trend, with workers taking advances for multiple paychecks in a row, but eventually shifting to saving their wages after digging out from a lack of cash. She concedes that apps for accessing earned wages cannot overcome external forces like historical inflation.

“I don’t know if we can solve this as well as we can help people with it,” she said.

Lauren Saundersassistant director of the National Consumer Law Center, said it’s important to remember that early access to cash doesn’t mean workers make more money.

“What it really shows is that there are a lot of people struggling paycheck to paycheck,” Saunders said, “at the end of the day, borrowing isn’t going to solve that.”

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