Is earned wage access the future of hourly pay?

Companies like Target, McDonald’s, and Walmart are making a bet that earned-wage access (EWA) is the next big thing in hourly retail work. That’s if references to “daily pay” and “on-demand pay” scattered across benefits pages and company blogs—not to mention employee Reddit threads—are anything to go by.

Advocates say EWA, which lets employees withdraw funds for accrued hours, helps workers avoid overdraft fees and payday loans, and gives them more financial security. While EWA transactions totalled $9.5 billion in 2020, biweekly pay is still the most common model in the US.

“But with today’s technology capabilities, it doesn’t need to be that way,” Jeanniey Walden, global chief innovation and marketing officer of EWA provider DailyPay, told Retail Brew.

A penny paid is a penny earned

With retailers worried about the R word (recession or retention—take your pick), faster access to wages may seem like a great way to improve recruitment and decrease turnover. In fact, a study by Mercator Advisory Group (and sponsored by DailyPay) found that the average tenure of retail workers increased 24% when using EWA.

But the model isn’t without its challenges: Nelson Lichtenstein, director of the Center for the Study of Work, Labor, and Democracy at UC Santa Barbara, said there are better ways for employers to help out hourly workers.

“My general impression on this is that these companies are parasitical on the low-wage economy,” he told Retail Brew. “I think, ultimately, it’s another form of payday lending.”

Payday loans—credit offered to those who need cash before their paycheck comes through—traditionally come with much higher interest rates (think 390% annually or higher). EWA, which advocates tout as a better alternative to payday loans, has also come under the eye of the Consumer Financial Protection Bureau (CFPB). That agency outlined requirements that EWA providers must meet to avoid being defined as “credit” under the Truth in Lending Act.

• There are several EWA models, but the CFPB memo refers to employer-integrated platforms, like DailyPay, which connects directly to a company’s time system and payroll to disperse earned wages.
• The service must be free for workers, who may only access wages that have already accrued, and that earnings information must come directly from the employer.

“There are some very large employers that have signed on to wage access like Walmart, and some Target and McDonald’s [locations],” Laura Udis, senior program manager of small dollar, marketplace, and installment lending at the CFPB, told Retail Brew. “So there’s certainly potential there that it could have a displacement effect on payday. I don’t think we know yet. But the potential is there.”

The CFPB recently said it plans to issue “further guidance” on EWA sometime soon. In the meantime, state laws may pose a challenge, as legislators around the country attempt to regulate the industry.

That includes California, which signed an agreement with five EWA providers in January requiring them to deliver quarterly reports to the state’s Department of Financial Protection and Innovation.

State of pay: Aite Novarica, which surveyed DailyPay users in 2021, reported that 21% of users had previously taken out a payday loan, while 57% had been late for bill payments. 95% of those same users said they stopped or reduced their use of payday loans after EWA, and 88% said they had less trouble with bill payment.

“As an HR leader, if I had the capability to pay people for their earned wages every single day, I would,” Abby Ludens, chief talent officer at Comoto—which integrates with DailyPay—told Retail Brew. Ludens said about 40% of eligible (hourly) workers opted to enroll, and those who withdraw wages are doing so to pay for the necessities.

“The top three reasons that we saw recently were food, bills and for transportation,” she explained.

• At GPS Hospitality—which owns and operates fast-food restaurants like Burger King and Pizza Hut, and which utilizes EWA provider Instant Financial—workers who use EWA “stick around longer than those who do not,” payroll director Christine Wasdin said.

Full steam ahead: Despite the looming challenge of state and federal regulations, EWA providers and their corporate partners aren’t slowing down. In January, Walmart announced its purchase of Even, an EWA provider that’s been available to workers at the retail giant for several years. And by 2023, consulting firm Gartner predicts that 20% of companies with majority hourly workforces will offer EWA.

“For us, it’s not a luxury,” Wasdin said. “You cannot drive around a big city and see fast-food restaurants that don’t offer that right on their billboard…It really just is what the expectation in the market is now.”—MA