With many consumers facing cash constraints during the COVID-19 pandemic, financial technology programs that enable workers to access earned wages ahead of payday have gained popularity. Federal Reserve Bank of Kansas City Senior Payments Specialist Terri Bradford and Payments Specialist Julian Alcazar in September 2020 published a Payments System Research Briefing that examined this trend.

How do these programs work?

“Early” and “earned” wage access programs (EWAs) fill a need by allowing cash-strapped workers to access funds in advance of payday.

Earned wage access programs are employer-based services and operate through a contract allowing a provider to access an employer’s time and attendance records to determine actual earned wages. The employee pays a fee that varies based on whether funds are received via the Automated Clearinghouse (ACH) or instantly via a card network. On payday, the provider collects funds directly from the employer for any earned wages disbursed ahead of payday.

Early wage access programs operate through agreements between the provider and the employee and do not involve the employer. A consumer downloads an application, establishes an account with basic information, and links a checking account. For these programs, the EWA provider functions more like a lender, providing access to a percentage of wages earned on a given day, as reported by the employee. Unlike a lender, however, these types of providers rely on a subscription or tip model, paid by the employee, for revenue.

Are there potential risks?

Both types of programs have been touted as options to help cover unexpected expenses and avoid high-cost alternatives such as check-cashing services and payday loans, but there are risks. For example, if an employee is a repeat user, the accumulated fees could rival recurring overdraft fees. In addition, EWA providers do not have insight into all deductions from an employee’s paycheck, such as for retirement and health care, which could result in the employee overleveraging. Moreover, an employee could “double dip” by using the earned wages program through an employer and then using an early wage mobile application for the same day’s wage. This could leave the employee short on payday; when the early wage access program sweeps the worker’s checking account, an overdraft fee might result.

What is the outlook?

Looking ahead, earlier access to wages might also be facilitated by the adoption of instant payments, such as those that will be available using the Federal Reserve System’s forthcoming FedNow Service and are available today through The Clearing House’s Real-Time Payments. Enhanced availability of instant payments could better enable banks to offer services that EWA providers offer, such as earlier access to payroll and push notifications.

As instant payment services become more broadly available, payroll providers might see these services as beneficial and begin to leverage them to compete for employers. Employers might do the same to attract and retain employees. Ultimately consumers will benefit by reducing time between pay cycles.

Further Resources

Read the full Payments System Research Briefing on this topic.