EWA Report Only Tells Half of the Story

The Center for Responsible Lending’s recent report “Not Free: The Large Hidden Costs of Small-Dollar Loans Made Through Cash Advance Apps” portrays earned wage access providers as payday lenders while practically ignoring half the industry.

The report acknowledges that there are two models for earned wage access – the direct-to-consumer model and the employer-based model. The report “includes five direct-to-consumer companies in the analysis,” but “[e]mployer-integrated companies were visible in the transactions data but were not reflected in the analysis because repayment was done through payroll.”

From this admittedly limited analysis, they conclude that “the frequent use of advance products combined with their high cost make earned wage advance harmful for consumers.”

They say their data shows users of direct-to-consumer EWA products saw a 56% increase in overdrafts on their checking accounts.

But only looking at the direct-to-consumer model misses how much EWA helps consumers, especially those facing income volatility.

In gathering information from its EWA members, which focus on the employer-based model, the Innovative Payments Association has collated research that shows that on average 63% of EWA users say that it allows them to reduce their use of payday loans, and 55% say they overdraft their bank accounts less often.

But don’t take our word for it.

The Financial Health Network has done research on EWA products as well. A quote from one participant in its focus groups probably does the best job of summing up the possibilities of earned wage access:

“I have tried payday loans, having a credit card, car title loans, gotten loans on my jewelry at a pawn shop. All of these charge fees at an insane interest rate and the fees are almost as much as the money borrowed if you have to pay over time. And it’s a temporary fix. Getting advanced wages I have earned through my employer is actually the safer alternative.”

Vulnerable consumers face risks from incomplete analysis. They may lose an important liquidity tool if the legislation and regulation called for in the report treats all EWA products the same. Consumers may also suffer if they get the impression that all earned wage access products are bad and choose to avoid those that could help them weather income volatility without needing expensive credit.
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In any analysis it is important to carefully define what is being investigated. While every report wants to grab readers’ attention, it is worth being a little pedantic to avoid creating collateral damage.