Dive Brief:

• The Connecticut Department of Banking this month instituted new guidance with respect to small loans, which may increase regulation in that state for earned wage access providers starting Oct. 1.
• In guidance issued Sept. 11, related to a state law signed in June concerning bank statute revisions, the department said small loans will include all lending of $50,000 or less, with an annual percentage rate of 12%, as opposed to a prior threshold of $15,000 or less, including for “earned wage access advances.”
• As a result, entities extending such loans, including to employees of a company seeking to tap their wages early, will likely be required by the state to apply for a small loan license.

Dive Insight:

Earned wage access providers, including Payactiv, DailyPay and EarnIn, are in the business of enabling companies to let their workers tap wages before a regularly scheduled payday. That trend of allowing employees access to their wages early has been growing over the past decade.

With dozens of companies in the U.S. providing such EWA services, also known as on-demand pay services, there is an array of business models through which those payments to workers take place. Some employers extend the service through providers to employees for free, but other providers exact fees from workers. 

Given its growth, and the rising numbers of workers using EWA services, especially lower-wage gig workers, the industry is drawing regulatory scrutiny.

The Consumer Financial Protection Bureau, led by Director Rohit Chopra, has said it would weigh in on earned wage access, but the federal consumer protection agency has yet to act. The agency, which is charged with overseeing financial services and products, made this commitment last June with respect to EWA:

“The CFPB plans to issue further guidance soon to provide greater clarity concerning the application of the definition of ‘credit’ under the Truth in Lending Act and Regulation Z.”

States are increasingly moving into the void and instituting their own laws and regulations to oversee the expanding EWA industry.

In June, Nevada Gov. Joe Lombardo signed an earned wage access law that advocates of the legislation say is the first such state law to put “guardrails” on the industry. The state created new separate licensing requirements for EWA providers and exempted them from the state’s lending laws. In July, Missouri followed Nevada’s lead.

California regulators are reviewing more restrictive rules for the industry. Lawmakers in Utah, New Jersey, New York, Georgia, North Carolina and South Carolina have also debated EWA legislation.

Connecticut is the latest state to weigh in, and it’s taking a more restrictive tack akin to California than the less regulated lending approach of Nevada.

Under Connecticut’s new banking guidance, EWA providers will likely have to adhere to the state’s small loan law provisions. “Although the Department recognizes that each type of transaction must be evaluated on a case-by-case basis, an advance of money on an individual’s future potential source of money of $50,000 or less with an APR greater than 12% will likely be covered by the Small Loan and Related Activities Act,” the Connecticut guidance issued last week said.

The Financial Technology Association, with fintech members that include Block, Klarna and Stripe, was quick to denounce the guidance, saying it “could jeopardize access” to EWA services for workers in Connecticut. “EWA products are not credit and should not be classified as loans – they simply give employees access to their already earned wages,” FTA President Penny Lee said in a Sept. 12 press release regarding the state’s action.

The states’ different responses to EWA could put them on a collision course when it comes to developing policy for the industry, Bloomberg reported last month, noting that some of the biggest U.S. employers, including tech giant Amazon and mega-retailer Walmart, now offer some type of EWA service to attract and retain workers.