The growth of earned wage access is already easing financial burdens on Americans, including possibly some of the 63% of Americans who say they live paycheck to paycheck. By helping workers avoid costly overdraft fees and expensive payday loans, EWA ensures employees meet basic needs, like paying for gas to get to work.

Attempts to regulate EWA as credit threaten worker access to this innovative and consumer-friendly financial tool.

Critics of EWA claim that their goal is not to abolish EWA altogether, but to make it subject to lending regulations. Unfortunately, their efforts fail to consider EWA’s actual impact on workers, whether EWA can actually operate as a loan, or whether rules allow EWA providers to earn sufficient revenue to operate.

Recent legislation passed in Missouri, Nevada and Wisconsin, as well as the Earned Wage Access Consumer Protection Act, recently introduced in Congress, point to a better way forward. These pieces of legislation present a pragmatic, consumer-protected approach to regulating the EWA industry that captures the nuances of EWA in a responsible manner.

Rather than rushing to apply existing regulatory frameworks to EWA and potentially killing it in the process, legislators must take the time to fully understand and properly regulate EWA.

Defining EWA as a loan demands the least amount of work by policy makers: no new rules; no new requirements on state regulators; and no need to learn about what EWA really is. However, this approach only makes sense if you don’t look too closely at what lenders are allowed to do.

For example, under the law lenders are allowed many protections that EWA providers have expressly disclaimed. EWA providers do not take employees to court for nonpayment or send debts to third-party collections. They don’t perform credit checks or charge late fees. All of these are measures lenders regularly use to protect themselves and reduce the amount of risk they carry — and EWA providers forgo them completely.

Critics of EWA argue that EWA providers do not even need these creditor protections because compared to lenders, they recover a high percentage of the funds they distribute to customers. But the high recovery rate is due to another characteristic of EWA that ultimately benefits workers.

EWA providers typically allow access to only a part of an employee's earned wages (usually around 50%), ensuring that employees still receive a substantial amount of their salary on payday. This cautious approach to providing access to earned wages improves recovery rates and helps safeguard employees against financial difficulties. Nonetheless, this practice has been misconstrued as a critique of the service.

That’s not all. Defining EWA as a loan leads to confusing guidelines that make compliance nearly impossible to achieve. For example, under Connecticut’s current approach, an EWA provider’s flat, per-transaction fee is recalculated in terms of an annual percentage rate, as if it were an interest payment on a loan. This calculated APR varies wildly depending on the length of the employee’s pay period and whether an employee takes a payout near the beginning or end of that pay period — even though the actual cost to the employee remains the same.

APR caps are an appropriate way to regulate payday loans, but they don't make sense for EWA. Fortunately, lawmakers in Connecticut have already proposed changing this approach by permitting small dollar, flat transaction fees instead of applying rigid and inappropriate APR requirements.

Financial regulations designed to safeguard consumers aim to make costs more understandable and transparent. However, representing EWA fees in terms of APR achieves the reverse, making them less clear and more difficult to grasp.

A flat fee is straightforward and easy for workers to understand. Similar to how ATM transactions give consumers access to their bank accounts when a bank teller is not available, EWA services give workers access to their earned wages when their paycheck is not available. It’s disingenuous to suggest that an APR that varies significantly within a pay period, depending on when a worker requests a payout, is somehow more transparent. 

Hundreds of thousands of workers take advantage of EWA, demonstrating the need for quick access to earned wages, and industry-sponsored research shows that it improves users' financial health. This need will not go away, even if EWA is regulated out of existence.

State legislatures have an opportunity to enshrine consumer protections while also ensuring that workers continue to receive access to EWA. This means enacting laws similar to those passed in Missouri, Nevada and Wisconsin, which accurately define EWA and establish appropriate regulations to protect consumers and ensure regulatory oversight.