Dive Brief:

• High-frequency earned wage advance users, which include those with six or more transactions, comprise 38% of all users, and they account for 86% of all wage advances, according to a Center for Responsible Lending’s analysis of earned wage access transactions released Tuesday.
• Users often tap more than one source for EWA services, also known as on-demand pay. About 39% EWA users who used those services through an employer-integrated tool also received advances from other direct-to-consumer EWA providers during the same month, the non-profit research organization reported.
• “EWA providers tout their products as ‘overdraft fee eliminators,’” the report said. “However, our research found evidence of the opposite.” About 67% of users in the latest survey who had overdraft problems experienced an increase in overdrafts after their first EWA use, while a prior CRL report found the number of overdrafts climbed 56%, on average, after the first use of such an advance product.

Dive Insight:

The Center for Responsible Lending’s report suggests that a sizable share of consumers receiving earned wage advances are relying heavily on these services to make ends meet. Furthermore, the fees and tips associated with these services continue to diminish workers’ limited funds, the report concluded. 

Employees sometimes receive EWA services through their employers, and in other cases directly from companies that offer them publicly, often through phone apps. With such services, also known as on-demand pay, employees can get access to their wages before a regularly scheduled payday.

“By offering predatory credit with just a few taps on your cell phone, cash advance apps are a loan shark in your pocket,” Candice Wang, a senior CRL researcher and co-author of the report, said in a press release accompanying the report Tuesday. “This report shows many cash advance app borrowers are trapped in a cycle of debt like that experienced by payday loan borrowers.”

The EWA cash advance app operators are issuing loans with annual interest rates of 100%, or more, she said, calling them “illegally high.” That inflicts “financial pain on a growing number of consumers,” she added.

In one extreme case, one user incurred 58 overdraft charges in the three months after using an EWA provider for the first time, amounting to $1,740 in fees, the CRL report said.

In its report, the Center for Responsible Lending examined the business models of companies like Dave, Earnin and MoneyLion. The organization found that EWA companies rely heavily on the fees they collect from frequent and repetitive wage advances. 

EWA providers are growing their businesses in the U.S. and abroad. Dave, a neobank that is one of the few publicly traded EWA providers, reported a nearly 30% increase in its in net operating revenue to $80.1 million, up from $61.2 million in the year-earlier quarter, according to its Q2 earnings report. Financing originations by its its cash advance service ExtraCash jumped 37% year over year to $1.2 billion, the release said. 

Last month, DailyPay, another earned wage access company, announced plans to extend its services to U.K. consumers. That same month, Rain, the Nashville, Tennessee-based earned wage access company, partnered with Workday to extend its EWA services to Workday’s corporate clients. 

As EWA providers proliferate and expand, lawmakers and regulators in the U.S. have introduced regulations and laws to better oversee the earned wage advance industry.

The Center for Responsible Lending noted that some states have enacted consumer protection laws to modify or clarify that lending laws apply to EWA players, which it said seek to “create loopholes for their predatory product,” per the report. Other states have proposed bills or enacted laws that have been friendly to the EWA  industry. 

At the federal level, the Consumer Financial Protection Bureau said in July that it will treat earned wage advances like loans, but EWA companies have strongly opposed such regulations.

Nonetheless, the American Fintech Council, which represents roughly a dozen EWA companies, warned of potentially suing the CFPB to block the agency’s proposal.

After opening its rule proposal up to public comment, the agency received pushback from EWA industry players and support from advocacy groups like the CRL, the National Consumer Law Center and the Consumer Federation of America.