Experts warn against the high costs of applications providing access to employee salaries

NEW YORK (AP) – When 37-year-old Anna Branch cut her work hours in 2019, she suddenly noticed ads for an app called EarnIn.

“You know how they use you – the algorithms – like they read your mind,” Branch said. “The ad said I could get up to $100 this week and pay it back the next pay period.”

Branch, who worked as an administrative assistant in Charleston, South Carolina, downloaded the app and added a suggested “tip.” The money helped cover her expenses until payday, when the app took the $100 she borrowed plus a $14 tip. Five years later, Branch said she still uses the app, even once a month.

EarnIn is one of several corporations providing this service, billed as access to wages. Apps provide staff with small, short-term loans between paychecks in order that they pays bills and meet each day needs. On payday, the user repays the money from his salary. According to Datos Insights, between 2018 and 2020, transaction volume tripled from $3.2 billion to $9.5 billion.

While wage access apps have been around for over a decade, the pandemic and its aftermath have increased their popularity. Some apps have accessible, human names – like Dave, Clio, Albert and Brigit – while others suggest financial freedom: Empower, FloatMe, FlexWage, Rain. According to the Government Accountability Office, the typical user earns lower than $50,000 a 12 months and has experienced two years of high inflation.

Proponents of the app say they assist people living paycheck to paycheck manage their funds and avoid having to resort to more burdensome options like payday loans or overdrafts. But some analysts, consumer advocates and lawmakers say these apps are literally payday loans in a brand new technological package and will trap users in a never-ending cycle of borrowing that eats away at their earnings.

Critics also say that borrowing costs are usually not all the time transparent. Many of them charge monthly subscription fees, and most charge mandatory fees for fast fund transfers, although there will likely be a free option to receive funds inside one to three business days. The average APR on a loan repaid inside 7 to 14 days was 367%, which is a rate comparable to payday loans, according to data report by the Center for Responsible Lending.

Adding to the confusion is the undeniable fact that some employers have incorporated payroll apps into their payrolls, offering different costs, models and fee structures. For example, Amazon and Walmart don’t all the time charge employees for early access to earned wages outside of regular pay periods.

“They suck you in”

Sheri Wilkins, 60, who works as a house health aide in College Station, Texas, said she has been using the app since 2020 and feels “money dependent.”

The health care skilled who employs Wilkins offers Every dayPay, and Wilkins typically uses the app to submit his each day pay amount ($10.60 per hour) twice a day – once after each of two shifts for which he’s paid individually. He pays a fee of $3.49 every time, for a complete of $7 per day. At $35 per week, the app takes up greater than three hours of her wages per week, or a day and a half of work monthly.

“They trick you into having this money,” Wilkins said. “It’s great to have it – buy groceries and cigarettes – but when it comes time to pay, it only costs $50 or $60.”

Wilkins said she didn’t know the app offered a free option to send money inside one to three days. She said the app all the time directed her to the quick transfer option.

A Every dayPay spokesperson said in a press release that the app offers two no-fee options for many users and a 3rd, which they described as a “small ATM-like fee.”

Matt Bahl, who researches workplace issues for the Financial Health Network, said the growth of the wage access industry is a symptom of widespread financial uncertainty.

“This is to help address short-term liquidity challenges,” he said. “But if these challenges are the result of insufficient revenue, it will not solve them. You cannot “technically” get out of material deficits.

Tips

Andrew Lewis, 32, of Bucks County, Pennsylvania, said he uses EarnIn partially to cover unexpected expenses. Lewis works as a process technician at an electronics manufacturing company and said he sometimes uses the app as often as weekly to get money for gas or do something his child or wife needs.

Lewis often pays the “tips” that the apps suggest, he said, but he “doesn’t like them very much,” partly because of the messages.

“Tips help us advocate for millions of members like you,” the EarnIn app says. The company says it uses suggestions to keep the option free.

“I feel a little guilty about how it sounds,” Lewis said.

In 2021, the California Department of Financial Protection and Innovation found that “users often feel pressured to leave (tipping) due to pressure tactics used, such as… claiming that tips are used to support other vulnerable consumers or for charitable purposes.” .

In its report, the department found that Earned Income Access borrowers take out a mean of 36 loans a 12 months. Across 5.8 million transactions, 73% of consumers paid a “tip,” averaging $4.09 per tip. For three dozen loans, that is $147 a 12 months in suggestions alone.

Convenience and no credit checks

Penny Lee, head of industry group the Financial Technology Association, says more individuals are turning to access to wage earners as a convenience that permits them to compensate for “the gap between what a consumer needs to be able to spend… and their wage cycle.”

As with Buy Now and Pay Later loans, the apps don’t perform credit checks and don’t bill you as interest-free. Unlike payday loans or automotive loans, where borrowers pledge their vehicles as collateral, app users do not have to take care of balloon payments, black marks on credit reports or the possibility of losing their automotive in the event that they default. Supporters also say the apps don’t sue or send debt collectors after unpaid debts.

According to FTA, the average cost of using the Earned Wage Access app is between $2.59 and $6.27. The corporations say the fees are comparable to ATM fees and cheaper than overdraft fees that individuals pay in the event that they don’t manage to pay for of their checking account to cover the bill before a withdrawal. The average overdraft fee is over $25 and will be as high as $36.

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However, in its report, the Center for Responsible Lending said that users of the app saw a 56% increase in overdrafts.

A key moment for regulation

Many states have moved to regulate access to wage earners by limiting fees for these products. The industry supports federal laws currently pending in Congress that might preclude regulation of apps under the Truth in Lending Act.

When Connecticut passed a law limiting the fees apps could charge, EarnIn stopped operating in the state. When asked why, EarnIn CEO Ram Palaniappan said it was not “economically viable.”

Both California and Hawaii are currently drafting laws to limit wage access fees.

Rep. Bryan Steil, R-WI, one of the supporters of the federal bill, said it “will ensure that workers across the country can continue to benefit from these services, which will help them better balance work and pay.”

But Hawaii state Sen. Chris Lee, a Democrat who introduced the wage access laws in the state Senate, called rates of interest of greater than 300 percent a “modern day payday program.” Lee said he would really like to see more transparency and protections for staff.

Lauren Saunders, an attorney at the National Consumer Law Center, says this can be a key moment for regulation.

“If people used (access to earned wages) to cover one emergency expense a year, that would be better than being charged overdraft fees, payday loans or car equity loans,” she said. “But being better than terrible predatory products shouldn’t be the bar.”