As early wage access grows in popularity, regulation debate ensues

Millions of Americans are using these services.

by Stephanie Haines | Aug. 01, 2024

Close-up of a man’s hands holding a mobile phone with the application for money transfer. He received a payment.

Story at a glance

More Americans are using apps and services that allow them to access portions of their paycheck before payday.

Billed as Earned Wage Access, these apps provide small short-term loans to workers between paychecks.

There’s currently an ongoing debate within the financial industry and government about how or whether these services should be regulated.

(NewsNation) — An increasing number of Americans are using apps and services that allow them to access portions of their paycheck before payday, according to financial data.

Billed as Earned Wage Access, these apps provide small short-term loans to workers between paychecks so they can pay bills and meet daily needs. On payday, the user repays the money out of their wages.

There’s currently an ongoing debate within the financial industry and government about how or whether these services should be regulated.

Is the concept of living paycheck to paycheck becoming obsolete?

Despite multiple data sets showing most Americans live paycheck to paycheck, services such as DailyPay or EarnIn help people access the money they’ve earned immediately, without waiting for their payday.

While these apps have been around for over a decade, the COVID-19 pandemic and its aftermath boosted their popularity. Between 2018 and 2020, transaction volume tripled from $3.2 billion to $9.5 billion, according to Datos Insights.

A 2022 Consumer Financial Protection Bureau (CFPB) report indicates that at least 5% of working Americans used these services at least once, with an estimated 7 million people advancing $22 billion through apps before payday.

A report from the Government Accountability Office suggests that inflation is a key reason why many Americans are using these services.

However, there’s a caveat: some, though not all, of these services, require fees or tips.

That prompted the CFPB to propose a new rule that would classify these services as loans under the Truth in Lending Act, a 1968 law that requires lenders to disclose all loan costs and fees. If implemented, the rule would require companies to state their charges upfront and subject them to the same regulations as other creditors.

What do the companies say about this?

Companies argue the government misunderstands their services, stating they are not loans since they don’t conduct credit checks, are either no-cost or low-cost and involve accessing money customers have already earned, not future earnings.

“DailyPay keeps millions of American workers out of a cycle of predatory payday loans, overdraft fees, and missed payments by enabling them to access their pay when they earn it,” DailyPay said in a statement.

There is federal legislation pending before Congress that would protect the companies from such regulation, while individual states are grappling with how to legislate the services.

In Connecticut, lawmakers passed a law limiting the fees the apps could charge, The Associated Press reported. EarnIn stopped operating in the state. Asked why, EarnIn CEO Ram Palaniappan said it was no longer “economically viable.”

The Associated Press contributed to this report.