What Are Earned Wage Access and Direct-to-Consumer Advance?
Employer or payroll-partnered EWA providers work with an employer or payroll system to gain insight into earned wage information and offer access to funds before payday, or the day funds are made available.
D2C providers work directly with consumers and connect to their bank accounts to observe inflows and outflows, extending consumers a certain amount of liquidity, upon request.
Why Do Consumers Use These Products?
One in five families has less than two weeks of liquid savings. For the many U.S. workers living paycheck to paycheck, financial distress can occur in the time between earning and accessing wages. Some households have a cash buffer in their checking account or liquid savings to tide them over if pay schedules don’t line up with bill due dates or unexpected expenses.
Without a buffer, many will seek out financial products that can provide immediate liquidity for short-term needs, overdraw their accounts, or defer payments and risk incurring late fees.
Not much is known about this space and how consumers use these products. To address this knowledge gap, the Financial Health Network collaborated with two employer-partnered EWA companies and two D2C companies. The companies provided deidentified data sets for all users that took an advance, including all activity for each individual over a period of at least 12 months.
Finding #1: Most consumers used products consecutively over varying periods of time.
Most users don’t take advances just once – they take advances consecutively across several semi-monthly periods, and generally within two months. Across all companies, more than 70% of users took advances over consecutive months at least once during one year of observed time. The lengths of consecutive use differed by company and by user.
Finding #2: Advances were recouped successfully at least 97% of the time.
Companies recouped advances through integration with a payroll system or by debiting employee bank accounts. Participants from all companies could stop or delay recoupment with proactive effort, for any reason. Across all participating companies, 3% or fewer of advances were not recouped.
Finding #3: The costs of these offerings were typically less than 5% of the advance amount, but the cost over time can vary based on fee structures and usage.
Our participating companies employed various fee structures to cover the costs of these services – voluntary, periodic subscription, and set fee per advance. The average amount a user paid per advance was $2.59-$6.27 across the companies, or 2.57%-4.69% as a percentage of advance amount.
In addition to the fee model, usage and restrictions on the number of advances in a pay period can impact overall costs. The voluntary-payment model can be more or less expensive than the fixed-fee model, depending on the number of advances the user takes, the size of the payments made, and consumer choice.
What Comes Next?
What can we learn about consumer needs by continuing to observe usage?
Understanding how regular usage may reflect factors like income gaps (when expenses exceed income) or other financial challenges would be informative. Similarly, it would be informative to see the extent to which EWA and D2C Advance reduce the need for consumers to rely on more costly products, especially those which have been shown to lead to a cycle of indebtedness
What can we learn about recoupment practices?
Future research could explore how recoupment practices impact other payment choices that a consumer makes. Insight into occurrences of consumers delaying a payment or stopping a payment could help shed light on how often consumers make use of these options.
What are the real costs of these products for workers' wages?
Future research could compare wage data to costs and explore how much wages are ultimately reduced over the course of using EWA and D2C Advance.