Tanvi’s Take: Earned Wage Access has Proven its Success, and There’s More Coming 🚀

Introducing Earned Wage Access (EWA)

EWA lets employees access wages they’ve earned before their scheduled payday. So instead of being paid on a bi-weekly or monthly cycle, employees can access their wages daily, weekly, or even on-demand. For 78% of Americans who live paycheck to paycheck, real-time access to earned wages could be a gamechanger. Beyond the potential social impact, 25% of payroll professionals said that EWA is critical to improving the employee experience. Amidst today’s Great Resignation and the war on talent, an optimal employee experience is paramount.

I don’t hear too much buzz about EWA, likely because it’s rather unsexy (if tax withholdings, payroll software, and regulation don’t scream fun I don’t know what does). BUT, as I like to say…

The more boring something is, the more opportunity there is.

EWA is a $12.2B opportunity that’s about to get much larger as it graduates from the hourly workforce and gets into salaried employee wages. And if this piques your interest, make sure to check out my previous blog post about compensation and benefits more broadly!

What’s the Deal With the Bi-Weekly Pay Period?

The bi-weekly pay period has roots in our country’s taxation laws. When universal income tax was extended to the entire working class in 1942 (mid-war!), companies needed to create a structure to deduct taxes from wages and send those taxes to the Treasury. The manual processing and check-issuing took time, and it was more efficient for companies to do this monthly or every other week, rather than weekly or daily.

When we think about this history from an employee experience lens…clearly the process was designed for companies and the government rather than for employees. There’s even an argument to be made that bi-weekly pay periods essentially give employers 0% loans from employees (woof). This is the problem EWA companies are trying to solve.

Breaking it Down

So — how exactly does EWA work? There are a few business models currently out there:

• B2B Model (Dailypay, Even, Payactiv, Clair, Branch, Rain): these companies integrate with employers’ payroll systems, assess how much an employee has worked, calculate tax withholdings, and provide the cash upfront to employees from their own balance sheet. They are then later reimbursed by the employer. Fees for this service, about $2 — $5 per transaction, are either covered by the employer or passed to the employee.
• D2C Model (Earnin, Dave, Pull): here, companies don’t go through employers and instead liaise directly with employees. Individuals connect their bank account to the service and access post-tax earned wages before payday. When the paycheck hits, the EWA company deducts the amount an individual accessed. Fees are covered by the individuals (though some like Earnin like to brand these as “tips”).
• Debit Card / Wallet Model (Instant, Branch, Payactiv, Flexwage, Wisely): wages are sent to a linked debit card that employees have access to. Notably, these programs are paid through debit interchange so there are no fees to employees or employers!

To EWA or Not?

There is no denying that the financial wellness of Americans during and post-pandemic isn’t great:

• Payday lenders raked in record profits in 2020
• Overall debt was up almost 5% from 2019 to 2020
• Overdraft fees hit a record in 2021
• 1 in 4 employees has been distracted at work by personal finance issues
• Over 25% of adults would not be able to pay their monthly bills if they were faced with an unexpected $400 charge

There is potential for EWA is to address the financial wellness of the hourly workforce.

• Access to real-time wages could reduce mental stress related to money and help individuals deal with unexpected financial expenses. Employers, in turn, benefit from increased retention and less distracted workers
• According to Dailypay, employees could save up to $1,205 annually on average with access to earned wages as a result of avoided overdraft fees, late fees, and interest on payday loans (but yes, Dailypay may be biased)
• According to Earnin, 92% of consumers who used EWA services said it helped them achieve one of their financial goals in 2020 and 82% felt less stressed about their financial situation (Earnin, too, may be biased)

However, not everyone is sold. The National Consumer Law Center (NCLC) calls EWA services “just a kinder version of payday loans.” D2C models, in particular, could trigger overdraft fees if the consumer doesn’t have enough in their bank account to cover the early access wages. The NCLC is pushing for EWAs to be treated as credit products, and sharply criticizes the fees that some EWA services charge (which could add up to $432 a year).

EWA: The Future

Despite burgeoning regulatory issues, I’m bullish on EWA. It’s solving a genuine customer pain point and has the potential to do a lot of good. Here are my thoughts on the future of EWA:

• B2B models will win: regulatory issues point primarily towards D2C models vs B2B models. The B2B models are less risky from the EWA provider’s perspective and have the potential to reach a larger audience. I’m particularly bullish on the B2B debit card model — which doesn’t charge the employee for the service and protects them from overspending.
• EWA solutions for small & medium businesses are next: the EWA firm that can tap into the SMB network will win. Sure — the scale and distribution from Fortune 500 companies have already made Dailypay and others successful, but there is still an untapped market of hourly workers within the SMB space (particularly in industries like restaurants, hospitality, and retail, which benefit the most from EWA).
  Square recently launched this feature in 2020, and I just saw that Gusto has a debit card EWA solution. Given their SMB networks, they may reign but I’d love to see some competition!
• Incumbents will start to join the fun: as this space continues to gain traction, I expect to see similar products launched by incumbents. In fact, Visa, Gusto, and payroll provider Ceridian already have EWA solutions, and Ceridian’s solution is expected to add at least $500M in incremental revenue by 2026! Acquisitions are also likely, either by big financial firms or payroll providers.
• Payroll APIs will pose additional competition: as firms like Zeal and Arglye continue to scale, they are a hop skip and jump away from providing an EWA service on top of their existing payroll APIs. EWA providers need to think about how they differentiate themselves above and beyond simply providing the service

Currently, just 5% of large US companies (NOT inclusive of SMBs) provide EWA, and that number is expected to jump to 20% in 2023. Expect to see more about this in the next few years🚀

Thoughts? Feedback? I’d love to hear them — please comment!

PS in case you’re a history nerd like me and would like to learn more about the history of the bi-weekly pay period, I recommend this quick 10-min podcast.