CA proposing to define employer on-demand pay as payday loan

CALIFORNIA – The California Department of Financial Protection and Innovation (DFPI) will soon decide if earned wage access (EWA) or on-demand pay will be defined as a payday loan.

Consumer advocate groups are concerned that DFPI’s plan might stifle new ideas and take away a useful financial option for people.

EWA is a growing practice

According to Critchfield, Critchfield & Johnston, a recent survey of mostly lower-income workers found that 60% of respondents stated that they had used a third-party EWA app to get a cash advance.

EWA is a company benefit that allows employees to receive part of their paycheck before payday. Companies like Walmart, Amazon and McDonald’s offer EWA as part of their benefits in efforts to recruit and retain employees.

EWA services don’t charge interest and consumers have no legal obligation to repay an advance. Customers can cancel the service at any time without penalty. The funding fee can range from $3 to $10 per request and the money is received within a day or two.

“Employees want pay flexibility so they can take care of bills on time, avoid overdraft fees, and manage their finances with confidence,” said Financial Technology Association (FTA) CEO Penny Lee.

Survey says food purchase is most popular use of EWA

According to a national survey of nearly 5,000 national EWA customers, 92% felt that the service helped them to achieve at least one of their financial goals in 2020, which were to pay bills on time, avoid overdraft fees and payday loans, and become less dependent on credit cards.

Purchasing food and groceries is the most popular use of earned wage access (52%), followed by avoiding fees (44%) and paying utility bills (40%).

In addition, 91% said they understand how the service works and 89% said they understand the associated fees.

Proposed regulations defines EWA as payday loan

FTA expressed support for the development of an EWA registry that would bring providers into a regulatory framework and allow the DFPI to learn more about how EWA products serve the needs of Californians.

However, FTA says that in developing a registration framework, DFPI should not and need not define EWA products as credit or loans.

“An unnecessary determination regarding the credit status of EWA products will create harmful precedent and further confusion across state and federal regulation,” said a May 2023 FTA letter.

The association argues that when an innovative product is working well for consumers – and not subject to widespread complaints – it is proper for a regulator to proceed cautiously before taking measures that may inadvertently impede or alter the well-functioning market.