Earned wage access is a way to get wages that you’ve earned before your scheduled payday. A true earned wage access program is set up by an employer through a trusted third-party company.
Don’t confuse earned wage access programs with early wage access and similar services like cash advance apps. “Early wage access” is a more general term that some use interchangeably with earned wage access. However, others use it to indicate loans against future earnings like those offered by cash advance apps.
Here are some more things you should know about earned wage access.
What Is Earned Wage Access?
An earned wage access, or EWA, program is one set up by an employer to allow employees to tap their next paycheck before payday. As the name implies, workers can access only the money they have already earned. So halfway through a pay period, it should be possible to receive half of the amount that would be due when salaries are next paid.
Employees can only get earned wage access if their employer has implemented a program. Those whose employers haven’t are left with early wage access services and cash advance apps, which are indisputably loans and can be costly forms of borrowing.
How Earned Wage Access Works
An employer signs up with a third-party EWA provider and alerts employees that the service is available. Only those who wish to participate need to enroll.
Payments can be received as often or as rarely as the employee chooses, and the amount received will be automatically deducted from the next paycheck.
With many EWA providers, this service is free to the employees who are prepared to wait the standard time it takes for an ACH transfer to arrive in their accounts, which is often 1 to 3 business days.
Only those who need their funds more quickly have to pay, and then the cost is nominal. The Consumer Financial Protection Bureau reports that EWA providers charged an average fee of $3.18.
“While employers can often make these fee-free, some of these products can come with fees for expedited service, subscriptions, or requested ‘tips,'” says the CFPB. It’s worth employees familiarizing themselves with the possible costs for using these services. Even seemingly modest fees for expediting payments can add up to a significant amount if one accesses earned wages frequently.
Some providers offer a Visa or MasterCard prepaid card to which transfers can be made instantly at no charge. However, these can come with fees for things like out-of-network ATM use, outbound instant transfers and foreign transactions.
How to Apply for Earned Wage Access
First, you must make sure that your employer offers earned wage access. To use an EWA service, you have to download an app on your smartphone or tablet. These are typically intuitive and easy to use, making requesting earned wage access straightforward each time an employee needs funds.
These transactions are entirely free unless you need the money immediately. Only then is an expediting fee charged.
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Is Using an EWA Program a Good Idea?
There’s no doubt that EWA programs are popular. According to the CFPB, the average EWA transaction in 2021-2022 ranged from $35 to $200, with an overall average transaction size of $106, and the average worker accessed $3,000 per year.
“While EWA offers clear benefits, there are potential risks to consider,” says Tamanna Ramesh, founder of Spark Careers. “One concern is the possibility of employees becoming reliant on early access to wages, which could undermine long-term financial stability if not coupled with financial education.”
Even in best-model cases where the only costs are for expedited payments, fees can add up for frequent EWA users. The CFPB says that workers using these employer-sponsored products request early paycheck access an average of 27 times per year. It characterizes EWA transactions as “paycheck advance” products or “loans” and recommends that employees receive standard truth-in-lending disclosures explaining the potential costs.
Some EWA providers disagree. “EWA does not have the hallmarks of a loan — no origination fees, no consumer credit checks or approvals, no applications or underwriting, no risk-based pricing, no interest or charges based on the time value of money, no late fees, no reporting to consumer credit agencies and no recourse to the consumer,” says David Schwarz, a spokesperson for EWA provider DailyPay.
The CFPB says 90% of workers in its study paid at least one EWA fee, and that the APR for a typical employer-partnered earned wage cash advance is 109.5%.
However, Schwarz disputes that. When the CFPB’s report was published, his company issued the following statement: “Characterizing employer-integrated Earned Wage Access products as loans or credit displays a fundamental misunderstanding of what we do,” adding that EWAs keep “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.”
And EWA users seem to agree. When the Financial Health Network interviewed a small number of such users in December 2023, it concluded that most “had positive experiences with EWA, did not have any issues with their account, and plan to continue using it.”
Is Dependency a Problem?
Still, there is a danger of people under financial stress using EWA as a bandage to cover a deeper wound that needs more radical intervention. Consider that employees who get paid bi-weekly receive 26 paychecks per year and those paid semi-monthly receive 24. If EWA users are using the service 27 times a year on average, that’s a lot of reliance on early access.
Some believe that EWA creates a level of dependency that could lead to more chaotic financial lives. “Businesses should remember that while EWA helps address immediate financial needs, it should not replace the need for fair wages, comprehensive benefits, and other long-term solutions to ensure the economic security of all employees,” Ramesh says.
Pros and Cons of Earned Wage Access
Pros
— EWA is a generally free service that can help hard-pressed employees avoid late fees, overdraft costs and payday lenders.
— Expedited service charge is much lower than fees for bounced checks or payday loans.
— There are no credit checks, credit applications, late fees or reporting to consumer credit agencies.
— With 37% of respondents telling the Federal Reserve in 2023 that they could not cope with an unexpected $400 expense, there is clearly a significant need for free or affordable ways to smooth out household budgets.
— Some EWA providers offer free financial wellness tools within their apps that could help users achieve greater stability.
Cons
— The bandage effect. EWA can mask deep-seated financial problems that need more long-term solutions.
— Over-dependency. On average, EWA users access funds roughly once in every two-week pay cycle. That frequency suggests too many people have come to rely on these programs, potentially making their financial lives more chaotic.
— Programs are only available to those whose employers have implemented an EWA solution.
— Charges for expedited access and other services translate to an APR exceeding 100%.
Cons that relate to the charges for expedited access and other extras don’t apply when employees use free services.
Earned Wage Access or Cash Advance App: What’s Better?
Earned wage access and cash advance apps (aka payday advance apps) are very different beasts. As already established, EWA does not provide loans; it gives employees access to money that’s already theirs. However, those who want faster access or other services generally pay for the privilege.
Cash advance apps, on the other hand, are definitely short-term loans against future earnings — typically, your next paycheck Their fee structures vary widely, with some being available for free to banking customers, others requiring a monthly subscription and the rest charging on a per-transaction basis.
Those whose employers have yet to adopt EWA may find themselves turning to cash advance apps. But those who can use earned wage access will likely prefer to stick with it.
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What Is Earned Wage Access and How Does it Work? originally appeared on usnews.com
