In 2020, the ability to access your income as you earn it has shifted from a nice benefit to have to an essential one. Amid the global health crisis, the antiquated way employees have been paid for decades is changing thanks to advancements in technology. With a surge in on-demand pay providers, government agencies are weighing in on which models are optimal for consumers.
On November 30, the Consumer Financial Protection Bureau (CFPB) finalised its advisory opinion process and simultaneously issued its first advisory opinions, including one which concerned Earned Wage Access (EWA). The advisory opinion process, similar to a private letter ruling from the IRS or a no-action letter from the SEC, is specific to a certain set of facts and circumstances, and each opinion has narrow applicability.
In the EWA opinion, the CFPB explains how a new technology called Earned Wage Access, by enabling workers to get paid as they earn money, rather than wait weeks at a time for their employer-scheduled payday, has provided a critical and more consumer-friendly alternative to payday loans and other predatory alternatives.
On December 30, 2020, the CFPB issued a follow-up order in response to its November 30, 2020 EWA advisory opinion, which provides guidance on certain earned wage access (EWA) programs. AS a matter of fact, the Consumer Financial Protection Bureau on Dec. 30 issued two compliance assistance sandboxes: one for dual usage credit cards and another for employee access to earned but unpaid wages. CFPB compliance sandboxes provide a safe harbor for banks to test products or services that have been approved by the bureau.
One of the Earned Wage Access providers (Payactiv) received a compliance sandbox for its program that facilitates employee-requested transfers of wages that an employee has already earned, capped at no more than 60% of the accrued cash value of the earned wages.
Under the CFPB policy, EWA providers had the right to request clarity on specific points that deal with regulatory uncertainty. Because the Bureau’s November 30 opinion identified specific at-risk models that might be considered extenders of credit, this provider requested a review of their at-risk set of facts. This was the reason PayActiv requested this follow-up order, because it was at risk of being deemed non-compliant with the CFPB’s initial advisory opinion on earned wage access.
The opinion does not grant any approval of the specific model itself. In fact, the CFPB follow-up order states that the “Approval Order does not constitute the Bureau’s endorsement of the PayActiv EWA Program or any other product or service offered or provided by PayActiv.”
DailyPay has never required any form of employee payback, debiting or payroll deduction that would implicate the extension of credit. The November CFPB opinion and the December CFPB EWA Approval Order were narrow issuances of guidance, to provide clarity around which practices of other providers are problematic. Particularly, the December order notes that wage deduction programs still face restrictions and prohibitions under state wage and hour laws. The safe harbor under the order excludes this key risk. Providers with wage deduction methods can expose their partner employers to this and other legal risks, and are not covered for these risks under the November opinion or the December order. Furthermore, employers relying on wage deduction-based programs must now contend with additional restrictions and concerns regarding this practice.
On 11/30/2020 the Consumer Financial Protection Bureau (CFPB) issued an advisory opinion regarding certain types of earned wage access (EWA) providers. In the document, the CFPB also provided an opinion on a legally ambiguous form of earned wage access that requires an employee to repay advances from a vendor.
In the opinion, the CFPB indicates that programs that require an employee to pay back an on-demand transfer via a payroll deduction and charge fees may be considered extensions of credit. The CFPB has noted that there is no extension of credit in the case of wage deductions only if there are no fees or other restrictions. As noted, DailyPay’s proprietary technology and use of the Non-Payback Model do not and have never relied on employee payback of funds via a payroll deduction or debiting of bank accounts (the CFPB’s analysis only clarifies information around these models — our model is and has always been in full compliance).
By way of background, there are two types of on-demand pay models. The difference between the two is the presence or absence of an employee-directed payback, i.e., an employee obligation to repay.
How Does the Opinion Apply to DailyPay?
The CFPB opinion does not apply to or impact DailyPay’s model, as DailyPay does not require any form of employee payback. As such, it does not require DailyPay, or any of its employer partners, to make any changes in response to the opinion. The opinion does not provide an “approved” or “endorsed” model. Its sole purpose is to clarify a legally questionable model used by some providers in the marketplace, solely from a federal consumer finance perspective.
Why is it that those with the least wealth are often required to front the money for the essentials needed to perform their jobs?
That’s a question that struck me one night when ordering pizza. At the time, I was working as a financial engineer on Wall Street. As I folded my slice in half, I started chewing over an idea. Low-wage workers like pizza delivery drivers — who are essential to our economy and lifestyles, as evidenced by the COVID-19 pandemic — are expected to not only have enough money to sustain themselves and their families but also to front the costs of gas, car insurance, repairs and auto registration.
But it doesn’t have to be this way. Our outdated payroll system wasn’t designed to address the needs of today’s employees. An on-demand pay model, however, can give employees access to earned income, ultimately enabling them to change their socioeconomic status — while improving the bottom line for employers.
Understanding the debt cycle
Due to the nature of the biweekly pay model, workers are required to work for weeks without pay when they start a new job — and they typically must pay for certain essentials and supplies from their own pockets while they wait for their first paycheck. Because they often lack significant savings, this system negatively impacts low-wage and entry-level workers the most.
Restaurant cooks must pay for the public transport or gas required to get to their jobs, in addition to chef’s shoes and other necessities. Teachers are too often tasked with paying for their school and cleaning supplies. Even entry-level white-collar workers must purchase corporate wardrobes, and interns are often asked to use (and therefore pay for) their own laptops.
Any CDO or CTO knows that an evolving tech stack is a key to providing business advancements that improve the company’s bottom line. In today’s HRIS environment, resources are often stretched, so innovation is in great demand. DailyPay delivers on that challenge by offering a full-service on-demand pay platform that reduces turnover, increases productivity, and enhances employee satisfaction, all at zero cost to companies. Through on-demand pay, companies have the potential to save millions of dollars a year without having to change their payroll system.
After implementing DailyPay, companies have found that their turnover rate decreased by 45%, while 56% of their employees were more motivated to pick up additional shifts. With DailyPay’s real-time earnings tracking technology, employees can access up to 100% of their earned pay anytime, so they can pay their bills on time without resorting to predatory loans and overdrafts. As a full-service provider, DailyPay facilitates early pay transactions for millions of workers and produces valuable insights that impact how over 80% of the Fortune 500 companies offering on-demand pay run their business.
2020 has been an incredibly challenging year for all of us. One meaningful takeaway that we collectively learned during the global health crisis is to appreciate the efforts of everyday workers. From the nurse putting in 16-hour days to the grocery clerk doing a double shift, we acknowledged that our heroes don’t all wear capes. Back in January, right before the COVID-19 pandemic hit us, an article written by the CEO of JUST Capital Martin Whittaker caught my attention. This article was all about raising awareness of employees’ financial struggles, and I was excited to see initiatives that PayPal implemented to help their financially stressed employees.
Today, I’m really encouraged to see PayPal CEO Dan Schulman take a stand in support of the American Worker by offering his employees on-demand pay.
The news that PayPal is implementing an on-demand pay benefit is not surprising as it fits right in with the fact that many fintech CEOs have a long history of being champions for supporting the financial wellness of employees. Those initiatives include everything from lowering their healthcare costs to increasing pay to creating educational programs on financial planning and health.
How can FinTechs and Payroll Providers Enable Better Capabilities to Help Employees Manage and Access their Earned Pay
There have been countless variables for how the “new normal” is impacting this subsector of FinTechs. Digital acceleration has taken place in telehealth, insurance claim scanning, contactless payments and now on-demand pay. Specifically, on-demand pay ensures employees feel safe and empowered with these new digital experiences, including instant-pay apps on mobile devices.
Why on-demand pay, though? The current bi-weekly payroll cycle has failed to timely and financially cover employees’ necessary and unexpected emergency costs. COVID was an awakening for businesses to abandon the antiquated payroll process and migrate to a digital, contactless pay solution which provides employees access to their earned pay and eliminates the typical two-week wait time until payday. Speed and safety are prioritized through digitization which ends up saving everyone valuable time and money. If you can change the cycle of payments — and make the money earned available when it is needed — you can remove the financial stress of waiting.
DailyPay has emerged as a vital part of the tech stacks of the majority of leading brands in the U.S., saving them a significant amount of money each year. Many restaurant chains, large and small, struggle with employee retention. But, with DailyPay’s on-demand pay ecosystem, DailyPay partners have seen as high as a 72 percent reduction in turnover rates and have saved millions of dollars. According to a recent study, 56 percent of employees have been motivated to pick up more shifts after having access to an on-demand pay solution and 1 in 6 now seek a job with an on-demand pay benefit.
DailyPay, a recognized gold standard of the on-demand pay industry, has been named winner of the 2020 QSR Applied Technology Awards Crew-Facing Category. The award speaks to DailyPay’s unwavering commitment to providing first-class full service to seven of the top 10 restaurant chains in the U.S including and more.
The global pandemic was a wake-up call for companies nationwide. It was a time of realization for antiquated business processes. On the top of the list was “pay.” Not just the delivery of it, but the entire pay experience. And within months, we saw employers of all shapes and sizes adopting a new way to pay called on-demand pay (and sometimes earned wage access). And once they offered this benefit, these businesses realized reduced turnover, increased productivity and a more engaged, satisfied and financially secure workforce.
One expansive effect of this health crisis is the realization that life happens between paydays — especially when faced with needing cash to buy medicine, food or other necessities. It is no longer a viable option to expect your employees to wait every two or even four weeks to have access to the money they’ve earned.