While the Consumer Financial Protection Bureau’s (CFPB) recent interpretive rule on earned wage access (EWA) products has generated plenty of interest, Jason Lee believes history will view it as a small, but inevitable step towards its logical conclusion – zero-fee products. Lee is the founder and former CEO of Daily Pay and Salt Labs, and Chime’s chief of Chime Enterprise following its recent acquisition of Salt Labs.
On July 18, the CFPB proposed an interpretive rule stating that many earned-wage products are consumer loans subject to the Truth in Lending Act. As lenders, EWA providers are obligated to disclose costs and fees.
“Paycheck advance products are often marketed to and designed for employers, rather than employees,” said CFPB Director Rohit Chopra. “The CFPB’s actions will help workers know what they are getting with these products and prevent race-to-the-bottom business practices.”
“In recent years, workers have seen big increases in wages, but junk fees and high rates on financial products not only chip away at these gains – they take advantage of workers,” added Acting Secretary of Labor Julie Su. “As part of the most pro-worker, pro-union administration in history, here at the Department of Labor, we proudly support efforts by the CFPB to guard against predatory lending in the workplace.”
The CFPB acknowledged that EWA could be offered fee-free but noted that some products come with hits for expedited service, subscriptions, or “tips.” It analyzed 2022 data from eight companies that partnered with employers to offer EWA. Together, the group represented just under half of the employer-partnered market.
More than 90% of workers paid at least one fee when employers didn’t cover costs; 92.5% of fee revenue was for expedited service (the average fee was $3.18). Monthly subscription fees were as high as $14.99. The average worker took out 27 “loans” per year that averaged $106 per. The CFPB said the APR for a typical employer-partnered EWA advance is 109.5%.
“The market for employer-partnered paycheck advance products is growing rapidly,” the CFPB said. “The CFPB estimates that the number of transactions processed by these providers grew by over 90% from 2021 to 2022, with more than seven million workers accessing approximately $22 billion in 2022.”
What employers and companies are saying
General industry EWA buzz centers around the next president and their influence that the CFPB is not a rule-making authority, any rule can take a long time to enact, and the legislative process.
Lee said most companies and employers are paying little attention to the CFPB announcement. They see the market moving to a zero-fee standard. They’re happy about that because they don’t like charging fees in the first place.
“The dialogue has shifted from if this happens to when it happens,” Lee said. “For employers, it’s all about preparedness. They don’t want to be caught flat-footed.”
With estimated adoption rates of around 40% EWA is an accepted part of the marketplace. Employers have heard some tell them it’s not a loan, but that’s mostly irrelevant. They don’t want any surprises and expect providers to pivot to 0%. Lee likened it to Y2K. Many complained, but it was coming regardless of what they said.
A long overdue innovation opportunity
Lee is also confident that entrepreneurs will find ways to innovate when they reach this fork in the road. That’s long overdue, anyway.
“The space has not innovated in the last seven years,” Lee said. “Plato said our needs become our greatest creator, and it’s like that.
“The industry has to adapt, and whether you like it or not, employers… want to find a way to offer this really cool, important benefit, but without it, costing my employees something. That’s where the dialogue has shifted.”
Lee anticipates the industry figuring it out. We’re in a similar spot to compact discs in an iTunes and Spotify world – there’s no going back.
Expect the banks to be front and center
One key player will most likely be the one it’s always been: the banks. EWA is all about the balance owed, and who can better track that than them?
I believe banks will ultimately ingest employment data to create these balances because, at the end of the day, it’s just a balance of money, and the bank’s job is to always reflect the most accurate amount of money that is yours,” Lee said. “On-demand pay and EWA is just money, and the party that is most responsible or most well-positioned to deal with money is the bank, and I think the bank will start to be the one that offers this.”
The Chime/Salt Labs union
Lee said Chime’s acquisition of Salt Labs is all about two companies working toward the same ideals. Chime is attracted to innovations that help historically non-savers to save, and Salt Labs does that.
While Chime is direct-to-consumer, Salt Labs focuses on enterprise customers. This will allow Chime to offer employer-focused holistic wellness services. Connecting bank account and employment data offers exciting opportunities to create value stores.
Lee said Chime stands out in a world of single-point solutions that focus on niche services that only attract a smaller percentage of many workforces.
“The opportunity we have at Chime is we offer (roughly) 25 different solutions for employees, all through one integrated app. Bill payments, auto loans, great. We have that, and that’s a very, significant value proposition.
“It’s something for everyone, regardless of where they are in their journey.”
