Many people across the U.S. have found themselves in situations where they needed some additional cash to reach their next paycheck.

In the past, many turned to high-interest payday loans or pawn shops requiring collateral, but there’s now a newer option known as “earned wage access” (EWA) for those encountering surprising bills.

Also referred to as early pay, on-demand, or instant pay, EWA permits workers to access the money they’ve already earned early, without falling under traditional loan regulations. To receive your funds quicker, you might pay a small fee, typically just a few dollars, and can opt to leave a discretionary “tip” for the service. Major employers like McDonald’s and Walmart promote EWA as a perk, as processing many individual requests themselves would be challenging. Therefore, they collaborate with third-party firms to handle the process, according to financial specialists.

However, the fees and optional tips have raised concerns, particularly as they can accumulate significantly for vulnerable consumers. In response, the Consumer Financial Protection Bureau (CFPB) is considering implementing disclosures akin to loans for these fees and is collecting feedback from the public until Aug. 30.

Marshall Lux, a senior fellow at Georgetown University’s Psaros Center for Financial Markets and Policy, remarked that this approach resembles “payday lending on steroids,” referencing his research that examines the topic in the report titled “Earned Wage Access: An Innovation in Financial Inclusion.”

What changes might occur with the CFPB’s plan?

Under the proposed guidelines, EWA fees and tips could be regarded as “finance charges,” which would need to be disclosed accordingly, according to the financial protection bureau.

For instance, the bureau found that employees took an average of 27 loans annually with each averaging $106. If fees were presented as an APR, the average rate associated with EWA cash advances via employers would equate to 109.5%.

A study from the California Department of Financial Innovation and Protection in 2021 indicated that the mean annual APR exceeded 330% across nearly 6 million EWA transactions.

If the fees and tips are categorized as finance charges, this would reverse a 2020 directive stating that employer-sponsored EWA “does not encompass the offering or extension of ‘credit.’” Specific guidance regarding third-party providers that directly offer this service to consumers through apps or websites when not provided by employers remains unclear.

The U.S. Treasury’s budget proposal for fiscal year 2024 aims to clarify tax categorizations that “on-demand pay arrangements are not loans.”

Why is this significant?

According to Phil Goldfeder, CEO of the American Fintech Council representing various EWA providers, many states enforce limits on interest rates lenders can implement.

“If considered a fee, then there’s no issue,” he explained. “But should the CFPB rule it as a loan, a fee of $3.50 could push the interest rate beyond state-set caps. This would leave companies either unable to offer EWA in those states or modifying their products, potentially increasing costs.”

The CFPB estimates that EWA transactions escalated by over 90% between 2021 and 2022, with upwards of 7 million workers utilizing approximately $22 billion in 2022.

Goldfeder asserted, “CFPB is, in an attempt to protect consumers, actually causing harm to millions of consumers.”

What’s the public perspective?

Feedback submitted to the bureau has shown a mix of opinions, with more than 100 comments recorded.

For instance, Jo Bug expressed: “I utilize this service 50 times a year because without it, I wouldn’t manage to survive. I have almost $10,000 in medical debt affecting my credit score, and even secured credit cards are out of reach for me. How does the CFPB expect individuals like me to get by if they eliminate this option? I’ve never tipped, and I can’t afford to start now; my pay is $21 an hour, and I consistently work 10 hours of overtime weekly.”

Conversely, Tammy Hall from South Carolina shared her concerns regarding her family members earning less than $40,000 a year, who used EWAs and encountered more financial strain.

“Emergencies like car repairs or unexpected medical expenses force them into borrowing against their paychecks,” Hall shared. “Subsequent fees then reduce their paycheck, and there’s no money left for gas to commute or groceries for their kids. It’s a predatory scheme that harms families, taking advantage of those who are already struggling, and the cycle of borrowing only continues. This kind of lending should not be tolerated.”

Are there other alternatives for Americans?

Rick Miller, a financial planner and advisor from Miller Investment Management, suggested

Here are some options to consider:

• If your workplace is a smaller one, consider directly requesting an advance from your employer: “Many smaller companies might offer you an advance, whether it’s in cash or half your salary.” These companies are often more flexible, and you may find there are no additional fees.
• Consider a cash advance from a credit card: “You might encounter some fees and interest if you don’t pay it back within 30 days, but it lets you maintain control of the situation.”
• Utilize 0% interest credit cards, provided your credit rating is “fairly good.”
• If you own your home and have equity built up, think about opening a home equity line of credit: “It’s a straightforward method to acquire a small amount of cash that you can pay back at your convenience, with no fees or penalties, although you will need to pay interest. Depending on your repayment speed, even a 20% annual interest rate can be manageable when spread out monthly.”
• Explore a small credit line offered by a credit union: “This option usually has minimal fees involved.”

Keep in mind, the most important aspect of these financing choices is the need to repay them promptly. By paying back the amount within six months, you also have the added benefit of potentially boosting your credit score, he noted.