Startups that offer quick access to worker wages are scrambling over key aspects of pending California legislation that would create the nation’s first-ever regulatory framework for the nascent industry.
The state Senate passed a 35-0 bill last month, but interviews with executives in the fast-growing sector revealed big disagreements over the legislation. These disputes reflect key differences in the business models of their companies.
The proposed rules should help businesses in general by making it clear that their products are not loans. Companies charge a fee to access income that workers have already earned, but have not yet received due to lags in the payroll cycle.
Many companies partner with employers, who offer the products as a benefit to employees. But since it’s unclear today whether financial regulators view these companies as lenders, their business models can sometimes be hard to sell to U.S. companies. Pending legislation would solve this problem in the country’s largest state.
“In the absence of regulation, there is just a lot of uncertainty and concern,” said Frank Dombroski, CEO of FlexWage Solutions.
Earned Wage Providers offer a new option for American workers who do not have a large enough financial buffer to cover irregular expenses. In a 2017 Federal Reserve survey, four in 10 American adults said they would be unable to cover an expense of $ 400 without borrowing or selling something.
Fees in the industry can vary widely, depending on the provider and how often the consumer uses the product, but it is generally accepted that these companies offer a better option than payday loans and overdraft fees.
An article published last year by researchers at Harvard Kennedy School found that a $ 200 payday advance from one of the industry’s leading companies cost one-sixth the amount of a payday loan and one seventh of the usual overdraft fee.
As the California Assembly prepares to hold hearings on the legislation, some of the companies reportedly concerned seek to relax its consumer protection provisions, arguing that the proposed rules would limit the number of workers in need of money. that they can serve. Consumer advocates are trying to push legislation in the opposite direction.
There are also divergent views on the bill’s treatment of some companies that bypass employers and offer funds directly to consumers, which would be placed under the same regulatory umbrella as companies that partner with employers. Meanwhile, at least one early access provider is outraged at what it sees as the outsized influence of San José, Calif., Based PayActiv, which has spearheaded the campaign for legislation.
Industry officials are pressuring Sacramento lawmakers to pass a bill this year. If the legislation is passed, analysts say the state framework will likely be adopted elsewhere.
“You would think that if California passed a bill like this, it could serve as a model for other states,” said Leslie Parrish, senior analyst at Aite Group.
In an April report, Parrish estimated that U.S. employees accessed their wages early 18.6 million times last year. The workers received an estimated total of $ 3.15 billion, which works out to an average of nearly $ 170 per withdrawal.
“This emerging market is poised to experience exponential growth,” the report says, “as solution providers increasingly partner with large employers as well as benefits and human resources platforms. “.
The legislative push in California began after the Department of Business Oversight, which regulates financial institutions, last year investigated companies that offer early access to earned wages, according to two people familiar with the matter.
Democratic Senator Anna Caballero introduced the legislation, but PayActiv is listed as its sponsor. Unlike many other states, bills in California can be sponsored by corporations, unions, and other interest groups.
The legislation includes provisions that seem likely to give PayActiv a head start over some of its competitors.
For example, the bill would set a limit of $ 14 on the monthly fees that can be charged, and it would prohibit providers from remitting funds more than three times during each payment period. It would also prevent consumers from withdrawing more than 50% of their unpaid income.
PayActiv charges users a flat rate of $ 5 for pay periods of two weeks or more, and a flat rate of $ 3 for weekly pay periods, according to an analysis prepared by the California Senate Judiciary Committee.
The company caps the amount of unpaid income a consumer can withdraw at 50%, although a source familiar with the situation said PayActiv uses a different method of calculating wages than what the legislation contemplates.
One of PayActiv’s competitors is DailyPay, based in New York.
DailyPay allows workers to access their earned but unpaid wages on a daily basis and has no cap on the amount they can use.
DailyPay said in comments to the California Legislature that the bill is drafted in a way that protects a company’s business model. The company pointed out the 50% limit to access earned income and the $ 14 per month fee cap, among other examples.
A source close to DailyPay’s arguments said the proposed pricing rules could limit the ability of early wage providers to work with smaller, less creditworthy employers, as these companies are more likely than large companies to shut down and to avoid their salary obligations. .
In its analysis of the bill, the Senate Judiciary Committee said: “The criticisms that these limitations reflect the business model of PayActiv, the sponsor of the bill, are not unfounded.
PayActiv’s chief operating officer, Ijaz Anwar, said in an interview that his company does not control the legislative process.
“We started the process,” he said. “But once that was done, it was a collaborative effort.”
The current version of the legislation is also facing criticism from consumer groups, who want tighter limits on fees and usage. In an April letter, the Center for Responsible Lending, the National Consumer Law Center and the Western Center on Law and Poverty cautioned against the risk of unscrupulous actors exploiting certain provisions.
Consumer groups argue that early access to wages can lead to “a hole in the next paycheck, which can create future problems and addiction to chronic use.”
The groups argued that California credit law exemptions should be limited to products that charge no more than $ 5 per month. They also demanded that access to first salaries be limited to six times a year. Under the bill, a worker could spend up to $ 168 per year in fees.
“While early access to an income can help a worker cover an unforeseen expense that he cannot handle with the last paycheck,” the consumer groups wrote, “the result is a hole in the next. paycheck, which can create future problems and a reliance on chronic use of early access to pay.
Consumer groups also want to add wording to the bill requiring earned income service providers to be licensed by the Department of Business Oversight, which would not have oversight and enforcement powers in the current version.
Ministry spokesman Mark Leyes declined to comment on the legislation.
Some industry representatives have argued that, contrary to the views of consumer groups, the Bill’s limits on fees and usage are too strict.
ZayZoon President Tate Hackert said his company currently allows users to access 50% of their earned salary, but he wants to increase that limit.
“I think low-income people can suffer from it,” Hackert said, saying the legislation should allow workers to access 70% to 80% of their earned but unpaid wages.
Another big sticking point in Sacramento is the status of companies that offer early access to unpaid wages, but do so through direct relationships with consumers, rather than by logging into employer payroll systems.
Because employers are not directly involved in these transactions, the advances must be repaid by the consumer, instead of being deducted from the employee’s next paycheck.
As a result, vendors must align with other billers at the end of the payroll cycle, and they face a significantly higher risk of loss than companies that partner with employers.
Companies that use the direct-to-consumer model include Earnin, which allows its users to cash out up to $ 100 per day, and Dave, which offers cash advances of $ 5 to $ 75.
Under the California bill, these businesses would be treated the same as businesses that partner with employers. Neither of these business models would be considered to provide credit to the consumer.
In an interview, Dave’s CEO Jason Wilk expressed his support for the legislation.
“I would say it’s still a work in progress, as far as we know. But overall, we are supporters of regulation in this space, ”Wilk said. “As long as we can get regulation in a major state like California, that’s helpful. “
But consumer advocates and at least some of the companies that work with employers argue that companies that serve consumers directly should not be exempt from loan laws. They argue that if the consumer has an obligation to repay the advance, the transaction should be treated as a loan.
American Banker reported in April that the New York City Department of Financial Services had launched an investigation into Earnin, fearing he was circumventing state lending laws. Earnin has not commented on this article.
In an interview on Wednesday, Jon Schlossberg, CEO of Even, which partners with employers such as Walmart to provide quick access to their workers’ wages, seemed surprised to learn that California law combines the two business models.
He said companies that advance money directly to consumers can put their customers on a treadmill similar to the cycle of debt that benefits payday lenders.
“This is actually the most dangerous type of access to earned wages,” he said.
The California Assembly Banking Committee has scheduled a July 8 hearing on the legislation.