As employers and workers embrace banking apps designed to let workers get early access to their pay, state leaders are grappling with a fundamental question: Are these products in fact loans?
Providers such as DailyPay, Payactiv, EarnIn and Dave say they offer a lower-cost, safer alternative to traditional credit. They’re lobbying hard for state laws that regulate what they call earned wage access products as a new financial service, unconstrained by interest rate caps and annual percentage rate disclosure requirements.
Consumer groups, on the other hand, say the apps are just a twist on payday loans.
“Earned wage access, or earned wage advance, is a marketing term for a loan,” said Monica Burks, a policy council at the Center for Responsible Lending.
Burks said fees to get instant cash can be sky-high when expressed as an APR and that apps can trap workers in a pattern of repeat use.
So far, more states are siding with providers. Lawmakers in Kansas, Missouri, Nevada, South Carolina and Wisconsin have in the past 18 months passed industry-backed bills clarifying that earned wage access products are not loans. The laws require providers to get a state license and follow certain requirements, such as letting users access funds for free.
The conservative American Legislative Exchange Council and nonpartisan Council of State Governments have both drawn up industry-friendly model bills.
Connecticut is the only state where lawmakers have defined earned wage access transactions as small loans. But consumer advocates hope new draft regulations from the federal Consumer Financial Protection Bureau, which found that they are consumer loans subject to the Truth in Lending Act, will change the conversation in state legislatures next session.
“The CFPB interpretive rule signals to state lawmakers and regulators that: We looked at this product, we analyzed how it operates, we analyzed it against legal standards, and we see it as a loan,” Burks said. “It’s a signal to our state lawmakers that they should look at their own code and probably come to the same conclusion.”
Earned wage access apps have exploded in popularity in recent years. Companies such as American Airlines, Kroger and Walmart partner with financial technology companies to let workers tap their earnings before payday. Millions of people also have downloaded apps that advance them funds out of their next paycheck.
Although earned wage access providers offer free services, most users end up paying fees to access money instantly or for other reasons. Some providers encourage users to leave tips, for instance, or to pay for a subscription.
About 90% of workers who used employer-partnered products in 2021 or 2022 paid at least one fee, about $3 per transaction on average, according to a CFPB analysis of eight providers. That translates into an eye-popping APR of almost 110% on the average $106 advance.
The agency’s proposed interpretive rule would clarify that tips and fees are finance charges and require providers to show the cost of transactions as an APR.
The proposal has frustrated earned wages access companies and upset users, who have flooded the agency with comments saying they rely on the apps to manage their expenses.
Consumer groups are “perpetuating a false narrative” that earned wage access transactions are loans, said Phil Goldfeder, chief executive of the American Fintech Council, an industry association, and a former New York state legislator.
Earned wage access providers don’t run credit checks, charge fees based on risk, report to credit bureaus or hound users for unpaid debts, Goldfeder said. “All the criteria that you would identify to determine a loan do not exist with earned wage access.”
Industry advocates plan to keep making their case to state lawmakers. Goldfeder said he’s optimistic that more states in 2025 will “sign on to a reasonable regulatory structure that views earned wage access products as it actually is, versus trying to pigeonhole it into outdated lending laws.”
States where lawmakers or regulators have sided with industry tend to have more permissive lending laws, said Tony Salazar, Maryland’s commissioner of financial regulation.
California regulators are working on rules that would define earned wage access products as loans. The attorneys general of Arizona and Montana have issued guidance saying they are not loans.
Salazar issued guidance last year clarifying that if a third party provides money to employees while benefiting from tips and fees, it’s a lender and must abide by state interest rate limits.
“Maryland is a very consumer-protective state. We have one of the lowest interest-rate caps in the country,” Salazar said. Given how state law defines loans, he said, “I believe that treating them as a loan is what’s required.”
The fight to define earned-wage access products — and the market for them, as it currently exists — may be short-lived, said Todd Baker, an adviser to financial technology companies and a lecturer at Columbia University’s business and law schools.
Amazon already lets hourly workers get paid whenever they want, Baker said. “Ultimately, these companies, the big companies, will do it themselves,” and let workers access their pay instantly.