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In February 2021, the outgoing Financial Conduct Authority (FCA) Chief, Christopher Woolard, published a review of the unsecured credit market. The market has moved on from the days of loans, credit cards, and overdrafts. Payday loans don’t even feel like recent ‘innovation’ anymore. What’s new in the market are products that sit outside regulation: Buy Now Pay Later (BNPL) and salary advances for employees.
For employee advance schemes, many names circulate: ‘Earned Wage Access’ (EWA) is how they’re commonly known in the US. Others include ‘on-demand pay’ or ‘instant pay’. Employer Salary Access Schemes (ESAS) is how they’re often referred to in the UK, and that’s how the FCA describes them.
There are two business models: direct-to-business and direct-to-consumer.
Direct-to-business
Under this model, employers partner with an ESAS provider to offer the service as an employee benefit. Employees are provided with an app to track their accrued wages during the month. Their employers then allow them to access a portion of their already-earned income before their normal payday. The employer sets a limit on the percentage of withdrawable accrued wages – normally about 50%. Any advances are then deducted from the employee’s salary payment for that pay cycle. For this, providers charge a fee. Typically, between £1.50 and £2 per withdrawal. Either employers pay this, or the employees bear the cost the cost themselves. This model falls outside of FCA regulation.
Direct-to-consumer
In the UK, an example of this model is Salary Finance. In addition to salary advances (as in the direct-to-business model above) Salary Finance provides regulated loans using direct deductions from future salary payments as security. In these cases, employers must have signed up to their platform, but may not have agreed to a salary advance arrangement as in the direct-to-business model. Instead, they have agreed for Salary Finance to make direct deductions from salary payments to repay a loan. An example from their website of an employer not offering salary advances but prepared to offer salary deductions for loan repayments is Bolton NHS Foundation Trust. Loans for their employees, who must be over 18; earn at least £6,000 before tax, have lived in the UK for at least three years, and have worked for the Trust for at least six months, range from £1,000 to £25,000 and the representative APR is 13.9%.
Salary Finance then deduct loan repayments from the employee’s salary each month (loans are repaid between 12 and 60 months). If the employee leaves their job then any outstanding repayments are made via Direct Debit.
Friend or foe?
In the US, EWAs have been around since the 2010s. Early companies included Instant Financial, and DailyPay. They allowed users to access 100% of their earned income for a $2.99 fee. By 2016, Uber had partnered with Green Dot to allow drivers to access their earnings after each drive. ADP, the largest payroll provider in the US, offered an EWA product in 2018. In 2019, Lyft introduced a similar product in partnership with Mastercard. In that time, EWA companies became very investible. Another similar company, FinFit, added another element to the service. It would call itself a “financial wellness benefit platform”. Not only could you switch your pay day, but this app promised to improve your financial circumstances, too.
The academic Jim Hawkins was the first to carry out a legal and empirical analysis of the US market in 2020. A major finding from his work was the common use of restrictive clauses in contracts between employees and EWA providers. For example, he found worrying contract clauses including one waiving the user’s rights to go to court and proceed in a class action. He also found instances of term agreement assumptions without proper consent. Providers published terms online and presumed consent.
Hawkins explored the dangers of EWA in his study, and his findings remain relevant. He describes the problem of what he calls ‘first call’.
For Hawkins, this is the model’s biggest strength. Providers get priority over what could be a competing set of financial demands on employees. This is an “extremely efficacious collection mechanism” (Hawkins’ words) – and it enables them to keep the cost of borrowing low. But withdrawing the autonomy of someone to make repayments in accordance with their preferences risks exacerbating personal and financial difficulties. Perhaps they would prefer to pay the rent or put food on the table, for example.
Another U.S study describes the risks of repeatedly using EWA products. The researchers note that “a pattern of early spending combined with a smaller regular income may make it difficult to pay for major obligations like rent or emergencies”.
And the study concluded:
Often misleadingly touted as a “financial wellness” benefit, closer examination of EWA programs suggests these programs may offer little in terms of enhancing the long-term financial well-being of workers and are more of a quick fix approach that does little to alleviate underlying causes of employee financial stress, such as consumer debt, low wages, and cashflow mismanagement. In many cases, EWA may serve to make a bad financial situation worse.
The costs associated with repeat use have also been noted by the FCA:
Employees may find it difficult to compare the fixed transaction fee charged for each drawdown to an interest rate/APR. In some cases (depending on the amount of the advance and when it is used in the pay cycle) this may result in it being equivalent to an interest rate that is higher than the price cap for payday loans and other forms of HCSTC. This can become particularly expensive if an employee uses the product repeatedly.
On the other hand, EWA is cheaper than many other credit options targeting those on low incomes. Donner & Siciliano say that EWA can potentially alleviate financial hardship by “replacing more expensive credit-based options used by households to manage their liquidity [notably] expensive payday loans.”
The schemes may also help users obtain the pay date/budgeting technique they prefer, rather than the one chosen for them. Wagestream, in the UK, told the Financial Times that their most frequent users were not necessarily using their product because of financial distress, but because they are part time shift workers wishing to be paid after every shift. It is notable that around four in ten of those in the lowest two income quintiles are paid weekly. Four in ten also said it would be harder to budget on a monthly payment. As an aside, this is partly why Universal Credit, with a single-monthly payment; it's five-week-wait, and advances recovered from future payments, is exacerbating the financial problems of many people claiming it.
A Voluntary Code of Conduct
In the US, the Consumer Financial Protection Bureau concluded, in November 2020, that EWA was not credit under the Truth in Lending Act (TILA). However, this was so only where there was no charge to the employee, no creditworthiness assessment, and repayments were made exclusively by employer-facilitated deduction.
In the UK, the ESAS direct-to-business model operates outside of FCA regulation, but the direct-to-consumer model involves regulated loans with salary deduction as a security. It’s hard to see the difference in practice. But it means that employees who receive advances, rather than loans, are not required to be assessed for affordability and are not able to make complaints to the Financial Ombudsman Service.
The FCA’s Woolard Review therefore recommended that providers establish a voluntary code of conduct, and this was finally delivered in September by the Chartered Institute of Payroll Professionals and seven ESAS providers. The code focuses on fair treatment of users and good practice for communication and information disclosure. However, this raises several questions, particularly concerning the issue of vulnerability.
The code says that:
Firms will act to deliver good outcomes and consistently fair treatment to vulnerable consumers in relation to the EWA products and services that firms offer.
It also commits signatories to:
Regularly monitor and assess whether the needs of vulnerable consumers are being met and respond appropriately where this is not happening.
It doesn’t say how they will do this. Without a definition of ‘vulnerable consumer’, or a description of the things within ESAS to which a consumer can be vulnerable, it’s unclear how this will work in practice. The code only requires that providers put in place procedures for dealing with vulnerability, and many different approaches could therefore be adopted.
Whilst an annual certification process is included, certification will be obtained through “self-attestation in which each firm confirms and evidences that they continue to meet the commitments which they have made as outlined within the Code”. There is also an annual review by an independent third-party who will “assess the outcomes that firms are delivering to consumers.” But there is no detail of that assessment process available as yet.
What more is needed?
The expansion of ESAS raises questions about whether the products are creating harm. Whether access to greater flexibility, when it comes with a loss of autonomy and at a cost to the employee, is worth it.
We need more research into these issues in the UK. Do providers’ claims of helping build ‘financial wellness’ stand up? Do schemes really reduce the use of other forms of credit, and what is their impact on household bills arrears? How do schemes impact the relationship with the employer?
With potential high costs for repeat users, the lack of independent evaluation of ESAS products is a concern. Our position is that employers should be introducing flexibility without any cost to the employee. This can either be achieved by partnering with an ESAS provider, or by employers modifying their own payroll systems. Either way, it should not cost the employee a penny.
But employers should also be evaluating impact through consultation with their employees. We are as yet unaware of any employer evaluation reports that have been published. A fundamental question that any evaluation needs to address is whether employees want and appreciate payment flexibility, or whether this is seen as a mechanism that their employers are using to avoid paying sufficient wages.
For ESAS providers we think there is a need for them to both assess affordability, and to put in place mechanisms for employees in financial difficulty to easily request part repayments or to have salary deductions suspended altogether.
And for the CIPP and the providers signed up to the new code there is a need for greater transparency concerning the policies that providers have put in place to meet their commitments, as well as with respect to the independent annual assessment process and its subsequent reporting.
