State Regulation hits EWA (but is it enough?)

Over half of Americans are living paycheck to paycheck, according to CNBC, and the heightened costs of living is making the situation worse. Seven out of ten people reported stress from their financial situation, and around half said this stress had increased since the pandemic, with many reporting a lack of savings to cover them should the situation worsen.

In addition, late fees and mismatched payment times plague the average consumer. “Sometimes, entities will make bills payable on the 29th because they know a lot of people will be late by two days, and then they can charge a late fee,” said Nico Simko, Co-founder and CEO of Clair. “It’s a huge issue for workers living from paycheck to paycheck if your bills don’t match the timing of your income.”

The options available to employees in this situation have typically been to pay late fees or turn to expensive loans to tide them over. 

Niko Simko, CEO and Co-Founder of Clair
Nico Simko, Co-founder and CEO of Clair

“Front-line workers are astonishingly underserved, as big banks don’t see them as profit drivers and aren’t building the solutions they need. Timely pay is crucial for them to keep up with their bills.”

Earned wage access was developed as a solution to this issue and has been met with increasing demand. The space, as a nascent technology, has largely escaped regulation, claiming it differs from a loan. 

“If you’re able to make the case that it differs from a loan, it’s actually a lot cheaper for a startup,” said Simko. Clair had decided to opt for national regulatory compliance and approach the space as a loan product, partnering with a national bank. 

“We decided to kind of use a framework that preempts states from changing laws,” said Simko. “States may do 50 different flavors of what EWA is and how it’s regulated. Imagine building a product that has to do this. And imagine when an employer is in one state and the employees are in another. What do you do?”

In some cases, the lack of regulation has been used to providers’ benefit, at times installing fees of their own that come close to matching existing loan options. However, one by one, states are providing clarity to flush the sector of bad actors. 

Missouri Joins Nevada in EWA Regulation.

The first to step up was Nevada. Last month, a proposed bill was published clarifying that EWA differed from a credit product and calling for increased transparency in the space. 

RELATED: First proposed bill to regulate Earned Wage Access

Since then, Missouri has stepped up, mandating that providers register for approval. 

Like in Nevada, the new law in Missouri requires state licensing for all EWA providers, including those who integrate with employers and companies that offer services direct to consumers. 

The bill sets out industry best practices and consumer protections, including strong transparency, non-recourse, no late fees, no debt collection, no credit reporting, no collection activity of any kind, and a requirement that a “no cost” option be offered to all EWA users.

“As one of the first states in the nation to embrace regulatory standards for the EWA industry, Missouri is at the forefront of responsible innovation creating access to safe financial services,” said Phil Goldfeder, Chief Executive Officer of the American Fintech Council. “Missouri families should have the ability to access the wages they have already earned from responsible companies that are providing an alternative to high-priced payday and other predatory options.”

Despite the progress, the state-by-state approach leaves a sense of instability in the space. Although Nevada and Missouri had similar rulings, still in 48 states, EWA remains open to interpretation. 

  • Isabelle Castro Margaroli

    Isabelle is a journalist for Fintech Nexus News and leads the Fintech Coffee Break podcast.

    Isabelle's interest in fintech comes from a yearning to understand society's rapid digitalization and its potential, a topic she has often addressed during her academic pursuits and journalistic career.