On May 13, the California Senate passed SB 472, 35-0. This bill lays the foundation for a needed and overdue statutory framework for earned income access, or EIA. In a nutshell, this bill recognizes that EIA is not credit, and imposes certain requirements and guardrails to achieve the goals of consumer protection and competition.
I first saw the great potential of EIA six years ago when leading the Consumer Financial Protection Bureau’s innovation office. Today, as an adviser to PayActiv and Earnin, two leading EIA companies, it has become even more clear to me that we need to enable this new technology to be further developed so more consumers can enjoy the tremendous benefits of this innovative, affordable, safe alternative.
Unfortunately, some people are misleadingly equating EIA — especially those programs that are directly marketed to consumers — to predatory lending. Opposition to EIA based on misinformation or mischaracterization is not only stifling innovation, it also ultimately harms low-income workers who stand the most to benefit from this innovation.
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EIA is a new breed of financial products that can better serve consumers’ short-term financial needs. The concept is simple: By breaking the biweekly payroll cycle that exists mostly for the convenience of tax withholdings, one should be able to access his or her own accrued wages on demand without creating a debt obligation.
EIA can be implemented through employers or marketed directly to consumers. In both cases, consumers typically pay a fraction of the cost of a payday loan or single overdraft fee, resulting in tremendous savings that could be used to pay off credit card debt faster, or celebrate birthdays for loved ones on their actual birthdays, something many of us easily take for granted.
Most distinctively, EIA providers generally have no recourse against their customers. If for whatever reason, or for no reason at all, the customer decides not to pay back his or her earned wages, he or she is held completely harmless. There is no collection on the amount unpaid. The worst that can happen to the consumer is the loss of access to future EIA withdrawals.
Both employers and consumers have begun to show strong interest in the various EIA programs. Financial stress increases absenteeism, lowers productivity and exacerbates turnover. Workers’ financial health is no longer an HR issue; currently, it now affects a company’s bottom line. Not surprisingly, employee demand for EIA at workplace is high even in absence of any employer promotion. This is a no-brainer — when an EIA program only costs $5, who would pay $45 for a $250 payday loan or $35 for a bank overdraft? In the direct-to-consumer market, a few EIA apps enjoy high customer ratings and are among the most popular finance apps in App Store and Google Play.
For the first time, there is a viable market solution that has the promise of significantly lowering the cost of helping consumers manage short term cash flow needs and improving their financial lives. Opposing EIA, especially efforts to ban the direct-to-consumer model, would be detrimental to consumers and small businesses.
Still, universal coverage of EIA through employers is impossible. A low-income worker will lose EIA coverage from his or her former job if the new employer doesn’t offer one. This problem is further amplified if one works in an industry with a high turnover rate and low pay.
Most small businesses will not be able to provide EIA to their employees because their small scale makes EIA implementation economically challenging. And without the direct-to-consumer route, small businesses, which are the engine of our economy, accounting for over 50% of the workforce, would be at a further disadvantage to large businesses. Low-income workers working for small businesses would be likely shut out of this option.
Finally, as long as EIA programs are nonrecourse, consumers will always be held harmless.
The burgeoning EIA market is at an inflection point. As with any disruptive innovation, resistance is expected initially but can be overcome once its great consumer benefits are understood and embraced.
One way is through the leadership of our policymakers. The CFPB has already created safe harbors for EIA programs in its 2017 payday rule, a positive development and endorsement for this young industry. Those safe harbors remain intact in the recent proposal. Even more critically, our state legislatures should strive to establish appropriate legal and regulatory frameworks to provide certainty for EIA to promote competition and safeguard consumers’ interest. California is leading the way.
The time has come to recognize that the market needs more choices. Evolution and change are part and parcel of human betterment. The insidious perpetual debt cycle and expensive options that have been in place for decades are ripe for replacement with innovation that is more fiscally sound, holistic and consumer-friendly. American workers deserve better options.