What earned wage access is, and how it differs from a loan

Wages are paid after the work

The International Labour Organization's Protection of Wages Convention of 1949 requires that wages be paid regularly; where no other arrangement guarantees payment at regular intervals, the intervals are set by national law or regulation, collective agreement or arbitration award. In practice wages are paid after the period worked, so a worker has usually earned part of the pay before receiving any of it.

Earned wage access, or EWA, lets workers access a portion of their pay before payday. The amount available is tied to wages already earned, or estimated, and it is repaid on the next payday. The UK Financial Conduct Authority describes such schemes as allowing employees to access, usually for a fee, some of their salary before their regular payday.

Two models: through the employer, or direct to the worker

The US Consumer Financial Protection Bureau distinguishes two models, and so does the Federal Reserve Bank of Kansas City.

• Employer-partnered: a third-party firm contracts with employers and typically provides the funding. It connects to the employer's time and attendance records, so the amount available follows the hours actually worked, and it is repaid by deduction from the worker's next paycheck.
• Direct-to-consumer: there is no relationship with the employer. The firm markets its service to the public, estimates the amount available from the transactions in the worker's bank account, and is typically repaid by debiting that account on payday.

The difference matters for risk. In the CFPB's data for 2021 and 2022, the charge-off rate was 0.3 percent for the employer-partnered firms in its sample, against about 6.3 to 6.5 percent in the public financial data of two large direct-to-consumer companies. Repayment from payroll is more certain than a debit from an account the worker controls.

How it differs from a loan

Like a loan, an advance puts money in the worker's hands now and takes it back later, often for a fee. Unlike a typical loan, the amount is limited by wages already earned, repayment comes from the next pay, and there is usually no interest that grows with time. The Federal Reserve Bank of Kansas City notes that EWA does not affect credit reports or go to debt collection.

Whether that makes it credit in law is a separate question, and the answer differs by market. The FCA says these schemes usually operate outside credit regulation in the United Kingdom, so the price cap on high-cost short-term credit and affordability checks do not apply. In the United States, some states have enacted laws treating EWA as not a loan, while others subject it to lending laws. Lesson 4 looks at how rules treat it; the rules comparison shows what applies in each market of the region.

Repayment from pay also rests on wage law. The ILO convention permits deductions from wages only under the conditions and to the extent prescribed by national laws or regulations, or fixed by collective agreement or arbitration award.

What it costs

Fees take three main forms: a fee for each advance, usually charged for receiving the money immediately rather than in a few days; a monthly subscription; and, with some direct-to-consumer providers, a tip the worker is invited to pay. Because the fee is fixed and the term is short, a small fee can be a high cost once expressed as an annual rate.

Annualised cost ≈ fee ÷ amount advanced × 365 ÷ days until repayment

A worked example with illustrative numbers: a worker draws 100 and pays a fee of 2, and the advance is repaid from pay 7 days later. The fee is 2 percent of the amount, and 365 divided by 7 is about 52, so the annualised cost is about 104 percent. If the same fee is paid on an advance of 50 repaid in 4 days, it is about 365 percent.

The CFPB used this method for a typical employer-partnered advance and found it equated to an annual rate of 109.5 percent, noting that this understates the rate for smaller and shorter advances. The Federal Reserve Bank of Kansas City cites California's financial regulator, which found rates of about 331 percent for transaction fees and 334 percent for subscription fees, lower than the 400 percent of an average payday loan but still substantial.

How it is used: a dated example from the United States

A detailed public measurement comes from the CFPB, which collected data from eight employer-partnered firms. Adding public data on direct-to-consumer firms, it estimates that in 2022 about 10 million workers in the United States received over 31.9 billion dollars through the two models together. The figures below are from its sample of employer-partnered firms.

• The average advance in its sample was 106 dollars.
• The average worker made 27 advances a year, and the share using the product at least monthly rose from 41 percent in 2021 to nearly 50 percent in 2022.
• Where employers did not pay the fees, roughly 90 percent of workers paid at least one fee, and almost all fees paid were for faster delivery.
• Workers paid an average of 68.88 dollars a year in fees.

These figures describe one market in one period. They are a reference for the questions to ask, not a forecast for Southeast Asia.

Benefits and risks, as regulators describe them

The FCA says that, used in the right way, these schemes can be a convenient way for employees to deal with unforeseen expenses and occasional short-term cash flow needs. The FCA names repeated use as a risk, and the CFPB's data show how frequent use can be.

• Taking pay early makes a shortfall before the next payday more likely, which can lead to further advances and growing fees.
• A fixed fee per advance is hard to compare with an annual rate, and with repeated use the cost can become high.
• The worker still has to meet obligations such as rent from the smaller balance paid on payday.
• Credit reference agencies do not record this use in the United Kingdom, so other lenders may not see it when they assess affordability.

The FCA points to ways to reduce these risks: signposting to debt advice, periodic notice of the charges a worker has paid, and monitoring usage patterns to spot financial difficulty. Lessons 5 and 8 return to them.