🔒Fintechs try again to ease restrictions on ‘earned wage access’ services in CT

If you’re not familiar with companies such as Brigit, DailyPay, EarnIn or Payactiv, you’ve likely never faced an emergency where you needed money from your paycheck before payday.

You may also be unfamiliar with these financial technology companies because they mostly haven’t operated in Connecticut since January 2024.

That’s when new guidance on the industry from the state Department of Banking took effect. Issued in September 2023 in response to changes adopted that year by state lawmakers, the new rules require so-called “earned wage access” (EWA) companies to be licensed and regulated as small loan providers.

More importantly, state lawmakers also changed the formula used to determine a small loan’s annual percentage rate (APR), adding into the equation tips and subscription or convenience fees.

Those are key revenue sources for EWA providers, which allow customers to access already earned wages before payday. The changes pushed many of their customer transactions well over the 36% APR cap for small loans set by state law.

As a result, most direct-to-consumer EWA providers have stopped operating in Connecticut since the new rules went into effect, according to a report from the Center for Responsible Lending (CRL).

Some still partner with employers to provide workers access to their money before payday, offering one- to three business day electronic transfers, or instant transfers to provider-sponsored debit cards. But even those providers have stopped offering “instant” deposits with fees for expediting the transaction, according to the Center for Responsible Lending.

EWA providers are lobbying state officials and legislators in hopes of getting some relief that would make it easier for them to fully resume serving customers in the state. Legislators have also heard from consumers who have argued earned wage access services offer a valuable tool during a personal financial emergency.

On the other hand, opponents — including AARP, the National Consumer Law Center and Center for Responsible Lending — argue that the state needs to strictly regulate the industry to protect consumers.

It’s an issue the Banking Committee attempted to address during the legislature’s short session last year, but a bill never went anywhere.

The 13-member committee has had a bit more success during the current session, raising and approving legislation — Senate Bill 1396 — that has bipartisan support.

Whether the bill will be brought up for a vote in the Senate and House, though, remains an open question.

The proposal

The bill would exempt salary advances to employees in the state from the small loan law’s APR and finance charge requirements, even if the APR exceeds the 36% cap.

It does, however, cap the total finance charge for income advances at $5 per advance, or $30 per 30-day period.

The bill also requires EWA providers to offer a zero finance charge option for consumers.

Rep. Jason Doucette, (D-Manchester), co-chair of the Banking Committee, said this year’s bill is “a broad-based compromise between the industry players and the regulators.”

He said EWA companies have been involved in talks with the Banking Department and the legislature on achieving that compromise, but that the bill may go through more changes.

The committee, he said, voted on the bill “as it was originally proposed and drafted at the beginning of the legislative session, with the understanding that there are going to be ongoing conversations about some outstanding issues.”

Sen. Eric Berthel, (R-Watertown), the ranking Republican member on the legislature’s Banking Committee who has raised concerns about EWA customers “being basically ripped off with fees,” said he supports the compromise bill.

The Banking Department has weighed in on the proposal and recommended several tweaks.

The department’s General Counsel and Chief of Staff Joseph Chambers has suggested in written testimony prohibiting earned wage access providers from making an advance to a consumer who has already been serviced by another provider.

That is not an uncommon occurrence, according to the Center for Responsible Lending. They call it “loan stacking,” in which a consumer uses multiple apps to borrow from their unpaid wages or salary.

According to CRL, one state resident “used as many as seven apps in the same month.” On average, workers used 1.5 apps every month.

CRL also noted that consumers with at least six advances in one or more months accounted for 32% of all users and 81% of all advances.

“Roughly one in four took out 25-plus advances in a year,” it said.

To prevent this, Chambers suggested that each provider be required to submit information to a third-party database that tracks all advances made to Connecticut consumers, and to use the database to verify that a provider did not violate the law.

Two-sided debate

There is evidence consumers in Connecticut want to use EWA services.

A new survey commissioned by EWA provider DailyPay and conducted by UConn public policy professor Kerri M. Raissian confirms that.

She led a quantitative online research survey, between Feb. 25 and March 9, in which over two-thirds (67%) of respondents stated that EWA providers had helped their financial situation before Connecticut’s rules took effect.

The survey found that EWA customers were primarily using advances to pay for food or groceries (85%), transportation or gas (63%) and rent or a mortgage (59%).

The survey results also noted that in the absence of EWA services, consumers went without what they needed (36%), relied on more expensive methods — including using a credit card (26%) — or borrowed from friends and family (31%) to afford necessities.

The Center for Responsible Lending, however, noted in its report that EWA products may exacerbate overdrafts, negatively impacting a consumer’s overall financial health.

Of the Connecticut users who experienced overdrafts, “63% experienced increased overdrafts after their initial advance,” CRL said.

Lauren Saunders, associate director of the National Consumer Law Center, submitted testimony on the bill that warned legislators not to be fooled by the generally small advances consumers take.

“Given the small amount of advances and how quickly they are repaid, a $5 fee alone could be 183% APR for a $100, 10-day loan and 456% APR for a $40, 10-day loan,” she said.

EWA providers argue their services don’t constitute a loan.

Doucette said legislators understand the two sides, but will continue to move with caution.

“We’re skeptical of some of the arguments that we heard, particularly last year from the industry, that these products aren’t loans and that they should not be regulated in any way as a loan,” he said. “We sort of are hoping that the two sides can work something out.”