Is earned wage access the kinder, gentler face of payday lending?

In principle, there should be absolutely nothing wrong with requesting an “advance” on your weekly or bi-weekly paycheck. When the electrician comes to my house and completes his task, I don’t say “I’ll send you a check in two weeks.” Labor is performed and payment is due on completion. There is no reason (other than convenience) that it should not be that way in general. We should all receive our day’s salary at the end of the workday. Waiting for payday is a zero interest rate loan to your employer. An advance is really not an advance at all.

Just like payday lenders, earned wage access (whereby an employer or a 3rd party fintech makes a portion of wages due available to the payee before the scheduled payday) responds to a real need. Sometimes a bill comes due, or a need arises before the paycheck arrives. It is the classic accounting mismatch between the availability of assets and the timing of liabilities. Many of us respond to this mismatch by using a credit card. But if your credit is poor and that is not an available option, then getting part of your paycheck early can fill the gap quite nicely. And if you can do so at little or no additional cost, why not?

Just like in business, the need to access emergency cash funding is usually a sign of weakness not strength. An advance early in the month to meet an immediate shortfall means a lower paycheck mid-month when all of the normal expenses will still be due. Will the discounted mid-month check be enough? Often not, starting the cycle that we see in payday lending when debts spiral as they are continuously rolled over.

Earned wage access addresses a symptom effectively, without in any way treating the disease.

We are back at the need for emergency savings. Those employers that are experimenting with earned wage access would serve their workers better by supporting interventions that support workers’ ability to create cash cushions. “Sidecar” savings accounts that automate payroll deductions to a liquid savings account, boosted by an employer match, are a far more effective response to the problem supposedly “addressed” by earned wage access schemes.

I do not think that earned wage access is wrong per se; particularly when offered by an employer, it has less potential for the kind of abuse that we see in payday lending. It is a sometimes useful convenience. But it is nothing more than that, and certainly not the panacea to the financial stresses experienced by low and middle wage workers that it is often portrayed to be.

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