Sid Hastings/AP Photo
A manager of a financial services store in Ballwin, Mo., counts cash being paid to a client as part of a loan on August 9, 2018.
In February 2019, 19-year-old Ethan VanBoxel’s vehicle slid off an icy highway in west Michigan. Startled from the accident, he stepped out of his vehicle to flag for assistance. A man stopped to help him pull the vehicle out of the ditch. As VanBoxel tied the tow straps underneath his car, another vehicle slid off the highway in the same place as he did, hitting him and shattering his right femur. VanBoxel would be bedridden for the rest of the winter through early spring. After physical therapy, he was not fully recovered until the end of the calendar year.
Just two years earlier, VanBoxel had graduated from high school. He moved out of his parents’ house in the summer during his recovery. “I was technically recovered but there was still a lot of physical activity that was really restricted,” VanBoxel told the Prospect. “There were multiple times where I was working and it almost felt like my leg gave out… That made money coming in less consistent.”
Before the accident, VanBoxel began using quick financial lending products, which were tied to high fees and interest rates. “To be honest, I just really didn’t know what I was doing,” he said. Growing up, he was told about needing to save money, but never how to manage it. A simple Web search into lines of credit cascaded into a flurry of ads chasing him around the internet. When money was tight, those ads for quick money became all the more enticing, a self-fulfilling prophecy.
Despite the targeted ads, VanBoxel blamed himself for taking out online payday loans he couldn’t afford, chalking it up to ignorance. “It almost felt like getting free money even though I had to pay it back and then some,” he said. “In the end, I've probably lost hundreds if not thousands of dollars from this stuff.”
Today, VanBoxel isn’t asking for sympathy, and he says his poor finances were mostly of his own making. He’s in a financially stable position today. But as he explained his story, it seemed that despite knowing a sense of the risks associated with nontraditional lines of credit, the true dangers of those terms and conditions weren’t made clear to him until well after the fact.
It’s impossible to definitively say that, had VanBoxel been in regular contact with a financial planner from a small regional bank, his financial troubles would have never begun. But it’s plausible that a few early nudges from human interactions could have prevented VanBoxel from making the early credit decisions he decided.
These days, that’s hard to come by. According to a February 2022 report from the National Community Reinvestment Coalition, banks have rapidly closed since the Great Recession, a trend which accelerated throughout the pandemic. In numerical terms, from 1984 to 2021, the number of banking institutions dropped from 18,000 to 5,000.
The closure of physical bank branches has resulted in the loss of personal interactions with the communities they serve, depriving customers of invaluable touchpoints for financial education. That’s especially true for young people, who after high school are immediately thrown into the financial deep end, figuring out a way to pay for education or vocational training in real time. Some, like VanBoxel, face a sudden financial shock, where painful personal finance lessons are learned. Now, young people must navigate a world where reputable and sketchy financial institutions sit next to each other on a web browser, with disaster just a click away.
VanBoxel said the immediate benefits were great. But as he was applying for apartments, he learned his financial profile was distorted.
One of the services VanBoxel began relying on was Earned Wage Access (EWA), which is essentially a combination of a digital payday loan and a paycheck advance. There are two forms of EWA. The safer one is an employer-linked system, where workers choose to access their wages or a portion of them after a day of work, with the total subtracted from their weekly or bimonthly pay stub. The other is a “direct-to-consumer” (DTC) model, which does not confirm employment, and is instead directly linked to a user’s checking account, essentially becoming a lightning-fast payday loan.
Consumer protection advocates call the latter “faux” EWA services. Aside from concerns about overdrafting checking accounts, these faux-EWA products psychologically exploit the trend toward tipping for more and more services. For example, testifying before the Vermont state legislature, a representative from a DTC EWA company, EarnIn, stated that 40 percent of the company’s revenue relied on tips.
EarnIn touts its services as free. But to receive the money quickly, consumers are subjected to fees for what the company calls “Lightning Speed.” Anybody who is likely to use a fast-credit option is likely to opt for the quicker one. It’s a false choice that exists to ostensibly allow the company to say that it offers free services. That is then combined with an optional tip. But when consumers use EarnIn’s app, it defaults to providing a tip, prompting with messages that tips help keep the service running. Essentially, consumers are strong-armed into leaving a tip. This is not a new tactic.
These practices are another example of what the Federal Trade Commission (FTC) detailed in a report last year called “Bringing Dark Patterns to Light.” Dark patterns include user interface design tricks, psychological tactics like confusing cancellation policies, pre-checked boxes, or difficult-to-find disclosures, which persuade consumers to give up their data or their money.
According to the California Department of Financial Protection and Innovation (CDFPI), if EWA products translated their fees, tips, and other charges into an annual percentage rate of interest, it would be greater than 300 percent. CDFPI’s report on EWA products also detailed that on average, consumers were using EWA services 9 times per quarter, up to 36 times a year. In other words, EWA users are frequent borrowers.
VanBoxel first encountered EWAs when he was crashing on a friend’s couch, searching for an apartment. He picked up a job at a Tim Hortons coffee shop in late 2020. By then he was sick of taking out online payday loans or cash advances, and didn’t want additional credit card debt. Shortly after being hired, he learned that he was eligible for an EWA service through the company. It seemed like a no-brainer.
VanBoxel said the immediate benefits were great. But as he was applying for apartments, he learned his financial profile was distorted. The deductions from his pay stub made it look like he was earning far less money. And from a landlord’s perspective, the numbers didn’t add up, marking him as a risky prospective tenant. Taken together, it’s not hard to imagine landlords rejecting applicants who rely on such services, even after providing an explanation.
Reflecting on the apartment search, VanBoxel said: “Wait for the check, there’s no way to shortcut it.”
VanBoxel’s experience runs contrary to the story fintech companies tout about digital, mobile, and alternative banking services. It goes something like this: all forms of technology serve the greater good, including financial services.
Now, it’s true that many tech-based financial products have been useful. Given the digital transformations that financial institutions have undergone, it’s only natural to expect that alternative credit lending and financial service options would also make the digital leap. According to reports based upon consumer survey data, around 70 percent of millennials and zoomers primarily use mobile banking services for their finances. For Gen-Xers, that number is only 49 percent. What’s more, 57 percent of millennials and 64 percent of zoomers have a financial account through fintech institutions.
Some of these options have provided immense convenience for transferring money around, such as PayPal, Venmo, or Zelle. But it’s a different story when it comes to high-interest payday loan-style products.
Fintech companies push a seductive argument that EWA is the obvious successor to the payroll system. It appeals to employers, especially in retail and service industries, where the labor market is tightest. Companies like Amazon have their own EWA. One of the industry leaders, DailyPay, has partnerships with companies like McDonalds, Dollar Tree, Kroger, and other retailers.
The argument that EWA companies make is that quicker access to wages can relieve employee stress, translating into higher productivity. Additionally, such programs can be beneficial for new hires in the first few weeks of a job. They might be caught between payroll cycles, waiting weeks for the first full paycheck. And if an emergency arises for an employee, they have immediate access to their money.
EWA founders like Benoit Menardo of Payflow and Safwan Shah of Payactiv have echoed these sentiments in separate TedX talks. The big takeaway is that the rise of EWA is a liberator in the same way that the rise of the gig economy offered freedom to workers. One of the points for this argument is that the end of dependence on the payroll cycle decouples workers from traditional banking. But that’s misleading, especially because fintech products in the United States rely on licenses from banks to operate.
Rather than freeing people from banks, EWAs are an intermediary, a banking-as-a-service (BaaS) technology. But Menardo and Shah opt for simple narratives that omit the structures the technology operates within. It’s not sexy telling consumers: “I require a license from another bank that lets me provide this service for you. But I’m also going to tell you that my service frees you from banks.”
In states without strong protections such as Texas, lobbying for deregulatory EWA legislation continues.
Experiences like VanBoxel’s with employer-based EWA products appear markedly different from the sleazier practices by companies like EarnIn. Both products require different approaches for consumer protection. Yet the fintech industry’s approach has been to collapse the debate into a single framing: all EWA products are definitively not lines of credit, and are thus exempt from state-level usury limits. Fintech companies want to be lenders without abiding by the laws that cover lending.
That disingenuous posture has infected debates in state legislatures, as EWA companies have lobbied for deregulatory legislation. Those states include Georgia, Kansas, Missouri, Nevada, New York, Texas, and Vermont.
The fintech industry’s maneuvering could circumvent strong state-level protections for interest on consumer loans. For example, Vermont caps single-loan interest rates at 18 percent. Monica Burks from the Center for Responsible Lending testified before lawmakers over a bill that would carve out EWA products from the 18 percent limit. Referring to EarnIn’s tipping model and expedited service fees, she said, “This is actually strong evidence that their business model depends on loans for which the true cost is often going to be higher than advertised or disclosed, with an APR that would well exceed Vermont’s usury cap.”
Meanwhile, the tech trade group Chamber of Progress, which collaborates with EarnIn, testified at the same hearing that they were happy with the bill. Chamber of Progress State and Local Policy Director Alain Xiong-Calmes said: “We had come with suggested amendments, but both of the amendments we were going to suggest, it sounds like they have already been incorporated.” (Xiong-Calmes told the committee that EarnIn and its other partners don’t have a vote in the trade group’s positions.)
In states without strong protections such as Texas, lobbying for deregulatory EWA legislation continues. Briana Gordley, a policy analyst from the progressive non-profit Texas Appleseed, spoke to the Prospect shortly after testifying against a bill before the state’s legislature. In Texas, payday lenders are classified as loan brokers, not loan originators. It’s the distinction between being an intermediary versus the source of a loan. That difference, Gordley told me, is why payday lenders are able to evade the state’s 10 percent interest limit. Now, EWA providers are working for the same carve-out for their products.
Gordley admitted that there could be positive uses for EWA products tied to employment, but conflating work-tied ones with DTC under the same standards could be detrimental. She said: “[Fintech’s] marketing skills are incredible, in that just labeling these products as earned wage access when they’re not [always] tied to your wages creates a lot of confusion.”
This confusion is heightened as groups like Chamber of Progress lobbyists use their prior socioeconomic backgrounds as evidence for the need for industry-friendly regulation. Chamber of Progress State and Local Director Kouri Marshall recounts the moments from his childhood not having enough money for football or marching band. He tells the state lawmakers: “I wish this type of legislation existed back then.” Marshall did not respond to an interview request from the Prospect.
Meanwhile, Gordley pointed to how EWA products would be exempted from money transmitter and usury limit laws, which she called “basic accountability measures that ensure consumers get the product they signed up for.”
Combined, these carve-outs would have less oversight than the existing consumer protection environment in Texas, creating additional loopholes. Gordley said: “Fintech companies want to step into [Texas], because they know that their products are most likely going to be more appealing. They’re going to look nicer and more affordable.” Toward the end of my conversation with Gordley, she explained that as lawmakers learn the difference between the types of EWA products, they’ve become more sympathetic to applying different approaches.
Meanwhile, at the federal level, regulators have taken notice. Under former President Trump’s Consumer Financial Protection Bureau (CFPB), in 2020 the agency offered “a temporary safe harbor from liability under the Truth in Lending Act and Regulation Z” for Payactiv. Last summer, CFPB director Rohit Chopra terminated that exemption. In January, the agency took further steps to denounce the previous administration’s classification for Payactiv’s exemption.
In an interview with the Prospect, Burks called the maneuvering from EWA companies and their trade groups a “legal fiction.” She said: “The industry is trying to create a new definition for what a loan is in order to exempt themselves from existing consumer protection laws… When you offer someone a portion of money on the promise that they will repay it, and often that repayment will be accompanied with fees or charges or interest, that's what a loan is.”
Editor’s note: This article has been corrected to clarify that Payactive does not provide services to Walmart.
