The Importance of Regulatory Compliance for Earned Wage Access Fintechs

Rise of EWA Fintechs Quavo Chargeback Management Software

The Rise of Earned Wage Access Fintechs

The challenges of the pandemic have created a great deal of financial stress for most of the workforce. Whether someone is paid by a business or earning extra income as a gig worker, immediate access to funds is increasingly critical. Forward-looking Fintech startups realized this growing demand and have carved out a unique service niche in the industry: “Earned Wage Access (EWA)” or “Gigwage” applications.

Their concept is simple: Provide fast and easy access to money as soon as the employee or gig worker has earned it. However, just like any other issuing Fintech, EWA providers are subject to the exact regulatory requirements as traditional banking institutions and just as susceptible to fraudulent activity, if not more so. To understand why and how EWA Fintechs require robust automated dispute management solutions, one must understand the account holders EWA Fintechs attract. In this article, our experts dive into the gig economy and its service providers, the challenges they face, and how automated fraud and dispute management solutions can help them grow their business.

Key Earned Wage Access Fintech Providers

There are several other promising companies in the industry, including:

  • Instant is one of the best-established providers in this space and offers daily earnings access once shifts have been completed. Instant has an app that connects with a debit card for ease of payment.
  • Gigwage is a service specifically designed for 1099 contractors, typically self-employed contractors, freelancers, and gig workers. Gigwage is directed towards gig worker marketplaces like delivery, driving, and similar services.
  • DailyPay PayEx gives employees same-day and next-day access to funds, including tips and gratuities.
  • PayActiv is a successful Earned Wage Payment provider used by over a million employees every month. It is the only EWA provider approved by the Consumer Financial Protection Bureau (CFPB).

Increased Access to Financial Services for Unbanked and Underbanked Populations

People without easy access to bank accounts and financial services are often described as unbanked or underbanked. More than five percent of households have no bank account at all, and another 16 percent are underbanked—more than one in five households cannot easily get paid or access good financing options here in the United States.

EWA providers are helping to close this gap by providing more ready access to cash and, in some cases, providing bank accounts with linked debit cards.

“According to recent research from the U.S. Financial Diaries project, some working families are cobbling together income from increasingly diverse, unpredictable means, such as delivering food, driving for ridesharing services, and doing odd jobs (Morduch and Schneider 2013). For those without a bank account, receiving payment by checks adds a layer of complexity to accessing earned wages quickly. And when income is lower than expected, or emergencies arise, the only alternatives to accessing funds may be costly—for example, running up a high-interest credit card, overdrawing a bank account, or turning to check cashing or payday loan services.”

In the Nick of Time: The Rise of Earned Wage Access—Federal Reserve Bank

Increased Susceptibility to Fraud & Disputes

Unbanked and underbanked markets are more susceptible to fraud, and they pose a significant challenge to issuers seeking to streamline their chargeback management processes. EWA Fintechs attract account holders who are struggling financially and have correspondingly lower credit scores because they are less likely to have access to loans and credit cards. Earned wage access provides an alternative to credit cards by making money available immediately, freeing up a person’s cash flow.

In today’s unpredictable economy, people struggling to make ends meet are finding few options to gain immediate access to cash. Rather than turning to risky payday lenders for help bridging monthly financial gaps, gig workers are turning to EWA Fintechs to help with their cash flow. EWA does not offer loans, though, so many EWA users still rely on payday lenders – suffering the consequences of / extremely high-interest rates and unfavorable terms in the process. As with most unbanked or underbanked populations, gig workers are more likely to find themselves trapped in cycles of debt, as any spare money they would have had goes towards servicing the loan. While EWA providers may offer an alternative to risky loans, their account holders’ financial insecurity still puts these Fintechs at risk for higher instances of disputed or fraudulent transactions.

The need for Fintechs to provide EWA services is more vital than ever—yet, due to the fast-paced and uncertain nature of their market, regulation and compliance surrounding earned wage access is a guaranteed necessity.

Why EWA Fintechs Need a Dispute Management Solution

While most earned wage access Fintechs do not categorize themselves as lenders, last year, the Consumer Financial Protection Bureau (CFPB) instructed state and federal regulators to investigate the space after its use spiked exponentially during the pandemic. Ultimately, it was decided that Covered EWA Programs do not involve the offering or extension of credit.

For example, Payactiv started the new year off right when they received an approval order from the CFPB stating its EWA program is not credit and exempt from the federal Truth in Lending Act (TILA) and Regulation Z rules that govern creditors.

The CFPB’s formal Approval outlines Payactiv’s EWA program as an “innovative mechanism for allowing consumers to bridge the gap between paychecks.” Additionally it, “differs in kind from products the Bureau would generally consider to be credit. Payactiv recovers corresponding EWA amounts via employer-facilitated payroll deductions” and does not “seek repayment from an employee directly or through a payment authorization from the employee’s account.” The Approval encompasses Payactiv’s free and fee-based EWA models, calling its standard $1 fee “nominal” and “de minimis.”

This Approval does not mean every Fintech offering EWA as a service can ignore regulatory requirements. In a November 30, 2020, Advisory Opinion, the CFPB stated that “all EWA providers face regulatory uncertainty,” meaning that the Approval granted to Payactiv is the exception and not the rule. Like other financial niches and products, all EWA providers must stay compliant and operate within the regulations they fall under.

If an EWA Fintech provides card access and supports transactions, it falls under the same regulations as any other issuer. As such, it is required to uphold regulatory compliance – especially with regards to fraud and dispute transactions.

Employing a Disputes as a Service Solution

With COVID still raging and the economy still partially shut down—the need for early access to earned wages will only grow. As Fintechs answer these calls, the CFPB will continue investigating if and how EWA providers will be held to compliance and regulatory standards. In the meantime, automated dispute management solutions may be the answer that players in this fast-paced sector need. By investing in software that automatically updates to ensure compliance and regulations are met—even if they change without an issuer having immediate knowledge—they are investing in the business’s future continued success. As EWA Fintechs evolve to offer more than just earned wage access, they would be wise to employ automated fraud and dispute management solutions to manage complex regulatory and compliance requirements.

Upholding compliance with government regulations and network mandates is a considerable challenge facing EWA Fintech organizations. Not to mention the significant strain on financial and human resources required to understand, apply, and continuously update processes that meet regulatory requirements. Fortunately, there is a cloud-based fraud and disputes SaaS provider dedicated to solving chargeback management and regulatory issues for emerging Fintechs and traditional banking institutions alike.

Quavo’s QFD™ automated dispute management software is the only cloud-based, end-to-end chargeback management platform in the industry. QFD was created by experts with decades upon decades of experience upholding regulatory requirements at some of the world’s largest financial institutions. QFD features automated fraud and dispute workflows designed to ensure compliance with regulatory requirements around deadlines for provisional credit, case resolution, and access to information.

QFD is part of our robust Disputes as a Service offering, which also features human intelligence back-office investigation services and AI technology. All Quavo solutions are supported by a team entirely dedicated to understanding the pages upon pages worth of chargeback mandates and legal stipulations. What’s more, EWA Fintechs can implement Quavo’s automated fraud and dispute solutions without requiring downtime or process disruption.

To learn more about how Quavo’s Disputes as a Service offering can help stay compliant, contact our experts or email us at experts@nullquavo.com. We’re happy to help!