A sure sign that a new product or technology is becoming mature is the level of attention that it attracts from regulatory bodies. On-demand earned wage access (EWA) has been in the sights of both federal and state regulators for some time. In 2020, the CFPB provided an advisory opinion regarding EWA and began to collect information from providers to understand the dynamics of the industry and presumably to shape its guidance. That document provided some understanding of the regulatory direction, but now the CFPB may rescind its own opinion, creating uncertainty.
This month, the California Department of Financial Protection and Innovation posted a letter with a legal opinion regarding the product construct specific to EWA provider, FlexWage. FlexWage’s product is different than most in the industry as the employers fund the pay that employees elect to receive early. California regulators determined that the FlexWage product is not subject to licensure in California under the California Deferred Deposit Transaction Law (CDDTL) or the California Financing Law (CFL). They came to this conclusion because the employer is the source of funds and FlexWage does not seek to collect over payments from individual employees. The question for the industry then becomes, if an EWA provider does provide the employee funding and does reserve the right to pursue employees for over payments, do they then need licenses in California and will the CFPB pursue a similar line of thinking?
Payments Dive noted this on the topic:
On-demand pay company FlexWage Solutions logged a regulatory win this month when a California regulator ruled it isn’t required to have certain licenses to offer its early access to pay services in the state.
FlexWage said in a press release Wednesday that it’s the only operator in the field that has received such a legal opinion from California’s Department of Financial Protection and Innovation. The Scottsdale, Arizona-based company requested the ruling last year.
The question of whether such services constitute a loan has been a point of contention between regulators and the burgeoning clutch of on-demand pay providers, with some consumer advocates arguing some companies are skirting lending laws and extracting inappropriate interest rates.
The industry is likely to take note of how California said it views the FlexWage business model. “It is important to note both that the funds come from the employer, not FlexWage, and those funds do not exceed the amount the employer owes a recipient,” said the letter, which was signed by the department’s senior counsel, Charles Carriere. “Thus, it appears that the payment that FlexWage facilitates simply satisfies part of an existing financial obligation from the employer to the employee.”
Overview by Sarah Grotta, Director, Debit and Alternative Products Advisory Service at Mercator Advisory Group