Dive Brief:
- Earned wage access can significantly help low-income workers save money, monitor their finances and plan long-term, according to a recent study from researchers at the Korea Advanced Institute of Science and Technology and George Washington University that was published in the peer-reviewed journal Information Systems Research.
- A modest and consistent use of EWA allowed low-wage workers to boost their monthly savings frequency by 3.7%, as they increased the monitoring of their financial dashboards by 12%, and boosted setting financial goals by 1.3%, researchers found, according to a March 2 release on the findings.
- Despite the benefits, researchers found the gains low-wage earners receive from EWA diminish if they fall into a persistent pattern of immediately tapping the cash advances — suppressing their ability to set financial goals.
Dive Insight:
Since 2010, companies such as Walmart, Uber Technologies, and DoorDash have given employees a portion of their earned wages prior to payday by partnering with EWA companies or offering the services directly themselves.
Still, EWA benefits remain controversial.
The evolving industry continues to face headwinds from federal regulatory upheaval, litigation and a patchwork of state approaches, with consumer advocates viewing most EWA providers as profiteers who may dupe workers into paying excessive fees, according to CFO Dive sister publication Payments Dive.
Through EWA, low-wage workers are also often required to pay associated fees when receiving their earnings early through different platforms. Some CFOs also have fears that the platforms could leave workers short on funds to pay rent at the end of the month.
While EWA offers workers more liquidity, the associated fees can be similar to payday lending products that could potentially be overused and lead to a cycle of dependency, — with some advances coming with an average percentage rate of about 110%, according to The New York Times.
But researchers from the Korea Advanced Institute of Science and Technology and George Washington University, who authored the new Information Systems Research report, say the self-empowerment concept of EWA provides greater autonomy over income-use and fostered forward-looking financial behaviors.
Giving the 25% of U.S. workers who earn less than $35,000 per year and living paycheck to paycheck limited access to liquidity helps them overcome persistent financial challenges, the report states.
The lack of liquidity and barriers imposed by financial institutions – including stringent credit checks that restrict access to funds – leaves workers vulnerable to unexpected expenses such as utility bills or medical emergencies.
That’s led workers to turn to payday loans for immediate cash, which comes with excessive financial costs that can erode their cash flow and often leads to defaults or bankruptcy, the report states.
“On-demand wage access changes the psychological and financial landscape for low-wage workers,” said Jihye Kim, a KAIST researcher and a report co-author, in a press release. “By giving individuals autonomy over when they access income, OWA creates conditions for more deliberate financial management, including heightened saving, more frequent monitoring of account dashboards and concrete goal-setting.”
The report, published in December, analyzed transaction-level data from about 4,000 low-wage workers through a major U.S.-based EWA platform between May 2021 and January 2022.
But while EWA helped many workers, the benefits were weakened when those workers showed “immediacy-seeking usage patterns” such as frequently making fee-based withdrawals, the report stated.
To mitigate that impulsive use, the researchers stated EWA platforms should adopt behavior design elements such as in-app reminders or budgeting prompts that nudge its users to make more deliberate decisions.
