Brian Tate is chief executive officer of the trade group Innovative Payments Association, based in Washington, D.C.

When it comes to financial regulation these days, no agency epitomizes the phrase “a hammer in search of a nail” better than the Consumer Financial Protection Bureau. Unfortunately, a recent Consumer Financial Protection Bureau edict will hammer the people the agency’s leadership purports to help, America’s low-to-moderate income wage earners. 

For more than a decade, American workers have benefited from an innovative financial service called earned wage access, which allowed low- and moderate-income households to access a portion of their paychecks when they need their wages, instead of waiting two weeks or a month as dictated by the employer. The growth of these programs was accelerated significantly during the COVID-19 pandemic. Today, more than 55 million Americans use EWA to access their earned income, and many do so at no cost. EWA is significantly cheaper than a payday loan, with no credit check needed or debt collection.

As EWA’s popularity with workers grew, and more and more companies competed to serve the marketplace, regulators in both Democratic and Republican administrations recognized the promise of a low-cost alternative to expensive credit offerings like payday loans. Low- and moderate-income American workers have benefitted from this combination of financial innovation and smart, bipartisan regulation. Consumer complaints about EWA have been virtually non-existent. These data points should point to a financial success story, but that’s where the CFPB steps in.

Most reasonable people would agree that wages are earned, and credit is when someone lends you something you don’t have. But for years, rather than advocating for a regulatory structure that recognizes EWA’s unique characteristics, consumer groups have lobbied state and federal regulators to classify EWA as credit.  Doing so would place EWA under Truth in Lending Act regulations, a decades-old law that regulates traditional credit products.   

Last month, the CFPB granted their wish and released a proposal to regulate all wage advances in the same way the government regulates mortgages and auto loans. In short, at the request of these consumer groups, CFPB wrenched EWA into a regulatory framework that comports to their world view, not one that benefits consumers.  

In 2020, the CFPB issued an advisory opinion that provided some EWA products with an explicit safe harbor from TILA requirements.  At the time, the CFPB said, “some efforts to give consumers access to accrued wages may not be credit at all,” and “there is a quite plausible argument that the transaction does not involve ‘credit’ because the employee may not be incurring a debt at all,” or that EWA is “designed to provide access to the consumer’s own funds.”  The market responded to the agency’s view by developing a wide variety of EWA products. Some were covered by the safe harbor, some were not, but all were better for consumers than the alternative — payday loans. 

The CFPB’s new TILA-based approach to regulating EWA will harm consumers in several ways. First, it will stifle competition and reduce innovation. The new rule will create a market dominated by the largest EWA providers who can afford them and drive others out. It will also erect a barrier to entry for new participants who may have a new idea or technology that could provide the same service at a lower cost for EWA participants.

Second, it will increase costs for workers who need to access the wages they have already earned. Allowing people to access the funds they have earned seems like a no-brainer. While many products offer funds for free, even the CFPB’s statistics show that when workers pay, it costs them about $3 for every $106 of earned income accessed. This is significantly less than the fees charged for a payday loan (see Financial Health Network study). 

Finally, and most alarming, the new regulations could outright deny EWA to the wage earners who need it the most. Low-to-moderate income earners use EWA products because they lack credit or savings when emergencies arise. If EWA is now a credit product, workers will have to pass a credit check to qualify for an EWA. The very same people who lack access to credit in the first place will likely be denied access to EWA. The CFPB’s new rule will unintentionally send to American workers back to a payday loan provider.

For their part, EWA providers and advocates, like the Innovative Payments Association, have argued for new regulations specifically designed with EWA in mind to protect consumers while at the same time providing space for market competition and innovation. The CFPB’s recent action will not achieve either.