The Rise of ‘Fringetech’: Regulatory Risks in Early Wage Access
58 Pages Posted: 5 Mar 2020 Last revised: 13 Aug 2020
Date Written: 2019
By many accounts, the financial technology, or FinTech, sector appeared to have developed an innovative solution to assist low-income workers with income shortfalls between standard paydays by displacing fringe financial service providers, namely payday lenders. Early wage access programs facilitate early transfers of earned but unpaid wages to low-income workers through mobile platforms, algorithmic technology, and GPS-tracking. To many, early wage access programs represent a win-win for employees and their employers. These programs are believed to be cheaper and safer alternatives to payday loans. Also, preliminary research suggests these programs improve labor retention rates for employers and help reduce financial distress for low-income employees. Consequently, a growing number of employers, including Walmart Inc., have partnered with early wage access providers to offer these programs as an employee benefit. Employees may also use third-party providers that bypass employers and offer programs directly through mobile app stores. In less than a decade, this nascent market has impressively achieved national scale, millions of users, and hundreds of thousands of employer partnerships.
Yet, notwithstanding these early successes and perhaps because of these early successes, these programs also have downsides, which have been much less emphasized. In particular, though the gatekeeping role that employers play in the fringe marketplace can facilitate meaningful improvements, it also masks significant borrowing costs to employees, which are not fully disclosed to employees. Additionally, the early wage access market creates detrimental regulatory blind spots and enables regulatory arbitrage by blurring the lines between once-distinct financial services—i.e., money transmission and loan services. Early wage programs have largely operated with minimal legal constraints because they have generally been characterized as money transfer services rather than loan services like competing payday loans. Building on the FinTech literature, by analogy, this Article argues that this blanket characterization is a mistake. Many early wage access programs pose unmitigated consumer risks reminiscent of payday loan risks and therefore, require regulatory intervention. This Article proposes a federal-level regulatory framework based on lending laws that addresses the some of these unmitigated risks with consumer protection requirements, including uniform price disclosure, ability-to-repay analysis, optional amortization mechanics, mandatory credit scoring and the right-to-rescind assignment. In doing so, it aims to facilitate growth of the market’s functional innovations and prevent a mere shift to fringe FinTech, or “FringeTech”, services.
Keywords: fintech, financial technology, early wage access, earned wage access, payday loans, fringe financial services, alternative credit services, consumer law, consumer credit, consumer financial protection
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