Amazon gave its subcontracted delivery drivers a salary bump ahead of the holiday season.¹ The company also added a perk that its regular employees have been enjoying for years: quick access to earned wages.²

Companies such as McDonalds, Hilton, Target, and Walmart make earned wage access tools available to many of their employees.³ The benefit gives worker on-demand access to large portions of their earned pay — Amazon allows up to 75% — before the next payday.⁴

Earned wage access tools popped up about a decade ago, as an alternative to payday loans and other high-interest credit that cash-strapped workers would often use as a financial bridge to their next payday.⁵

The products seem to be fulfilling both needs and expectations these days. The rapid adoption of smartphone apps and faster methods to buy goods, track expenses, and send money has changed views on worker pay, especially among Millennials and Gen Z.⁶

Empower research shows that more than half of Americans (51%) use digital payment apps weekly, noting the quick and seamless transactions that they provide.

How it works

Earned wage access products come in two forms: employer integrated and direct-to-consumer.⁷

Under the employer model, a company will contract with a fintech provider such as PayActiv, DailyPay, or EarnIn (or payroll providers such as ADP) to give workers on-demand access to earned wages. The services might be free, partially subsidized, or fee-based — depending on the benefits provided and how often workers take advances, among other factors.⁸

Fintech companies and online banks such as Chime also offer earned wage advances directly to consumers, without involving employers.⁹ These advances are typically based on a user’s checking account history and come with many different models and fee structures.¹⁰

Many direct-to-consumer models involve monthly subscriptions (from $1 to $14.99) for pay advances, while others charge fees on a per-transaction basis.¹¹ There’s typically a no-cost option to receive funds in 1 to 3 business days, but expedited payments often include fees, typically a few dollars.¹² Some products allow consumers to leave optional “tips” when they take free pay advances, which also average a few dollars.¹³

Why it works for many

The pandemic, inflation, and rising levels of consumer debt have all contributed to a surge in earned wage offerings.¹⁴ More than 10 million workers used employer-integrated and direct-to-consumer products totaling $32 billion in 2022, the latest year federal data is available. Employer plans nearly doubled between 2020 and 2022 and accounted for about 70% of the market.¹⁵

Many workers use the products to smooth out cash flow issues, cover unexpected expenses, and avoid having to budget according to rigid pay schedules.¹⁶

Survey data collected by the Bureau of Labor Statistics in 2023 found that 43% of employers had biweekly pay schedules, 19.8% had semimonthly schedules, and 10.3% had monthly pay schedules. About one-quarter of employers, 27%, paid their workers on a weekly basis.¹⁷

Read More: Money comes, money goes: Are we in an age of “Fast Spending”?

Pay demands change

There’s a growing view, particularly among younger workers, that employee pay should be more immediate.¹⁸ One study showed that 75% of Millennials would factor in earned wage benefits when deciding on a job offer.¹⁹ 

This trend has been influenced in part by the rise of gig economy, where workers are typically paid after completing tasks. Faster payments elsewhere, such as apps like Zelle, Venmo, and PayPal, is another contributor factor to changing pay expecations.²⁰ 

Employers have their own incentives for offering earned wage access benefits, such as attracting and retaining employees, helping them reduce financial stress, and gaining a competitive edge in the labor market.²¹ A survey by the Society of Human Resource Management found that 16% of employers offer payroll advances to workers.²²

Read More: Generation Money: Millennials’ snapshot

Fees, tips and interest. It’s tricky.

Regulators have struggled to keep up with the rapidly growing industry and its many different models and fee structures. Fees, tips, and subscriptions are often nominal, but they can add up with repeated use.²³

A federal survey of 8 employer-partnered programs found that the average worker had 27 earned wage transactions per year, with an average fee of $3.18. An average pay advance of $106 with $3.18 in fees for a ten-day period would translate into an annual percentage rate of 109.5%.²⁴

Using published data from a direct-to-consumer plan, the same survey found that a $144 transaction for a seven-day period, with $8 in combined fees and tips, would equate to a 290% APR.²⁵

Tip features are never mandatory in direct-to-consumer products and some providers skip them altogether. A state of California study analyzed 5.8 million transactions from tip-based providers and found that users left tips 73% of the time, with an average amount of $4.09.²⁶

Loans or not?

The Consumer Financial Protection Bureau has proposed regulations that would treat many earned wage products like loans. Providers would have count “tips” and expediting fees as finance charges, raising the advertised costs of the products.²⁷

But there’s considerable disagreement among the states about that approach. Kansas, Nevada, Missouri, and Wisconsin have enacted laws that say earned wage access products aren’t loans.²⁸

Earned wage products can be costly, but they’re often less expensive than incurring bank overdraft fees or paying the 400% average APR on a payday loan, according to another federal study. Wage advances also have no effect on credit reports.²⁹

Many in the industry compare the costs of earned wage access to ATM fees. Consumer finance professionals say the products are most beneficial to employees that have a handle on costs and know which services they really need.³⁰