Hartford Business Journal

24 HARTFORDBUSINESS.COM | FEBRUARY 19, 2024 FOCUS | BANKING & FINANCE State Rep. Jason Doucette (D-Manchester) co-chairs the legislature's Banking Committee, which is likely to consider legislation this year on how to regulate earned wage access providers. PHOTO | YEHYUN KIM/CT MIRROR Regulatory Overreach? Fintechs urge action after new banking regulations drive 'earned wage access' services from CT By Michael Puffer mpuffer@hartfordbusiness.com R ecent and little-noticed changes to Connecticut banking laws have sparked backlash from financial technology companies, which have stopped providing "earned wage access" services in the state. Such services allow users to access already earned wages before payday, and have been used by more than 150,000 Connecticut workers since 2012. Earned wage access programs have grown in popularity in recent years, with U.S. workers annually tapping billions of dollars in early pay, according to consulting firm Datos Insights. That has stirred the attention of policymakers and regulators in various states, including Connecticut. Critics say the industry is not so different from storefront payday lenders, which were largely driven out of the state by predatory lending restrictions that went into effect in 2016. However, earned wage access providers insist they aren't lenders, and offer a no- or low-cost option for individuals who need early access to their paycheck, and might otherwise have to turn to pawn shops, credit cards or other higher-cost alternatives. The Connecticut Department of Banking in September issued new guidance on the industry — in response to a series of changes adopted by state lawmakers in 2023 — that require earned wage access companies to be licensed and regu- lated as small loan providers. More importantly, lawmakers also changed the formula used to determine a small loan's annual percentage rate, adding tips and subscription or convenience fees into the calculation. Those are key revenue streams for earned wage access providers, and the formula change pushed them well past the 36% small loan APR cap set by state law. Fintechs argue the changes, which went into effect Jan. 1, make it difficult to operate in the state, and they're clamoring for legislative fixes that would reopen the door to Connecticut. "I think regulators and adminis- trators that have a forward-thinking approach will say: 'This is a new product, let's build a new regulatory framework for it,'" said Phil Gold- feder, CEO of the American Fintech Council, which published a letter in September raising "serious concerns" about the guidance issued by the state Department of Banking. "Connecticut's just not doing that. And because Connecticut is doing what it's done, most companies have left the state." The Washington, D.C.-based trade association represents 10 companies currently engaged in earned wage access, and others exploring it. Gold- feder said he expects to testify before Connecticut lawmakers as they consider adjustments to banking laws this year, following an outcry from the industry and Connecticut residents who use its services. The Department of Banking declined to comment on this story. What is earned wage access? Earned wage access providers have two primary business models, according to a March 2023 report by the U.S. Government Accountability Office. In the "employer-spon- sored" model, a fintech partners with companies to confirm hours worked and provides access to a portion of an employee's earned wages prior to payday. The advance then gets deducted from an employee's paycheck. According to the American Fintech Council, earned wage access providers have established partner- ships with over 1,300 businesses in the state. In the "direct-to-consumer" model, customers provide fintechs direct access to their bank accounts to confirm prior employer direct deposits, which help inform future early wage payments. Individual employers are not involved in the process. The GAO report noted earned wage access providers may offer underserved consumers benefits, including lower costs and access to credit. But they can also lack cost transparency and pose "fair lending" risks to consumers and "credit risk" to partnering banks, GAO said. Earned wage access companies that work with the American Fintech Council are required to offer a no-cost option, according to Goldfeder. They also cannot charge late fees, send an unpaid debt to collections, or report to a credit reporting agency — all factors that distinguish the industry from lenders, Goldfeder said. Essentially, their only recourse for a customer who dodges repayment is to bar them from the service, he said. "The opponents of earned wage access will try to make you believe Phil Goldfeder

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