On-demand pay company FlexWage Solutions logged a regulatory win this month when a California regulator ruled it isn’t required to have certain licenses to offer its early access to pay services in the state.
FlexWage said in a press release Wednesday that it’s the only operator in the field that has received such a legal opinion from California’s Department of Financial Protection and Innovation. The Scottsdale, Arizona-based company requested the ruling last year.
A bevy of competitors selling on-demand pay services, also known as earned wage access, are jockeying for a regulatory edge to burnish their brands as federal and state government agencies increase scrutiny of the industry. A key point of contention at the state and federal levels has been whether the services are a form of lending which are highly regulated to protect consumers from exorbitant interest rates and fees.
"DFPI concludes that FlexWage does not originate or facilitate loans subject to the (California Financing Law) or (deferred deposit transactions) subject to the (California Deferred Deposit Transaction Law)," the department’s commissioner, Clothilde Hewlett, said in a Feb. 11 letter to the company. "For this reason, neither FlexWage nor its employer partners are subject to the CFL or CDDTL’s licensing requirements."
Providers of on-demand pay services, also known as earned wage access, have proliferated over the past decade, offering employees a means to tap their earned wages before a standard paycheck cycle ends. U.S. households tapped nearly $10 billion in early wages during 2020, according to the research and consulting firm Aite-Novarica. The services are often used by hourly and low-wage workers.
There may be as many as 35 vendors offering the services in North America, by one estimate. They have varying business models, with some providers charging employers, others exacting fees from employees and still others imposing a hybrid of those two approaches.
FlexWage, which partners with Meta Bank and card giant Visa to provide its services, varies its approach, depending on the employer. In any case, FlexWage’s maximum fee for employees is $5 per transaction on a monthly basis and $16 overall on a monthly basis, according to the state’s letter.
The question of whether such services constitute a loan has been a point of contention between regulators and the burgeoning clutch of on-demand pay providers, with some consumer advocates arguing some companies are skirting lending laws and extracting inappropriate interest rates.
The industry is likely to take note of how California said it views the FlexWage business model. "It is important to note both that the funds come from the employer, not FlexWage, and those funds do not exceed the amount the employer owes a recipient," said the letter, which was signed by the department’s senior counsel, Charles Carriere. "Thus, it appears that the payment that FlexWage facilitates simply satisfies part of an existing financial obligation from the employer to the employee."
A spokesperson for the California Department of Financial Protection & Innovation explained the state’s reasoning for taking the action. "The ruling represents the DFPI’s commitment to provide clarity to financial services providers, particularly when doing so advances the DFPI’s complementary goals of consumer protection and fostering responsible financial innovation," said the agency’s deputy commissioner for communications, Maria Luisa Cesar, by email.
The company said the state’s ruling sets its approach apart from those of its rivals. "With this watershed opinion, employers and partners of FlexWage can feel confident that the FlexWage EWA solution is the only solution in the market that has received a legal opinion from California’s top financial regulator," FlexWage said in its release.
At the same time, the state opinion seemed to cast aside some third-party providers as not eligible for the same treatment as FlexWage. "For the above analysis, it is essential both that the employer, not FlexWage, is the source of the funds, and that the funds available are limited to what the employer owes the recipient," the letter said. "A third‐party with no financial obligation to the employee could not rely upon this reasoning, because the funds provided would be for the recipient’s temporary use, and the third‐party would presumably arrange to recoup the amounts it advanced."
The California agency’s ruling also lets FlexWage avoid being affected by a law designed to protect employees from an employer, or third-party, capturing the workers’ wages because the employers are only paying earned wages. On this front, the state took into account the company’s relatively low fee to employees, citing the maximum $5 per transaction fee on typical payments of $184 amounting to just 2.7%.
At the federal level, the Consumer Financial Protection Bureau has been grappling with some of the same issues, specifically deliberating over what services constitute a loan. And other states’ legislatures are battling over such issues as well.
In response last month to consumer advocates in New Jersey protesting state legislation that would have provided leeway for companies to collect payments for on-demand services, the CFPB’s acting general counsel, Seth Frotman, said the state proposal shouldn’t be seen as being supported by a 2020 CFPB advisory opinion.
He also said that because of "significant confusion" apparently caused by that CFPB advisory opinion, issued during the Trump administration, he plans to recommend that CFPB Director Rohit Chopra clarify the guidance. That means the former policy call, which has been controversial, could be revisited and revised.