If you’re one of the more than a third of Americans who couldn’t afford to cover a $400 emergency, waiting a week or two or longer for a paycheck is a pain, especially if an emergency upends your already tight budget.

For some cash-strapped workers, the solution can be found in an earned wage access app — an increasingly popular service that offers users early pay, often in exchange for a fee, for work they’ve already completed but haven’t yet gotten a paycheck for. 

Earned wage access has become an umbrella term for apps that pay out earned wages early, though there are key distinctions among different types of programs. Some of them are integrated directly into employers’ payroll systems to let employees get some of their wages in advance, leaving them with a smaller paycheck on their normal payday. These are offered by some of the biggest employers in the country, including Amazon and Walmart.

Direct-to-consumer early wage access programs, sometimes known as cash advance apps, on the other hand, function more like loans, giving workers their wages in advance based on what they report they’ll earn. 

The market for both types of services appears to be growing rapidly. Workers accessed $9.5 billion via early wage access companies like EarnIn, MoneyLion, and DailyPay in 2020, up from $3.2 billion in 2018, according to a report from the research firm Aite Novarica.

The apps are popular across industries that employ low-wage workers, including food service, retail, and gig work, according to a 2021 report by the New York-based accounting and consulting firm KPMG. Employers such as Uber, McDonald’s, Burger King, Domino’s, and Chili’s have introduced earned wage access programs in some form, and KPMG predicts the sector will continue expanding and reach new classes of workers, including white-collar workers. 

Early pay programs can spot workers who are short on cash, and some can be less costly compared to credit cards. But some apps charge service fees so high that many experts say they’re merely payday loans by another name, draining precious funds from already cash-strapped low-wage workers. Some programs’ fees are repaid by directly debiting workers’ bank accounts, which creates the risk of steep overdraft fees, said Lauren Saunders, associate director of the National Consumer Law Center.

Between January 2016 and January 2023, workers filed more than 450 payday loan-related complaints against early wage access providers with the Consumer Financial Protection Bureau, citing issues including unexpected fees, an inability to stop withdrawals from their bank accounts, and problems paying the advances off at the end of a loan period, Vox’s analysis of CFPB data found.

Employers position earned wage access programs as a workplace benefit and personal finance tool that offers workers flexibility and control over when they’re paid. Yet these services also reflect and reinforce the high cost of being poor in America: Rather than getting paid enough in the first place to cover everyday expenses and save for emergencies, workers are penalized for needing early access to wages that they’ve already earned. 

“The biggest problem with these programs is they really end up [with] people paying to be paid, and that’s just wrong,” Saunders said. 

With their popularity surging, early wage providers are now facing intensifying regulatory scrutiny, which could limit their ability to extract high fees from their customers. But the industry is also working to head off regulation by carving itself out of laws that protect consumers from predatory lending.

Early wage access, explained

Some companies cover their workers’ fees for early wage programs, so they can get their pay earlier at no extra charge, while others pass the costs onto employees and contractors. Employer-based programs generally charge fees of a few dollars per transaction, depending on the amount of money that’s requested, while cash advance app fees can range from less than a dollar to over $20, according to Nerdwallet. 

That may not sound like much, but the costs can add up. Uber, for example, offers an early wage access service that lets drivers cash out their earnings up to five times per day for $0.85 per transaction. If a driver does this every day for five days, it’ll cost them $21.25 in fees. Multiply that over four weeks, and it totals $85. A recent report from California’s Department of Financial Protection and Innovation found that fees for early wage access programs, including both employer-backed and direct-to-consumer programs, averaged an eye-popping annual interest (APR) of more than 300 percent. 

“Employers often claim that these programs are a benefit. If they’re a benefit, then the employer should pay for it,” Saunders said.

Some cash advance apps push customers to pay a “tip” to the app to be able to access their funds. The term “tip” is effectively a way for apps to disguise fees, said Yasmin Farahi, deputy director of state policy and senior policy council at the Center for Responsible Lending. Consumers often don’t know that these fees are optional and cannot figure out how to opt out of them, she added. 

Employer-backed early wage services don’t ask for tips, but they may begin to if regulators allow it in the future, Andrew Kushner, policy counsel at the Center for Responsible Lending, told Vox. 

The fees can push low-wage workers into a vicious cycle of reborrowing. “Any time there’s a fee involved in that — even a small one — that’s going to add up. And at the end of the day, all you’ve done is added more fees to your budget rather than have any greater ability to handle expenses,” Saunders said. “For low-wage workers, even a few dollars are a meal.”

In theory, early wage access programs are best used as a one-off, to cover an unexpected expense or budget shortfall. But once workers start using it, they tend to start needing it for every paycheck, trapping them in a cycle of needing a cash advance every pay period, Farahi said.

Some research suggests that wage access users repeatedly turn to these services after they’re introduced. A March 2022 paper by Harvard and Yale researchers, examining data from the Mexican fintech firm Minu, found that 40 percent of workers who began using early wage access continued to use it afterward. 

Another June 2023 survey from Harvard researchers found that only a quarter of respondents used direct-to-consumer early wage access apps to cover emergencies or unexpected expenses, while three-quarters rely on such services to pay for regular expenses like groceries, rent, gas, and childcare.

Of the survey respondents who used early wage access apps in the past year, a third said they used them a few times a year, while 21 percent said they used them once a month and 16 percent used them twice a month or twice a week. 

“Because people are likely to have to keep taking these out, then what sounds like a really short-term loan can end up being a longer-term loan, [a] longer-term cycle. And that’s where we see the similarities of payday loans,” Farahi said. 

Regulators are eyeing the earned wage industry

Because early wage access apps are so new, financial regulators haven’t settled on how to classify and govern them. Many states have lending laws, such as interest rate limits or disclosure regulations, that may apply to wage access services if they’re legally considered loans. “Lending laws have a lot of important protections to protect people against problems that credit can create,” Saunders said. 

In 2019, the New York State Department of Financial Services (DFS), along with financial regulators from 10 other states and Puerto Rico, launched a multi-state probe into the payroll advance industry to investigate allegations that it was collecting illegally high interest and fees, as well as improperly triggering overdraft fees on users’ bank accounts. When asked about the status of the inquiry, a spokesperson for DFS said it cannot comment on ongoing investigations.

In Pennsylvania, the company Activehours, Inc., better known as the early wage access app EarnIn, is facing a lawsuit alleging that its interest rates, fees, and other charges exceed the state’s maximum interest rate of 6 percent. The suit also alleges that customers can’t figure out how to opt out of tipping the company for its services. Activehours did not respond to Vox’s request for comment. 

Meanwhile, the earned wage access industry is trying to head off regulatory scrutiny. Last year, the American Legislative Exchange Council (ALEC), a prominent conservative lawmaking group that writes draft legislation for state governments, created the “Earned Wage Access Act,” a proposed law intended to soften regulation of the wage access industry. It would exclude early wage access services from the definition of credit and prevent them from requiring credit scores or reporting customers’ payment history to credit bureaus, essentially exempting them from lending laws that protect consumers. 

ALEC didn’t respond to Vox’s request for comment about which states it’s trying to push the bill in, but Missouri and Nevada have passed legislation modeled on the bill, and a handful of mostly red states are considering similar laws, Bloomberg Law reported last month. 

For the early wage industry, it’s critical to avoid being defined as credit because that would make it subject to state and federal credit regulations, such as caps on fees or interest rates, Saunders said. The ALEC bill would create “a gigantic loophole” in state lending laws, she said, enabling a new form of payday loan available at the click of a button that comes with predatory annual interest rates of 150 percent to 500 percent.

Connecticut has passed legislation defining early wage services as loans, and California is working on rules that would do the same, Bloomberg Law reported.

The Consumer Financial Protection Bureau has begun taking enforcement actions in the early wage space. Last year, the agency rescinded a provisional approval order that had safeguarded the early wage provider Payactiv, which partners with employers, from liability under the Truth in Lending Act, a federal law that protects consumers from unfair credit practices. A CFPB spokesperson did not say whether the agency would take more enforcement actions in this area, but told Vox it intends to clarify what is considered credit under current laws. 

Just pay people enough to live

The early wage access industry has emerged because so many Americans aren’t paid enough, and they aren’t paid quickly enough. There’s frequently a lag of several days between when employees complete their work and when they get paid, making many workers reach for early pay apps.

The US still largely lacks the ability to make instant, real-time payments between bank accounts — a technology that’s widely available in many other countries — which means it can take longer for workers to get paid. Slow bank payments “have very significant wealth effects for low-wage workers,” said Elena Botella, author of Delinquent: Inside America’s Debt Machine. Fintech companies have stepped in to fill that void with early wage apps, offering workers faster access to their earnings for steep fees. 

The Federal Reserve launched its own US instant payments system, called FedNow on July 20, which could speed up the delivery of paychecks to workers. 

Though a faster payment system would benefit workers, the financial services sector has benefited somewhat from America’s slow payments system through bank overdraft fees and check-cashing services. Banks with more than $1 billion in assets generated $1.4 billion in overdraft-related fees in Q1 2023, according to an S&P Global Market Intelligence Report released in May. 

Banks can also ease the burden on low-income people by not clearing low-wage workers’ paychecks at a slower pace than higher earners, said Botella, who formerly worked at Capital One and now is principal at Omidyar Network. If a customer has overdrawn their account in the past, some banks will delay how soon they can access the funds as part of their fraud mitigation efforts — but this ultimately can push low-income workers toward alternatives, like wage access apps, that will get them paid faster, Botella added. 

The more obvious, more permanent solution is to pay workers a living wage, Saunders said. Early wage access shouldn’t be viewed as an “escape hatch” that makes it easier for employers to pay subpar wages. “Employers have a moral imperative to pay their workers a living wage to enable the essential workers that support us all to live on what they’re being paid,” she said. “Giving people the opportunity to borrow from next week’s paycheck because this week is not enough — it’s not a substitute for a living wage.”

The reporting for this story was supported by the Economic Hardship Reporting Project.

Citing the impact of Covid-19 on many consumers’ finances, some banks, including Ally Bank and KeyBank, have stopped charging overdraft fees or have offered relief from them. Other banks, however, have gone in a different direction. 

Between March 13, 2020, and September 20, 2021, account holders filed over 1,600 complaints against various banks to the Consumer Financial Protection Bureau (CFPB) about overdraft fees, the agency’s records show. 

“Wells Fargo picks and chooses when they are going to charge overdraft fees and when they are going to pay a bill or not,” one complaint filed against Wells Fargo on September 1, 2021, reads. “I will go to sleep and my account [is] positive and there is enough to cover pending charges. Then all of sudden days later the date of the [charge] is changed and I have been charged an overdraft fee. They have recently even had notices within the app that says your balance amount may not be accurate.”

These fees, which can be as high as $35 per overdraft transaction, are an incredible hardship for some consumers. As the complaint continues, “I have a second chance checking account and because of some hardships I am limited in who I can bank with. I feel like Wells Fargo takes advantage of the underprivileged.”

Though some US banks temporarily paused on charging overdraft and other service fees, an analysis of banks with more than $1 billion in assets and some smaller institutions that chose to disclose data suggests that banks are on their way to charging service fees at pre-pandemic levels even as the Covid-19 pandemic resurges. A March 2021 report from S&P Global Market Intelligence indicated that banks collected $3.6 billion in service fees in the fourth financial quarter of 2020. Overdraft fees composed $2.32 billion of those service charges in the quarter, a 64 percent spike from just six months prior in the second quarter of 2020, the report noted. 

Put simply, these fees amount to another tax on the poor, an extraction from the country’s poorest Americans to its wealthiest banks, experts say. Overdraft fees are meant to safeguard banks from risks associated with covering account holders’ overspending, but they can disproportionately hurt low-income consumers who need protection the most, experts told Vox. Lawmakers and advocacy groups had called for the curtailing of these fees even before the Covid-19 pandemic disrupted the US economy. Now, the call to regulate bank fees has returned as the coronavirus crisis continues to upend consumers’ financial lives. 

Why do banks charge account maintenance and overdraft fees?

The FDIC defines overdraft fees as a fee assessed whenever an account holder spends more than what’s in their account. Banks may also charge an account maintenance fee, also known as monthly service fees, just for having the account or for falling below a certain minimum balance, per the FDIC. Banks, of course, can charge a range of other fees, including ATM use fees, per-check fees, and stop-payment fees.

It’s hard to pinpoint when banks began charging overdraft fees in the US. Vox reached out to JPMorgan Chase, Wells Fargo, and Bank of America to ask when they started charging account maintenance and overdraft fees, but none of them shared when they implemented these charges. According to a 2020 report from the Center for Responsible Lending, banks historically declined debit card charges when account holders lacked the funds to cover charges. But over time, banks — at the urging of software consultants who were promoting overdraft programs on a contingency fee basis — began allowing overdraft transactions to go through and charging customers fees. 

“I think that at some point it was clear that it was a helpful situation, so that bills didn’t bounce, checks didn’t bounce, mortgage payments didn’t bounce,” said Peter Smith, senior researcher at the Center for Responsible Lending. “This was a fairly informal service, but when people started using debit cards more [and] people started using electronic payments more, I think banks began to see this as an opportunity for revenue and not just a convenience service they could offer their account holders.”

Though overdraft fees can be costly for low-income households, they make up a small share of banks’ overall income. Per the Center for Responsible Lending’s analysis, bank overdraft fees average $35. That fee tends to be higher than the value of the transaction that triggers it, which is $20 on average. For banks with assets of $1 billion or more, overdraft or insufficient funds fees are about 5 percent of their non-interest income, the report noted. 

Banks charge overdraft fees to account for the risks associated with covering charges on overdrawn accounts, said Deeksha Gupta, assistant professor of finance at the Tepper School of Business at Carnegie Mellon University. Though banks are profitable without charging these fees, they want to avoid risks for paying merchants’ charges and deter account holders from overspending, Gupta said. 

Bank fees’ impact on vulnerable consumers

Banks don’t want to take on the risks of covering consumers’ overdrawn transactions, but it remains up for debate whether the fee is truly worth it given its impact on low-income consumers. Overdraft fees tend to prey upon low-income consumers, Rebecca Borné, senior policy counsel at the Center for Responsible Lending, said. The center’s 2020 report found that 9 percent of bank account holders pay 84 percent of the more than $11 billion overdraft fees banks collect every year. 

Borné said while other fees serve a function — it does cost banks to administer checking accounts, rendering account maintenance fees somewhat necessary, for instance — with overdraft, the effect is different. Besides charging a high overdraft fee per transaction with insufficient funds, banks engage in a range of practices that can leave customers with compounding overdraft fees, including charging more than one fee per day, charging fees for debit card purchases and ATM withdrawals, and imposing another overdraft fee if previous fees aren’t paid within a set period of time, the Center for Responsible Lending’s report explained.

As some banks resume charging overdraft fees, pre-pandemic research suggests such fees play a role in excluding unbanked consumers from accessing traditional bank accounts. According to the FDIC’s 2019 How America Banks report, about 5.4 percent (7.1 million) of US households were unbanked, meaning nobody in the household had a checking or savings account at a bank or credit union. Among the reasons why respondents said they don’t have a bank account: Almost half of respondents said they don’t have enough money to meet minimum balance requirements, and more than a third said bank account fees are too high. 

Complaints filed to the CFPB offer a window into consumers’ struggles with overdraft charges. “In … 2021, US Bank had enrolled me into an overdraft protection program which I never authorized. One time I was out traveling and forgot to put money in my checking account, and my balance hit negative. I was unaware and kept using my debit card for small transactions like coffee,” reads one complaint filed August 27 against US Bancorp. “The majority of these transactions are below [$10]. Instead of declining these charges, US Bank charged me a series of overdraft fees, each of them [$36]. In the end, the total overdraft fees ended up being [$360] for over a couple of days. They waived three of them, bringing my loss down to [$250] … Talking to their customer service, they never offered an option to opt out of their overdraft ‘protection’ program. They offered some even more predatory protection options instead which I declined.”

With bank fees pushing consumers away from traditional bank accounts, vulnerable consumers may be driven to use even costlier alternative financial services. According to a May 2020 Federal Reserve report, 16 percent of US adults were underbanked in 2019, meaning they had a traditional bank account, but also used alternative financial services like check cashing services, money orders, and payday loans. The report also noted that unbanked and underbanked Americans were more likely to have lower education levels, be people of color, or have lower incomes. For consumers who are worried about overdraft fees, they’d rather turn to riskier alternatives instead.

As for why consumers turn to alternative financial services, some consumers have no other option, and these alternatives are actively targeting them. The Federal Reserve report noted that 43 percent of credit applicants with incomes of less than $40,000 were denied credit, compared to 9 percent of applicants who earn more than $100,000. Even for underbanked consumers who have traditional bank accounts, payday lenders and other high-cost installment lenders aggressively target customers in low-income neighborhoods, communities of color, and people who need extra cash, Borné wrote in a follow-up email. Meanwhile, banks don’t always offer affordable small loans for consumers, and they have little incentive to do so because regulators can allow them to charge high overdraft fees for each overdraft, she added.

“Those who go to payday lenders because they believe they will be in and out of the loan quickly are often stuck for the long term, incurring a lot of overdraft fees when the payments are extracted from their accounts,” Borné wrote. “Ultimately, they often lose their accounts. These wealth-draining products tend to feed each other, creating needs rather than filling them, and leaving customers with fewer credit options down the line.”

Gupta agreed underbanked and unbanked consumers are often forced to turn to more expensive alternatives. As the coronavirus pandemic continues with no discernible end in sight and assistance programs come to an end, overdraft and account maintenance fees can compound for households that are struggling now, she added.

“Ideally, the banking system should be helping low-income consumers. We don’t want that type of money to be flowing from lower-income households to banks because they’re in overdraft,” Gupta said of the billions of dollars in overdraft charges.

Even though overdraft fees and other service charges make up a small share of major banks’ revenue, some experts questioned whether limiting these fees would disincentivize banks from offering affordable financial services that could attract low-income consumers. As Gupta explained, some banks could opt not to offer certain affordable bank accounts to avoid taking on additional risk. An April paper from the Consumer Financial Protection Bureau also suggested that capping overdraft fees could cause banks to offer fewer affordable account options for low-income people. 

What to do if you’re being charged too much in overdraft fees

Banks could do a better job of disclosing bank fees to consumers, said Desmond Brown, assistant director of the CFPB’s office of consumer education. He said depending on the institution, overdraft fees can be structured in a complex way. Some bank accounts offer the option to opt in to overdraft fees, so consumers should see whether it’s an option to opt out when looking for a new account. When signing up for a new account, Brown said, consumers concerned about fees should shop around and ask for bank accounts that are tailored to low-income consumers and learn about the bank’s cost structures. Consumers can also look for banks that provide alerts when their funds are low, he added.

Brown also encouraged consumers to file complaints with the agency if they’re experiencing fee problems with their bank. Doing so not only allows CFPB to assist consumers directly, but it also helps the agency assess issues happening in the marketplace, he said. 

“If we have seen a spike in an area of complaints, then we can look to other tools at the bureau to help drill down and find out exactly what’s going on, and be more responsive to consumer needs,” Brown said. 

For consumers looking for affordable bank accounts, Brown pointed to the FDIC’s Model Safe Accounts program, which works with banks to determine how they can offer affordable bank accounts. Some financial services firms offer accounts with no overdraft or account maintenance fees. (In their respective statements, JPMorgan Chase said during the pandemic it has waived $650 million in fees, including overdraft fees, between January 2020 and March 2021; and Wells Fargo touted its low-cost, no-overdraft-fee bank account, its zero balance alerts, and its overdraft fee waivers.)

When asked what the agency is doing to assist consumers who’ve been charged excessive overdraft fees, a CFPB spokesperson said, “Overdrafts have the potential to be very costly for consumers, and we are continuing to closely monitor developments in this area.”

But as consumers file complaints or seek low-cost bank accounts on their own, advocacy groups and lawmakers have pushed for more restrictions on overdraft fees. On June 30, Rep. Carolyn Maloney (D-NY) introduced the Overdraft Protection Act of 2021, a bill that aims to regulate the marketing and charging of overdraft fees at financial firms. During a House Committee on Financial Services hearing on July 21, Borné provided a statement on behalf of the Center for Responsible Lending calling for Congress to hold regulatory agencies like the CFPB to protect consumers from harmful overdraft fee practices. 

“What to me is especially frustrating is that financial inclusion is all the buzz in a lot of circles. I feel like in a lot of these conversations people just try to talk around the elephant in the room, which are bank overdraft practices,” said Borné. “We’re talking about billions of dollars every single year being drained, disproportionately from Black and brown communities, and kicking people out of the banking system, eroding trust in banks. It’s just a huge barrier to real financial inclusion.”