It always feels good to get paid, so it’s no surprise that a payroll model like earned wage access (EWA), which allows employees to withdraw their accrued wages at any time, has exploded in popularity.
The pandemic has certainly played a big part in helping us understand the benefits of being able to treat their accrued salaries like a small bank account. While wage advances and payday loans have been around for much longer, they serve an entirely different purpose. With EWA, since you can only access money you’ve already earned, there’s no risk of building up debt and employees can better manage their finances.
The potential for this model is huge, but the industry is still in its infancy. Several countries do not yet have an EWA provider and in most other countries providers are still taking their first steps.
Jennifer Ho, partner at Integra Partners, is confident that the EWA industry will continue to grow after positive early interest. “In 2021, raised over $1.13 billion by startups offering EWA products. Changing lifestyles, rising costs of living and the residual impact of COVID-19 have left many SMEs dependent on EWA,” she said.
That’s not to say there aren’t problems. Most EWA providers are still experimenting to find out what works, and business models vary widely, which is a symptom of an industry trying to gain a foothold. Two of the more prominent models involve either charging the employer a flat fee or charging employees per transaction.
Aris Xenofontos, partner at Seaya, believes that an employer-paid model is the right choice for two reasons: social impact and long-term viability. “From a social impact perspective, would you want the party that needs the money most, the employee, to pay for the services? And from a long-term viability perspective, offering the service to employees for free helps drive better adoption — often 2x-3x the acceptance you get when employees pay per transaction,” he said.
“EWA companies are typically B2B2C companies and face the same challenges as many B2B2C companies: the decision maker and the consumer have different incentives and priorities.” Jennifer Ho, partner, Integra Partners
“Considering that the pure EWA business model is not among the strongest in the fintech world, choosing the model that helps with better adoption leads to more cross-selling opportunities and ultimately a better economy.”
To get a more in-depth look at the state of the EWA industry, how it should be classified, and where the money is going, we spoke to a few active investors in the space:
EWA is already prevalent in the US in sectors such as retail and fast food, so how difficult will it be for startups to bring the technology to new sectors? Which sectors are the most mature and which are the most resistant?
Jennifer: EWA works in any industry where wages are not immediately paid, and it works best when they can serve large groups of financially disadvantaged workers. The less savings people have to fund their daily activities prior to the payout, the more valuable the EWA becomes.
In developed markets, this usually means sectors with a large number of workers. However, in emerging markets such as Southeast Asia, where financial literacy remains relatively low and large segments of the middle class remain financially disadvantaged, EWA could have a much broader impact.
aris: We recently observed penetration of EWA in two dimensions: vertical and horizontal.
Vertically, retail and fast food are indeed some of the first that come to mind, but other sectors are also seeing growing penetration. Especially those where the workforce is dominated by workers, such as manufacturing and transportation.
From a horizontal perspective, we see that EWA is penetrating almost every industry in terms of lower pay/entry employees. This is for sectors where the proportion of permanent full-time employees is high.
We believe that the cost of living crisis that started in 2022 and is likely to continue for some time to come will promote this horizontal penetration.
Aditi: The best way to roll out EWA to new industries is to distribute through payroll providers. One sector where EWA is rated favorably is the nursing/medical industry.
Access to earned wages is still a fairly new service and we see multiple models, with some employers charging fees and others charging employees. Which wage earner access model is the strongest? Why?
Jennifer: From a financial inclusion perspective, models where the employer – rather than the employee – bears the costs have the stronger social impact. What we’ve found is that EWA startups typically serve a mix of customers from both models, with the employer paying in some cases and the employee paying in others.