It always feels good to get paid, so it’s no surprise that a payroll model like earned wage access (EWA), which lets employees withdraw their accrued wages at any time, has exploded in popularity.
The pandemic certainly played a big role in helping people 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 a very different purpose. With EWA, since you’re only accessing money you’ve already earned, there’s no risk of accumulating debt, and workers can better manage their finances.
The potential for this model is huge, but the industry is still very much in its early stages. Several countries don’t yet have an EWA provider, and in most others, providers are still taking their first steps.
Jennifer Ho, partner at Integra Partners, is confident that the EWA industry is going to keep growing after positive early interest. “In 2021, over $1.13 billion was raised by startups offering EWA products. Due to changing lifestyles, rising costs of living and the residual impact of COVID-19, many small and medium-sized enterprises have grown dependent on EWA,” she said.
That’s not to say there aren’t some issues. Most EWA providers are still experimenting to find out what works, and the business models vary widely, which is a symptom of an industry trying to find its footing. 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 an employer-paid model is the way to go for two reasons: social impact and long-term viability. “From a social impact perspective, would you want the party that needs the money the most, the employee, to pay for the services? And from a long-term viability perspective, offering the service for free to employees helps drive better adoption — often 2x-3x the adoption you get when employees pay per transaction,” he said.
“EWA companies are typically B2B2C businesses and face the same challenges that many B2B2C businesses face: The decision-maker and the consumer have different incentives and priorities.” Jennifer Ho, partner, Integra Partners
“Taking into account that the purely EWA business model is not among the strongest in the fintech world, choosing the model that helps drive better adoption leads to more cross-selling opportunities, and eventually, better economics.”
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:
- Jennifer Ho, partner, Integra Partners
- Aris Xenofontos, partner, Seaya Ventures
- Aditi Maliwal, partner, Upfront Ventures
EWA is already prevalent in the U.S. in industries 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 ripe, and which ones offer the most resistance?
Jennifer: EWA works in any sector where wages are not paid instantly, and it works best when they can serve large pools of financially underserved employees. The less savings people have to finance their day-to-day ahead of wage disbursement, the more valuable EWA becomes.
In developed markets, this typically means sectors that have a large blue-collar workforce. However, in emerging markets like Southeast Asia, where financial literacy remains relatively low, and large segments of the middle class remain financially underserved, EWA can have a far broader impact.
Aris: We have been observing recently a penetration of EWA in two dimensions: vertically and horizontally.
From a vertical perspective, retail and fast food are indeed some of the first ones to come to mind, but other sectors are seeing growing penetration as well. Especially those where the headcount is blue collar dominated, such as manufacturing and transport.
From a horizontal perspective, we see EWA penetrating nearly every sector at the lower compensation/entry-level employees point. This is for sectors where the proportion of permanent full-time employees is high.
We believe the cost of living crisis that started in 2022 and will presumably last for some time is likely to promote this horizontal penetration.
Aditi: The best way to roll out EWA to new sectors is by distributing through payroll providers. One sector where EWA is viewed favorably is the nursing/medical industry.
Earned wage access is still a fairly new service, and we see multiple models, with some charging employers and others charging employees. Which earned wage access model is the strongest? Why?
Jennifer: From a financial inclusion perspective, models where the employer — rather than the employee — bears the cost have the stronger social impact case. What we’ve found is that EWA startups typically service a mix of customers across both models, where the employer pays in some cases and the employee pays in others.