Payments 3.0: How EWA And BNPL Could Help End Poverty

Buy now, pay later and earned-wage access services could be powerful tools to end poverty, if they are not regulated out of existence.

Both of these products directly address one of the main factors causing poverty: income volatility.

In “The Financial Diaries: How American Families Cope in a World of Uncertainty,” authors Jonathan Morduch and Rachel Schneider write that one of the biggest problems facing families that can’t make ends meet is that their income fluctuates. This can lead to damaged credit scores and expensive borrowing when income and expenses do not line up.

“Most poor households in our data were not, in fact, poor during the entire study year,” they write. Instead, households, including a third of those with middle-class incomes, spent at least one month below the poverty line during the year of their study.

Families traditionally cope with unstable incomes through both formal and informal loans and by tapping savings. Members of the Innovative Payments Association that offer savings accounts in conjunction with prepaid programs tell me that cardholders build up and draw down savings in cycles. This is to pay for emergencies like a car repair but also for planned expenses like summer camp for their children.

Now, the emergence of buy now, pay later and earned-wage access products offer new tools for households struggling with income volatility.

Buy now, pay later is a modern version of what was traditionally known as layaway. People can buy a product and spread the cost over time. The fundamental difference is that, with layaway, the product traditionally stayed with the store until it was paid off. With BNPL, shoppers can get immediate access to an item. This can make a huge difference in the life of someone who needs a new tire to get to work but does not have a traditional credit card. This can also help smooth out income volatility by providing access to necessities without large drawdowns of savings or expensive borrowing.

The second tool helping solve this issue is earned wage access products. These programs allow workers to access a percentage of their wages before the end of a pay cycle, based on hours worked. EWA programs do not allow workers to take all of their pay to ensure that there is money left for benefits, garnishments, and taxes. They also ensure that the worker will have some money on payday.

The programs let hourly workers, and even some who are salaried, choose to get real-time access to money they have earned. This is much like gig workers receive money when they have completed a job or tipped workers walk out of a restaurant with part of their pay at the end of the night.

Both BNPL and EWA carry risks. Probably the greatest one is that they could lead to impulsive purchases. But for households that are watching their money, spreading out payments and getting real-time access to funds could increase savings and asset building.

The risk to these products comes from regulators and nonprofits equating them with existing products such as payday loans. If these tools get regulated out of existence, then average Americans will lose the opportunity to smooth out their income at times when they need to minimize volatility the most.

Before imposing heavy constraints, regulators should do a thorough examination of how the majority of consumers use these products and how that benefits their lives.

Well-meaning consumer groups and regulators—people who have steady incomes—risk trapping consumers in a permanent economic underclass if they do not allow people to access products that address the needs created by fluctuating incomes.

—Ben Jackson, bjackson@ipa.org