Secured accounts and cards have traditionally been a way for consumers to build or repair their credit with a little bit of upfront capital, but the concept is seeing new use cases in the earned wage access industry.
Direct-to-consumer
With Live Pay, customers open a deposit account with EarnIn’s sponsor bank partner, Evolve Bank & Trust, and set up a direct deposit of at least $1,000 per month. Behind the scenes, a secured account is opened, and those funds are automatically transferred.
Consumers are issued a Visa EarnIn Card, and can use those funds, plus a maximum of up to $1,500 in unpaid wages per pay period, to cover purchases made with the card. But unlike a secured card, which typically will lock up the money put up as collateral, customers can transfer their cash back to a different checking account at any time.
The idea is to find a way to get consumers access to their pay faster, and to do that, EarnIn had to use elements of secured cards, EarnIn CEO Ram Palaniappan told American Banker. But he stressed there are key differences.
“It’s very different from a secured card. On a secured card, you’re putting all the money in. We need a secured account to make the construct work” within the banking system, Palaniappan said. “We need to move money behind the scenes between multiple accounts, because we’re receiving direct deposit, but it’s also a credit card, so that needs to have a different online account, not a checking account.”
Access to Live Pay costs $2.99 per month, and EarnIn reports activity to the credit bureaus.
“Every paycheck you build your credit history based on the wages that you have accrued,” Palaniappan said.
The service was piloted with 1,000 EarnIn employees, and opened its wait list last week with over 30,000 consumers joining in the first 24 hours, an EarnIn spokesperson said.
EarnIn will be letting people off the wait list “pretty regularly,” Palaniappan said.
Live Pay comes four months after
Live Pay has the potential to siphon deposits from banks, especially if it proves to be a popular way to access earned but unpaid wages while also building credit, said Aaron McPherson, principal at AFM Consulting.
“That would put pressure on regular banks to come up with a competing service,” McPherson told American Banker. “This is a really interesting model, and I would expect other companies to try to imitate it.”
But revolving access to funds poses its own risks, especially to consumers that struggle with impulse control, McPherson said. Most earned wage access products are delivered on-demand, meaning the customer has to request funds and then select their delivery method. With Live Pay, consumers gain access to a portion of their earned wages over time that is made available immediately.
“If part of the purpose is to educate people on how to manage their money, this could be really good, because it’s kind of a gentler way of doing it,” McPherson told American Banker. “But you’ve still got to stay on top” of your spending.
“Once you get on the treadmill, then you’re always a pay period behind,” McPherson said.