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.
“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.
Broadly speaking, an EWA startup’s goal is to prove its value as an employee welfare and retention tool. For accounts that start on an employee-pays model, employers will get a better understanding of how EWA improves employee productivity and retention over time.
This will be a key driver for encouraging employers to pay for a fixed fee per disbursement, ultimately facilitating the transition of the account to an employer-pay model.
Aris: We have seen many different models. In fact, some providers have been offering both alternatives to customers: employer and employee paid.
We may be a bit biased here, because we have invested in Payflow, Inc., an EWA business whose model is to charge the employers only. But we believe the employer-paid model is better 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.
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.
Aditi: Charging employees can feel predatory and unfair. In many cases, charging an employer allows EWA to be viewed as an employee benefit, helps retain the employee and improves their overall satisfaction with their workplace.
There seems to be some debate as to whether EWA is actually fintech or if it better fits an HR tech classification. What do you see it as? How does its classification impact startups’ ability to fundraise and attract talent?
Jennifer: The fact that there is debate as to whether EWA belongs in the world of fintech or HR tech is a great illustration of how embedded finance is blurring the lines between financial services and other sectors.
Most EWA startups are probably a hybrid of the two, and it’s a fact that most companies are either offering EWA bundled with payroll management solutions or integrating it with other HR tech solutions. The fundamentals of how a particular EWA business makes its revenue can also determine where that particular business falls on the spectrum of fintech versus HR tech.
Whilst EWA companies look alike at inception, we expect them to fall in either one of two categories at scale: Some EWA players will focus on credit and turn into a bank or quasi-bank, while others will focus more broadly on being a platform for benefits.
The key difference is that one has a balance sheet and is regulated, while the other is more broadly a SaaS platform that plugs into third-party balance sheets.
Aris: It is indeed in the overlap of fintech and HR tech. We think it’s fintech, but whether it is closer to fintech or HR tech really depends on a case-by-case basis and a couple of factors: product strategy and revenue model.
On the product strategy side, we ask questions such as: “What other products does the company offer/want to offer in the future? Will you sell banking products, such as loans, credit cards, savings, etc.? Or will you offer benefits products, such as pension, insurance, etc.?
On the revenue model side, it’s about whether the employee is charged (feels more like a short-term loan, hence fintech) or the employer.
We believe that positioning a company as HR tech may help increase its valuation given the fact that investors have recently been valuing fintech companies more like banks instead of tech companies.
Aditi: I view it as the intersection of both the spaces — it is fintech-enabled HR tech. The strong distribution channels are through payroll providers and employers and typically involve selling to CEOs, helping them to see the value in EWA as a benefit for their employees.
EWA is also a lending product at its core and requires quite a bit of user data such as hours worked, time clocked in and out, days of the week worked, likelihood to come in to work the next day, etc. That helps determine the likelihood of the employee’s engagement in their job.
Despite employee demand, some employers appear hesitant to adopt EWA. What can EWA companies do to become an indispensable part of employee benefits?
Jennifer: It is important to remember that 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.
It is therefore imperative that EWA companies articulate clearly what their value proposition is to the HR department, as well as to the employees themselves, which may be different.
In addition, EWA is usually the first in a long list of underserved financial needs for blue-collar workers. Other needs include financial literacy, insurance, savings and investment. If EWA companies want to make themselves indispensable, they should take a holistic approach to understand what HR departments want to achieve and what financial challenges employees face.
Aris: The market is still quite immature and requires a lot of education. Employers associate EWA with loans and are concerned about their employees entering a negative spiral.
Focusing on customer education and removing any adoption friction (e.g., not charging employees per transaction) are ways EWA companies can become an indispensable part of employee benefits.
Aditi: By charging employers, and potentially even providing a revenue-sharing opportunity, EWA providers can disprove the opinion that EWA is a predatory product that takes advantage of employees. It also incentivizes employers to offer it, as there is an opportunity for them to make revenue as well.
Many EWA providers use their own capital to pay user-employees their accrued wages early. Do they have lower gross margins (debt servicing) than other fintech companies? What can be done to offset this?
Jennifer: As with other fintech companies, EWA providers often start with their own capital to prove the efficacy and effectiveness of the model but eventually work toward optimizing their funding and capital structures.
Our belief is that EWA is a great hook to acquire large pools of customers at an attractive price. The next step is to become either a broader benefits provider or to become a credit provider. Both can be very profitable although the journey to success is very different.
Aris: They do indeed have lower gross margins compared with other fintech business models. This is due to the fact that EWA providers have financing, payment processing and know-your-customer/fraud costs within the gross margin.
However, we see these gross margins in line with other B2B2C digital lenders. A good way to improve them is to offer additional products to both employers (like benefits management SaaS) and employees (benefits or banking products). This is what many EWA providers are working on at the moment.
Aditi: Many EWAs that I have met with are actually taking out warehouse lines in order to service the debt. If EWA providers are using their own capital to pay user employees, then it is a much less scalable business model.
Given that there are so many EWA startups, the technology is seemingly replicable. Will larger companies eschew startup offerings in favor of in-house solutions? What is the scope for consolidation in the sector?
Jennifer: Traditionally, payroll was managed on a fortnightly or monthly basis to reduce admin burden, improve predictability of cash flows and reduce processing costs. Most companies have not developed in-house solutions for EWA simply because their finance processes are not set up to do so, making it inefficient for them to manage this in-house. This is why many look to partner or use external providers.
That said, we definitely think that cross-sector partnerships may result in consolidation over time through mergers between payroll management companies and EWA startups, for example. For now, we see one or two local champions emerging in each local market. Over time, we might expect to see one of these companies making a play to be a regional consolidator.
Aris: The technology is evidently replicable. However, the pain of integrating with the various payroll systems and the lending/balance sheet side of the business, makes it hard for a larger company to do this in-house.
We don’t see in-house development as a big competitor here. However, the sector is indeed crowded. Consolidation has already taken place, and we expect more to come. The product is relatively sticky and the sales cycles can be long, so we expect larger players to “buy their entry into new countries.”
Aditi: The differentiation in this space lies in distribution, and if companies are able to find the right payroll provider partners and employers to work with. It is hard to build these partnerships and networks of providers, which I think could make them appealing businesses to buy and also allow them to differentiate from one another.
What have you learned from early data with regard to the usage of EWA in developed markets compared to emerging markets? Where is EWA spreading the fastest? How widespread do you expect the industry to be by 2030?
Jennifer: 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. Particularly in Asia, EWA has picked up steam this year.
In Southeast Asia, the oldest EWA companies are just a few years old. In most markets, we see a handful of players, and one or two have a clear early lead over others. We are now starting to see broader benefit strategies in some markets, while in others, credit-led models are becoming more prevalent. Similarly, HR SaaS platforms are distribution partners in some areas, and in others, there is competition to a certain extent.
We expect that credit and SaaS, while not mutually exclusive, require a very different skill set. As such, we believe that HR SaaS will ultimately be more of a distribution channel on the basis of revenue sharing for EWA.
Aris: We see EWA spreading faster in emerging markets than developed markets for two main reasons: a larger proportion of the population who live by the day or week and the existing pain point of employers. The former point is self-explanatory.
Regarding the latter point, let’s think about Mexico. Many employees are nowadays getting paid on a biweekly basis, and that is the norm. This creates huge pains for employers, who, for instance, have to process payroll very frequently. An EWA solution eases that pain while simultaneously making wage access easier and more flexible for employees.
So far EWA providers have distanced themselves from credit providers. However, as more data is collated on how users interact with EWA, could the EWA model evolve to offer lending solutions as well? Could you elaborate on why this would or wouldn’t be the right step?
Jennifer: This could be one way indeed. Consumers have longer-duration credit needs — think of purchasing a home or financing a car. For those comfortable with credit, this could be a way to grow and deepen the customer relationship.
As the balance sheet requirements grow with the business, this would logically push the EWA company to become a deposit-taking institution to control its cost of funds and compete with other lenders on price.
At its core, EWA is a great way for providers to understand the salary and spending behavior of employees. There are many ways the EWA model could evolve. Lending is one, but we also have insurance, savings and micro-investments, just to name a few. There will certainly also be EWA providers who will stay away from credit altogether and focus on providing benefits.
Aris: It depends on the EWA provider’s strategy. We typically see two strategic paths: employee wellness and neobanks for the unserved.
If a provider’s strategy is the former, then products like financial education, personal finance management and savings make more sense. A personal loan solution would often clash with the company’s identity.
However, if the strategy is one of a neobank for the unserved population, then loans make a lot of sense because they can significantly improve the average revenue per end user.
How do you prefer to receive pitches? What’s the most important thing a founder should know before they get on a call with you?
Jennifer: We love speaking with founders. Please reach out anytime via email.
Aris: I prefer to receive pitches via a common contact, but a cold email can also work.
I would advise every founder to invest some time to filter the funds they contact and tailor their email according to the fund by making it clear why they are engaging with them and why they see a fit. We try to do the same when we send cold emails to founders.
We always love to meet people that are on a journey to make a big impact on the world. You can contact me via email.
Aditi: Hearing the why behind the company and the founder’s motivations is really important to me. I think it is important to be able to articulate why you are the right founder to be building this specific business and not any other type of company.
I also think for anything fintech or HR tech or SaaS-related, a founder needs to have a differentiated GTM strategy, as these categories are saturated with businesses competing for all the same dollars and users. Founders can contact me via email.
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