U.S. Economy Resilient Amid Inflation, Fintech Sectors Flourishing

Despite inflation, the U.S. economy remains resilient with sustained consumer spending, as highlighted by Federal Reserve Chairman Jerome Powell earlier this month. The U.S. Bureau of Economic Analysis confirmed this narrative, stating that the U.S. economy expanded nearly 5 percent in the third quarter, a significant increase from the 2.1 percent growth of the previous quarter. Two fintech sectors, “Buy Now Pay Later” (BNPL) and “Early Wage Access” (EWA), may be contributing to this spending surge.

The Rise of “Buy Now Pay Later”

BNPL services, similar to the “layaway” transactions popular in the 1980s and 1990s, have found their place in the digital age. Firms like Klarna offer flexible, short-term installment loans, allowing consumers to spread out the cost of their purchases. These services are particularly popular among households with incomes below $75,000, according to data from Bankrate.

PayPal’s Pay-in-4 service, for instance, is used by an impressive 57 percent of consumers, and nearly 19 percent of Apple users report having used Apple Pay Later. The BNPL industry has seen significant growth, with its value reaching $155 billion this year. During the COVID-19 pandemic, the total value of BNPL loans soared over 1,000 percent. By 2027, the global BNPL industry is projected to reach $744.06 billion with nearly 900 million users worldwide.

The Emergence of “Early Wage Access”

Running parallel to the BNPL boom is the rise of EWA platforms. Viewed as a kinder alternative to payday loans, these fintech solutions offer early access to paychecks without the traditional interest charges or credit checks, although most do come with fees.

Two main models dominate the EWA ecosystem. Direct-to-consumer models, like those offered by EarnIn and MoneyLion, provide wage advances ranging from $25 to $100 to users who grant bank access. The borrowed funds are then automatically withdrawn on the user’s payday. Employer-backed models, like DailyPay Inc., partner with companies to offer EWA to employees once they’ve accrued a certain amount, similar to using paid time off.

The direct-to-consumer EWA model diverges from traditional lending by charging subscription fees, transaction charges, or even requesting voluntary tips instead of interest. In California, for example, 73 percent of users chose to pay voluntary tips on 5.8 million transactions.

The adoption of EWA platforms has surged, with a nearly 200 percent increase in accessed pay reaching $9.5 billion in 2020. Brands like Dave Inc and MoneyLion Inc saw a significant increase in originations between 2021 and 2022. Private EWA company EarnIn advanced $5 billion last year alone, demonstrating the sector’s potential despite inherent challenges.