It is very easy for many who are new to the fintech space to think that financial technology is an exclusive term for payments technology, and while there is some truth to this, it does not tell the entire story about fintech. However, in June, The Fintech Times is looking to indulge this belief as we look to discuss hot topics surrounding both sending and receiving payments, like buy now pay later (BNPL), early paydays and much more.
Our monthly focus now turns to early pay days, analysing how on-demand payments stand up against the traditional payroll system. There are pros and cons to early pay days, for example, they can alleviate stress as users can find comfort in knowing they don’t need to use a lender to pay for something, however, they can also lead to bad spending habits. While figures seem to suggest a rise in early pay day usage, we reached out the fintech industry to get their views on if employees really need early pay days, or if they’re an unnecessary ‘luxuary’:
Early pay days can lead to a less stressed work environment
Kunal Sawhney, CEO at Kalkine said, “Several studies have now found that employees are in dire need of early paydays. Almost 70 per cent of workers surveyed for a research study said they are plagued by financial stress and over 50 per cent of them admitted of their work getting affected due to this. The employees can avoid dealing with pricey payday lenders, bank overdraft fees and late penalties, etc. when they have access to early paydays. Bank overdraft fees amount to $35billion annually in the US. Even employers benefit from an early payday or payday advance program. It has been found that a pay advance program increases loyalty, results in better retention, and improved employee productivity among others.”
Stats show more volume is associated with on demand pay than traditional pay
Jim Colassano, SVP, product development and strategy at The Clearing House, looks at the numbers and explains how whether if we like it or not, early pay days are seeing a lot of traction, “We have seen a clear and increasing need for employees to have faster access to pay for work that they have done. The pandemic helped to highlight how real-time payments are important for workers and businesses. Many workers needed faster access to wages to help pay for living expenses, and it became evident that traditional weekly or biweekly payroll cycles weren’t fast enough. In fact, on the RTP network, the real-time payments network from The Clearing House, we currently are seeing more volume associated with on-demand pay, or real-time payroll, than we do with traditional payroll.”
Early pay days do not teach financial responsibility
Shelli Woodward, tax analyst at Merchant Maverick, is not in favour of early pay days as she told us, “I do not believe employees need early paydays. While there may be a few instances where this truly helps them, in the long run, it sets them up for failure. They become reliant on receiving the funds early, and it does not teach financial responsibility. They may have earned the funds, but there is no requirement to pay them immediately.
“Earned wage access allows employees to access their pay when they need or want it, rather than following the employer’s defined pay schedule. This allows employees to have access to pay when they need it and align their income to their bills. This is not a solution to financial problems.”
Early pay day is a repackaged form of credit
Krzysztof Grzeszczuk, senior innovation consultant at Netguru, warns about the possibility of bad spending habits leading to debt, “The main goal of early-payday solutions is to provide users with access to their wages before it makes it to their current account. The Monzo app allows you to get your salary one day earlier and enjoy your ‘favorite day of the month, sooner’. Earnin claims to grant ‘access to your hard-earned cash right when you need it’. And Moneylion – with its Instacash feature – helps you survive the few remaining days before the payday by transferring cash to your debit card. This comes in handy when an emergency expense catches you by surprise or if the transfer you’re waiting for needs a few extra days.
“Similarly to BNPL, the early payday is a repackaged and well-marketed version of the good old line of credit. It’s there when you need it. It’s a convenient credit product as long as you use it wisely. However, just like with BNPL, it can become a debt trap. The instant access makes it tempting to use it not only in emergency situations, but as a regular way of making ends meet.
“The earned wage access programs, run in cooperation with companies such as Uber or Lyft, enable workers to get earlier payments. This is done by giving earlier access to money from the accrued wage and deducting the payouts from the paycheck. Such a mechanism seems safe and fair at first, however it too creates a risk of fostering bad money spending habits and generating additional fees.
“It is hard to judge if such services are good or bad. It depends on the specific terms offered by loan providers, their transparency, and how good they are with educating and helping their customers. Early-payday solutions without financial management education can backfire and make your account go red. Permanently.”