Getting creative with payday flexibility
WHAT IT IS
Historically, on-demand pay has been a service typically provided by financial technology firms. It’s an employee financial wellness benefit that provides employees access to a portion of wages that has already been earned but not yet paid out. Often, employees can manage and access earned wages via a mobile app and debit card and this benefit has proven to attract labor applicants, improve employees financial wellness, and reduce turnover.
Many of us reading may never have experienced the financial stress of living paycheck to paycheck or asking friends/families/employers to borrow money to bridge expenses to the next payday. And many of us, it is hoped, may never have had to resort to cash checks at 10% fees or borrow money at payday loans at exorbitant rates of 100-300%. Unfortunately, this isn’t the case for many American workers. According to an IBISWorld report, the check cashing and payday loan industry is estimated at $18 billion. Per the FDIC, a third of the U.S. population – or ∼106 million Americans – are underbanked or unbanked. This population has no access to credit, bank accounts, or ability to afford traditional bank fees with high balance requirements. The vast majority of this demographic are hourly workers who work in the hospitality, food services, grocery, and retail industries.
According to a Visa insights report, 75% of American workers live paycheck to paycheck and have less than $500 of savings, insufficient to absorb unanticipated expenses in between paychecks for medical emergencies, vehicle repairs, etc. According to PwC’s Employee Financial Wellness Survey, 47% of American workers are stressed with their financial situation, can’t make minimum payments on time, and are spending an average of $2,400 annually on payday loans. The financial stress of living paycheck to paycheck, now exacerbated by skyrocketing inflation, leads to lower productivity, mental health issues, and employee turnover.
WHAT IT ISN’T
On-demand pay is not a loan because it’s not an advance on future earnings. It’s an advance on earnings previously earned, just not yet paid out due to the traditional payroll cycle. There is no interest charged to employees and isn’t meant to put users into a cycle of loans but offers a safe alternative to help avoid predatory lending. Data shows on-demand pay is utilized by only 15-20% of employee base and typically is utilized by different employees monthly. A Visa survey indicated employees utilize on-demand pay for essential items such as groceries, utilities, and gas bills.
These programs often can can be implemented at zero cost to employers with a small flat fee charged to the employee regardless of the amount drawn. This flat fee is well below the cost of pay day loans that charge 200-300% interest and ensures employees utilize on-demand pay responsibly.
In many cases, an employer’s decision to implement on-demand pay is championed by an executive who has the vision, heart, and determination to drive the implementation because employees have expressed an interest in the benefit. While it may take a few weeks to integrate systems, the time investment typically is worthwhile in doing good for employees and reducing cost associated with labor shortage and turnover – at zero out-of-pocket cost to employers.
5 factors to consider when evaluating a vendor
1. Tips Solution
While all on-demand pay vendors provide access to earned wages, only a select vendors provide employee access to earned tips.
2 Cross-Border Money Transfer
Only select on-demand pay vendors have capabilities outside the U.S. Cross-border money transfers enable employees to send money to families abroad without the excessive fees charged by other financial institutions.
3. Digital Banking Solution
Select vendors offer digital banking to employees, which is helpful for unbanked employees who can’t afford the high minimum balance of traditional banking and are subject to monthly penalties or overdraft fees. The banking option offered by on-demand pay can benefit employees as it provides direct deposit and avoids check-cashing fees (up to 10% of paycheck); saves employers the hassle and cost of printing/issuing checks or dealing with lost payroll checks; and encourages employees to save and enables digital banking for employees (free online bill pay, free ATM access, etc.).
4. Implementation Time
As alluded above, some on-demand pay providers can develop algorithms that won’t require systems integration, while others require direct integration to time and payroll systems.
5. Onboarding Employees
An on-demand pay provider’s active involvement in supporting employee onboarding is the cornerstone to the success of the program. A successful onboarding plan determines employee opt-in rate and thus better improves employee engagement, financial wellness, and retention rates.