High energy and food prices are especially bad news for people living from one payday to the next. In the UK, around 22 per cent of adults have less than £100 in savings, according to a government-backed survey. In the US, about 20 percent of households say they could only cover their expenses for two weeks or less if they lose their income, according to the Consumer Protection Agency.
In this context, many employers want to do something to help their employees become “more financially resilient”. An increasingly popular idea is to partner with companies that offer “Access to Earned Wages” or “Early Pay Advance Scheme” products. These companies connect to an employer’s payroll to allow employees to deduct a portion of their upcoming pay package in advance.
Companies usually charge a fee per transaction (generally between £1 and £2 in the UK) to be paid by the employee or employer. The products are largely unregulated as they are not considered loans. They are spreading to the UK, US and a number of Asian countries such as Singapore and Indonesia.
Revolut, the UK-based banking app, has also launched, telling employers it’s a way to “boost employee financial well-being without costing you”. Data is scarce, but research firm Aite-Novarica estimates that US wages were called at $9.5 billion in early 2020, up from $3.2 billion in 2018.
In a world where many employers are no longer offering ad hoc advances to their employees, these products can help employees cope with unexpected financial hardships without resorting to expensive payday loans. Some of the apps, like UK-based Wagestream, whose backers include a few charities, combine it with a range of other services like financial coaching and savings. Also valuable is the clear information some of these apps give workers about how much they are making, especially for shift workers.
But for companies that don’t offer these broader services, the question is whether payday advances really promote financial resilience. If you take from the next paycheck, you risk missing out again the following month.
Data from the Financial Conduct Authority, a UK regulator, suggests that users take advances one to three times a month on average. While data shared by Wagestream shows that 62 percent of its users don’t use the pay advance option at all, 20 percent use it once or twice a month, 9 percent use it four to six times, and 9 percent tap it seven or more times.
Along with the risk of being caught in a cycle, the costs can quickly add up when you pay a flat fee per transaction. The FCA has warned that when compared to interest rate lending products, there is “a risk of employees failing to appreciate the true cost”.
Wagestream, on the other hand, told me that frequent users aren’t necessarily in dire financial straits. Some users are part-time shift workers who simply want to be paid after each shift, for example. Others seem to want to create a weekly pay cycle for themselves.
On average, Wagestrom users transfer smaller amounts less frequently after a year. The company’s “ultimate goal” is for all fees to be borne by employers, not employees. Some employers are already doing this; others plan to do so when the cost of living increases.
Regulators have noticed the market but have not yet interfered. In the UK, the FCA’s Woolard review last year “identified a number of harm risks associated with the use of these products” but found no evidence of “emergence or widespread consumer harm”. In the US, the Consumer Financial Protection Bureau is expected to reconsider whether any of these products should be treated as credit.
A good starting point for regulators would be to collect better data on the size of the market and how people are using it.
Employers, meanwhile, should be wary of the notion that they can deliver “financial well-being” at a bargain price. Companies that believe in the value of these products should take on the fees and keep an eye on how employees are using them. They could also offer salary savings programs to help people build a financial cushion for the future. Nest, the UK’s government-backed pension fund, has just completed an encouraging attempt at an ‘opt-out’ approach to employee savings funds.
If employers don’t want to go that route, there’s a perfectly good alternative: pay employees a decent living wage and leave them to their own devices.