A furloughed federal employee holds a sign. Photographer: Andrew Harrer/Bloomberg
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OBSERVATIONS FROM THE FINTECH SNARK TANK
In a recent study looking at the impact of the COVID-19 crisis on employment in the US, two professors from Virginia Commonwealth University wrote:
“The employment rate decreased from 72.7% to 60.7%, implying 24 million jobs lost. Those who still have their jobs are working fewer hours; 21% report a decline in earnings.”
Waiting until payday was already hard enough for many people—now it’s getting worse.
Why DO We Have To Wait So Long for Payday?
Have you ever thought about why we receive a paycheck just once or twice a month? The answer is simple: Because, back in the day, it wasn’t economical for employers to print and send a check out everyday.
An employer like Walmart, with 2.2 million employees, would spend $800,000 per day—$290 million per year—just to mail out paychecks if they were cut every day.
But thanks to technology, we have direct deposit so employers don’t have to cut and mail checks to a large percentage of their workforce. Then why don’t we get our money every day, right after we put in a hard day of work?
You Can Get Your Paycheck Early
Speaking of Walmart, the retailer has partnerships with two fintech startups that enable its US workers to get part of their salary paid before payday.
With the service—typically referred to as earned wage access or on-demand pay—Walmart employees can get up to eight drawdowns on their salary ahead of scheduled payouts. Employees get the first eight drawdowns for free, but pay a fee for subsequent uses.
The service links Walmart’s payroll system to an employee’s bank account or to prepaid cards. In essence, employees get something akin to a payday loan from their employer for a fixed fee—not a usurious interest rate.
On-Demand Pay is Catching On With Consumers
According to research from bank consultancy Cornerstone Advisors, nearly nine million Americans have already used on-demand pay services. Of those who have used the service, nearly half have done so two or more times.
Q1 2020 survey of 2,587 US consumers
Source: Cornerstone Advisors
Not surprisingly, the coronavirus crisis is creating strong demand for the service. According to Matt Pierce, CEO of Immediate an on-demand pay provider:
“We’ve seen 30-40% growth across the board in the number of early access pay transactions over the last six weeks and are experiencing strong growth in healthcare, particularly in assisted living communities and home health.”
Pierce adds “After going live with an employer, we usually see about 10% adoption in the first month. An 1,100 employee senior living community we took live in March had 17% adoption in the first seven days.”
Jeanniey Mullen, Chief Innovation and Marketing Officer at DailyPay, an earned wage access provider, commented:
“Between March 15 and March 17, the number of people transferring their earned pay spiked 400%. Nearly 43% of our user base needed to use their money ahead of time for COVID-related purposes.”
In a survey of consumers with access to its service, Canadian-based earned wage access provider Zayzoon found that more than 80% of the wages accessed through it service were used for necessary—not discretionary—expenses.
Earned Wage Access Providers Are Offering Free Services
The number of startups in this space is growing and many are offering free or discounted services during the COVID-19 crisis including:
- Branch. Free to both employers and employees, Branch provides financial services that can help employees avoid fees and meet their everyday needs: 1) Zero-fee checking account with debit card (no overdraft fees, no minimum balances), and 2) Cash flow management tools including free instant access to earned wages and budgeting tools.
- DailyPay. DailyPay is a provider of earned income software that integrates with large companies’ payroll and time management systems. The company has coordinated an effort for employees of companies who offer DailyPay by waiving fees for access to earned income; the waived fees will be in effect until further notice.
- Even. Even connects to employers’ payroll systems to let employees send their wages straight to savings to help with bills or debt. During the crisis, Even is offering its services for free.
- FastP.A.Y.E. FastP.A.Y.E is a way for companies to enable their staff to access their already earned money before payday without the need to rely on expensive credit. The firm is are offering its wage app with no costs in order to help struggling employees.
- Hastee. Hastee is an earnings-on-demand platform founded to change the way people are paid by giving workers access to a portion of their earned pay. Hastee is giving workers deemed crucial to the UK’s coronavirus response access to their wages ahead of pay day for free until June.
- Immediate. Immediate offers ImmediatePay, a financial health platform delivering early access to earned but not yet paid wages. The firm is waiving fees during the pandemic and announced a “Return to Work” program offering no fees for 60 days for new customers.
- PayActiv. PayActiv is a provider of employer-sponsored earned wage and tip access, as well as a suite of employee financial wellness tools. The company is waiving all fees for all services during the COVID-19 crisis.
- Zayzoon. This Canadian firm counts Tim Hortons and Subway as customers, and is offering free advances and free financial education throughout the crisis.
On-Demand Pay Isn’t a Payday Loan Killer
There’s a growing belief that earned wage access services could help consumers escape the payday loan trap that many are in. Townhall.com wrote:
“[Earned wage access] is a winner for all involved—it’s a payday loan killer—and offers tremendous benefits for workers who have been suffering while trying to make ends meet for years.”
On-demand pay provides many benefits, but it’s not a payday loan killer.
According to Cornerstone Advisors’ research, among consumers who used on-demand pay in 2019, almost half took out a payday loan as well. Of those that used the service three or more times, 14% also took out three or more payday loans.
Q1 2020 survey of 2,587 US consumers
Source: Cornerstone Advisors
On-Demand Pay is a Winner Emerging From the Crisis
Becoming a payday loan killer is a high bar to clear, but the service doesn’t need to slay those loans in order to be successful. As a relatively new financial service, more marketing—and agreement on what to call it—will help accelerate adoption.