The pandemic has put pressure on wages and making finances stretch for the full month has become a challenge for many employees. Could enabling workers to access wages early support their financial wellbeing and reduce the risk of debt? Jonathan David considers the growth in the market for earned wage access.
There have been massive advances in the wage advance industry recently, with new entrants coming to the market and wide-spread adoption by organisations across the UK.
Even major payroll providers such as Sage – which has just announced a partnership with earned wage access company FlexEarn – are opening up early access to salary for employees who need to do so before their usual pay day.
Pay and benefits
There are many drivers behind the growth. The first is that advances in HR tech mean these schemes are feasible in a way they weren’t 50 years ago.
Back in the 1960s, when the country shifted from being paid a weekly wage to a monthly salary, employers’ finance teams were more concerned with stripping out admin from the payroll function than improving employee wellbeing.
Employers didn’t care that weekly pay helped employees smooth their spending to match cash flows – they were too busy trying to shave down costs.
Now, with the advances in fintech, the idea of giving people the option to be paid on demand – but, this time, at no cost to employers – is back on the cards.
Financial emergencies
It’s not all on the supply side. There have also been changes to demand. During the pandemic, many employees have been earning less or furlough means that they have earned 80% of their usual salary.
It’s become harder to make ends meet, so when something goes wrong and an unforeseen expense raises its head, this creates a real challenge. Even without Covid looming in the background, many of us will also face the odd emergency every once in a while, whether it’s tyres that need replacing or a boiler breaking down.
The pandemic has multiplied that threat because earnings have reduced. If employees can access money they have earned already that means no one has to rely on family, short term loans or credit cards, creating a greater sense of stability and financial resilience.
This is also a generational issue. A survey of more than 5,000 millennials by PwC and the Global Financial Literacy Excellence Center at George Washington University showed that 42% had turned to ‘alternative finance’ sources such as payday lenders and pawnshops in the past five years.
Stop the cycle
According to the Financial Conduct Authority, some payday loans can carry interest rates of up to 1500%, which makes it easy and dangerous to become stuck in a cycle of debt. An individual’s credit score could be affected, making it harder for them to get a mortgage and other loans later in life.
While some earned wage systems charge a small fee to access money early, having that option is arguably better than getting ripped off via a Wonga-style loan.
If employees can access money they have earned already that means no one has to rely on family, short term loans or credit cards.”
There’s also something timeless about the need for certainty. Most HR professionals will be aware of Maslow’s hierarchy of needs, which includes our need for feelings of security. Particularly in times of economic volatility, employees want to feel more financially secure.
It’s natural to be wary of early access to any kind of money after the scandals that the payday loan industry produced. (Wonga, the most notorious, was hit by a mountain of customer compensation claims.)
But providers would argue that earned wage access means there are no hidden charges, credit checks, or interest. It’s simply allowing employees to withdraw a portion of their salary before their regular salary payment date.
Retention rewards
Not only is there demand from employees, there is also demand from employers. High turnover is a problem for the type of large, consumer-facing companies that tend to employ low-wage workers.
The annual turnover numbers in these occupations can be staggering: The US Bureau of Labor shows it to be 30-45% among US call centre employees, for example, and its is more than 100% among fast food employees, according to the National Restaurant Association in the US.
Research from the John F. Kennedy School of Government has looked at whether employers in the US providing what they call “earned income advance” schemes have experienced any changes in employee retention rates.
The paper concluded that active users of an American payroll advance scheme had a 19% to 28% lower turnover rate than other employees. Given that this study was conducted on American workers (who are paid every fortnight, rather than every month), it seems safe to assume results might be even more pronounced in the UK.
While, from a statistical standpoint, this research should be viewed as evidence of a strong association rather than proof of causation, the evidence is of great importance for employers seeking to control turnover costs – at no cost to their organisation.
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So what might advances in wage advance look like in the future? Could we see the effective relaunch of the weekly wage in the UK? Ideally, growth in the popularity of earned wage access signals the beginning of the end for monthly pay packets and employees’ reliance on unreliable sources of alternative finance.
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