This post originally appeared in PaymentsJournal
The stagnant minimum wage, increase in household debt, and rising living cost in the United States have created an environment where our country’s most vulnerable employees are dealing with greater levels of financial stress. More than half of Americans are living paycheck-to-paycheck, and according to a survey done by Bankrate.com, almost 60% of Americans don’t have enough savings to cover a $500 emergency. Research shows that the financial stress felt by millions of Americans leads to a loss of productivity and higher turnover, which increases costs for employers. These troubling statistics are evidence of a broken, outdated system of how we pay employees. Financial technology companies are responding by offering a very appealing on-demand pay solution.
There has been a lot of press lately about companies providing employers the ability to offer their employees faster access to their earned wages ahead of payday. In an effort to help hard-working Americans, more and more financial technology companies are delivering alternative solutions to short-term, high-interest payday loans. While all of the companies in, or entering the space, are providing a valuable service, some important differences need to be considered if you are an employer, PEO, or payroll company before choosing a partner.
Who is providing the funding, the provider of the service or the employer?
Some of the services fund the early access to wages themselves, while others require the employers to put up the money.
Many of the financial technology companies requiring the employers to put up the funds can offer access to money at a lower fee, which can be appealing, but this model can put a big burden on small and mid-sized employers who don’t have the cash flow to provide this benefit.
How do employees access their wages early? Is it the same day, 1-2 business days, or instantly?
Obviously, giving employees early access to their wages ahead of payday is a benefit to all, but many, if not most service providers, don’t have the capability of providing them with their wages in real-time. Many are running on the ACH rails, which may be able to get the money to the employee the same day, but often times it is 1-2 business days before the employee gets access to their wages. Having to wait a day or even a few hours isn’t helpful to the employee if they have an immediate need.
However, if the service is tied to a mobile wallet or payroll card the employee can get their funds instantly when they need it most.
How inclusive is the service? Do people need to have bank accounts to take advantage of this benefit?
Make sure that you ask this question and read the FAQ section of the technology provider’s website. Many of the service providers require people to have a bank account because the technology powering the payouts does not interact with prepaid cards. Often, the people who need this benefit the most don’t have access or don’t want bank accounts which excludes a key segment of employees. With a mobile wallet or prepaid payroll card associated with the service, it makes it available to everyone.
Who is paying for this benefit? The employee or the employer? Is there a choice?
There are two different schools of thought here. Some of the technology providers, like Instant Financial, are charging the employers the fee, while others, like DailyPay, charge the employees the fee. Then there are programs offering InstantWage, which allows the employers to choose if they want to pay the fee as a benefit to their employees or pass through the cost to the employee.
It’s clear that with financial stress levels increasing, employers need to transform how they pay wages to meet the needs of today’s employee. Financial technology companies are again disrupting the traditional way of doing things to provide a better option. With well-known brands like Uber adopting on-demand pay and employees’ love for the service, all employers need to jump onboard to stay competitive or risk falling behind.