The Rise Of The Pay-Advance App
For workers living paycheck to paycheck even before COVID-19, having their hours cut back due to the pandemic can stretch already tenuous financial situations to the breaking point. Cash-strapped employees struggling to make ends meet need fast access now more than ever to the money they’ve already earned, Ceridian Chief Information Officer Warren Perlman told Karen Webster in a recent chat.
“Workers need to be able to access their funds as those funds are available to them — especially in a downturn,” Perlman said.
He added that the data on the subject is pretty clear. Nearly a third of workers run out of money before payday — an issue no longer limited to low-income earners alone. It really doesn’t take much of a shock, Perlman added — say, an unplanned expense of just a few hundred dollars — to leave workers unable to meet their financial obligations. Real-time access to wages means employees facing such problems can avoid relying on high-interest payday loans.
And it is an avenue, recent New York Times reporting indicates that consumers are increasingly flocking to as workers hours are seeing their hours cut, their paychecks shrink and their ability to cover the gap between paydays diminished. According to data released by DailyPay, the number of users who tapped money for coronavirus-related reasons increased some 400 percent during the pandemic’s early months.
A Better Option Than Payday Loans
One of many attractions of such an app for consumers is that they can be cheaper than traditional payday loans, which often carry high fees and interest rates. Based on paying consumers out of their earned income, early pay apps charge no interest, no fees, voluntary fees (sometimes called tips ) or fairly modest fees.
The apps, while similar in type, come in two basic types. The first, like Earnin and Dave, are available to the public, while others like PayActiv, DailyPay and Rain are only available via employers’ systems as a workplace benefit. Kroger, Wayfair, Dollar Tree and other large employers have begun offering access to such apps during the pandemic.
Walmart was an early adopter long before the pandemic, working with a start-up called Even. “We believe this is the right thing to do, and we are happy to champion it,” Judith McKenna, Walmart’s chief operating officer, told the Times in 2017. She added that workers who are less worried about cash issues “feel more confident and more settled at work.”
In fact, Walmart workers signed up en masse, Even CEO Jon Schlossberg told PYMNTS. And, over the last few years, Walmart workers are far from alone.
According to a PYMNTS/Mastercard’s study of workers (gig workers in particular), they want early pay access. Moreover, the survey found that in the often paycheck-to-paycheck gig world, gig workers by an large want to invest that money in pursuing pathways to financial stability. Our research found that 39.7 percent would save for emergencies, while others would pay their personal bills (37.6 percent) or purchase gas for their vehicles (35.6 percent).
Widespread enthusiasm to the side, the Times also reported that pay advance apps aren’t without detractors. Class action lawsuits have been raised against some firms with consumers complaining they didn’t live up to their low-cost, fee-free promises — and that collecting a pay advance had ended up costing them much more than anticipated.
Consumer advocates have noted that while payday advances are an improvement over payday loans and their trip digital insurance rates, they are not without danger to consumers who could end up in a cycle of constantly needing an advance of their pay to make up for the hole their last advance made in their paycheck.
“It’s possible it’s helping them cover their bills and avoid overdraft and higher-cost loans,” said Alex Horowitz, a senior officer for the Pew Charitable Trusts’ consumer finance project told The Times. “It’s also possible it’s leaving them without enough money on payday so they turn to them again.”
Notably, however, PYMNTS data and the NYT anecdotal accounts indicate that consumers are willing to pay the fees, and in fact, consider them negligible in return for the financial peace of mind that comes with early pay.
Pay Advance As The Future of Financial Management
The ability to put money into an employee’s hands faster, Jeff Gies, ADP vice president, told PYMNTS, is both important in what it does for the worker immediately — puts money in their hands — and for what it can help that worker do long term.
Because business should be helping their workers build long-term financial wellness, and he noted, any worker who has ever sweated out his or her next payday with an empty bank account knows that the ability to receive payment for work they’ve already done is a critical such tool.
However, he notes that it is also the start of getting employees engaged with their other available financial tools.
“If you’re really looking to draw people in, things like the ability to get paid early or access their pay early may be critical,” Gies said. “If you want to drive adoption and create excitement, it’s by building those types of pieces that really resonate with a broad swath of employees.”
Ceridian CEO David Ossip made a similar point in his conversation about advanced pay for workers with Karen Webster — noting that the two-week pay cycle is a remnant of a previous era where it wasn’t really possible to pay workers the money they earned as they earned it from a technical point of view. That is just no longer true, he noted and given that we know that workers now more than ever need access to funds — it is nearly incumbent on employers to figure out how to get it to them.
“It’s very hard to argue that people should be paid in arrears,” he said. “If you move to effectively same-day pay or continuous pay, it is the right thing to do by your employees. And once employees have seen that this is an option, it’s going to be a big part of where they choose to work.”