Teresa Long, an assistant manager at a Walmart near Dallas, is like many Americans: She sometimes struggles to pay her monthly bills on time, especially when her biweekly paycheck fluctuates.
Occasionally, when she was not able to budget correctly for the month, she would default on a bill, miss a payment or send in a check late. Sometimes Long would take out a payday loan, but the fees were crippling. “You’re taking a $300 loan, and, by the time you pay it off, it’s probably $1,000 or $1,500,” said the 40-year-old mother of four. “It’s extra money you could have been saving.”
So when she saw information on an internal Walmart WMT, -0.20% website about a new service from an Oakland, Calif.-based company called Even, Long was intrigued. It promised to pay her up to half her wages in advance, on demand, for an average $6 monthly subscription fee.
Even aims to address the “mistiming of expenses and income,” said Jon Schlossberg, the company’s chief executive officer. Being able to get money when you need it — along with some self-control — “is far more important than some arbitrary pay cycle,” he said.
The origin of the U.S.’s common two-week pay cycle is somewhat mysterious, but one thing is for sure: It’s costly for workers. At least 15 million people each year use at least one small-dollar credit product, including payday or pawn loans, according to the Chicago-based Center for Financial Services Innovation. Those loans often have interest rates of 30% or higher, and their fees alone amount to $9 billion a year, according to Pew Charitable Trusts, a nonprofit based in Philadelphia.
Companies including Even, Stripe and Green Dot are changing the way Americans are paid. As a result, they are helping lower- and middle-income earners avoid predatory lenders, said Louis Hyman, a historian of work and business and a professor at Cornell University in Ithaca, N.Y.
In the future, we all may be able to tap into our paychecks using on-demand services, much as we do with apps that play music and movies. In fact, on-demand payments are the first major payroll innovation since the Electronic Fund Transfer Act was passed by Congress in 1978.
More than a third of U.S. households experience large fluctuations in income — changes of more than 25% year over year, according to Pew Charitable Trusts. Those families are more likely than those with stable incomes to say they wouldn’t be able to come up with $2,000 for an unexpected need, Pew found.
Americans living from paycheck to paycheck are likely to be put into a tailspin when an expense unexpectedly arises, said Hyman. “The speed of the pay cycle is one of the things that could help working Americans avoid debt,” he said.
Pay cycles today are based more on “historical momentum” than an intentional decision that a biweekly or monthly schedule is best, said Emory Nelms, a senior researcher at the Common Cents Lab, part of the Center for Advanced Hindsight at Duke University in Durham, N.C.
The payroll company ADP ADP, +0.14%, which serves one in six working Americans, says about half of its customers are on a biweekly pay cycle, according to Don Weinstein, the Roseland, N.J.-based company’s vice president of product and technology. A quarter of companies use a weekly pay cycle, and the rest pay their employees monthly.
There isn’t a technology-related reason for that, Weinstein said. It would even be possible to pay employees daily if it weren’t for overwhelming tax and accounting work.
But paying employees more frequently also be more expensive and time consuming, he said. What’s more, some businesses don’t want to pay their employees more frequently than they do because they don’t have the cash flow to do so.
“There’s always an incentive for businesses to delay payment,” Hyman, of Cornell, said. “You can make money on the float,” meaning companies can invest employees’ salary funds until payday.
Americans’ personal income totals about $16 trillion a year. If companies invest part of that amount in a money-market account, even for a brief period, the money adds up.
Demanding faster payments
Employees today are no longer satisfied with the traditional pay cycle, especially those with fluctuating work schedules, including workers in the so-called gig economy.
With the rise of peer-to-peer payment apps, such as Venmo, Zelle and the Cash App, and other fast payments in the consumer world such as quick ATM transactions or money transfers through services like PayPal PYPL, +1.30% and Square SQ, -0.68%, many Americans have grown reliant on faster payments. (PayPal owns Venmo, while the Cash App is a service of Square; Zelle is owned by a consortium of big banks.)
Companies have been gradually introducing immediate payments to their contract employees, and full-time workers now expect the same consideration. As the unemployment rate has dropped to a 49-year low of 3.7% and companies increasingly must compete for talent, workers have increased bargaining power. How they get paid is part of that.
That can be particularly important for lower-paid employees, who are living closer to the edge and want to make sure they have money when they need it.
“If I have two competing offers, and Company A pays biweekly and Company B pays weekly or even more frequently, I’m going to go for Company B every time,” Weinstein, at ADP, said.
That’s exactly what happened with Lyft and Uber, the rival San Francisco–based ride-sharing companies that compete for drivers.
Lyft wanted to provide a way for its drivers — there are more than 1.5 million in the U.S. and Canada — to cash out whenever they wanted to. So it built a customized platform called Express Pay with the payment company Stripe, also based in San Francisco. The service became available in December 2015.
“Having immediate access to earnings helps to make drivers’ lives easier with quick cash for life expenses like groceries, rent and medical emergencies,” said Chris Nishimura, a Lyft spokesman.
So far in 2018, 58% of drivers’ payouts have been through Express Pay. Drivers can cash out up to five times a day.
Uber followed suit shortly afterward. It partnered with payment company Green Dot, based in Pasadena, Calif., to pay its drivers more frequently. The ride-sharing company launched a service called Instant Pay for its drivers in San Francisco in March 2016. It’s now available to its more than 900,000 drivers in the U.S.
“I talk to drivers constantly who are excited about that fact,” said Brett Narlinger, chief revenue officer at Green Dot. “If I realize I’m short on cash, I now have the ability to make it up. I don’t have to ask people for money or ask for a loan; I just go drive.”
Green Dot GDOT, +1.48% has several options for companies: They can use a completely digital account or offer pay workers through a cash card, which functions like a debit card.
DailyPay, based in New York, similarly offers employees 100% of their paycheck instantly. Fees are paid either by employees or by employers if they offer the service as a perk. Transaction fees max out at $3, similar to an ATM charge, said DailyPay CEO Jason Lee.
Besides direct deposit, “payroll itself hasn’t changed in about two centuries,” Lee said. “The fundamental disconnect is that we have a pay cycle on a batch basis, but we have an expense cycle on a real-time basis.”
Now, technology can “bridge that gap,” he said.
‘Save me from myself’
To be sure, allowing employees to access their paychecks early can create its own problems.
One risk is that workers blow through the money. When ADP interviewed workers about faster pay cycles, some balked. “Their feeling was kind of, ‘Save me from myself,’ ” Weinstein said.
Even, the payment company, provides savings tools and provides employees only half of a paycheck early for that reason, Schlossberg, the CEO, said. The other half is paid on the usual cycle.
Faster payroll by itself “can do more harm than good,” he said. It can create a “money-burning-a-hole-in-your-pocket problem.”
Lisa Harper, an assistant manager at the restaurant Lizard’s Thicket in Columbia, S.C., uses DailyPay. It is especially helpful for her, she said, because she previously worked as a server and was used to being paid every day in the form of tips.
Now, she said, she uses DailyPay about once a week to access her paychecks, which typically come every two weeks.
That helps her with money management, but she can see how it could become a problem, she said. “Anything can snowball into a bad thing if you’re not responsible about it,” she said. “Frivolous spending is frivolous spending, no matter how you look at it.”
Optimal pay cycle
It’s hard to say what the optimal pay cycle is, Duke University’s Nelms said.
There is some evidence that a shorter pay period is better. Recipients of SNAP benefits (food stamps), for example, tend to run out at the end of the month, according to a 2016 study from researchers at the U.S. Department of Agriculture.
Yet, it’s difficult to predict expenses several weeks or months ahead when people have immediate wants and needs.
That’s why Nelms predicted a hybrid solution will become the new normal.
“It is unlikely, and probably undesirable, that we will move toward a world where people are getting paid daily or given complete access to their pay at all times,” he said. “That doesn’t mean that we should stick with what we have now, though. I would hope that new technology and payroll providers actually push us toward a world where people are given more flexibility to customize how and when they get paid.”