One in six adult Americans can’t pay all their bills in a given month. This dilemma is not limited to those with low incomes, either: Nielsen research found that one in four American families earning $150,000 or more annually is living paycheck to paycheck.
For many struggling with this burden, the only available solution has long been payday loans. Each year, millions of people spend billions of dollars on such loans just to stay afloat between paychecks.
A payday loan is typically a short-term, high-cost, unsecured loan of $500 or less that is due on an employee’s next payday. A typical two-week payday loan, with a $15 fee per $100 borrowed, equates to an annual interest rate of almost 400%.
The Pew Charitable Trusts has reported that, on average, lump-sum payday loan repayments consume more than a third of borrowers’ gross pay. This often forces people to borrow repeatedly, creating a cycle of debt and financial anxiety.
Many emerging companies are working to break this cycle through solutions known as daily pay benefits (DPB).
Emerging largely in the past year or so, daily pay benefits allow workers to receive early payment of earned wages at little to no cost, helping them manage unexpected expenses and pay their bills on time while avoiding the high costs and risks of payday loans. The programs typically provide access to wages a week or two in advance, but it can be earlier for workers on a monthly pay cycle. Depending on the provider, employees are generally able to access their earned wages multiple times during this cycle.
Daily pay benefits enable individuals to take the first, hardest, and most essential steps in attaining financial wellness. By helping employees cover their monthly fundamentals, they create opportunities for people to manage debt, gain control of their financial lives, and make progress toward financial freedom and stability. In doing so, they help fulfill two of the CFPB’s four tenets of financial well-being: having control over finances and absorbing an unexpected shock. (The other two are saving and planning for the future and having the ability to make a discretionary purchase.)
DPB programs fall into four main categories:
Early wage access (EWA) solutions integrate with an employer’s payroll system, typically provide up to half of earned wages, and do not charge interest. Instead, they charge a per-transaction or subscription fee to access earned wages early. Employers can cover the cost as an added benefit to their employees, or they may direct the service to charge employees directly.
Non-employer-sponsored EWAs provide similar offerings as regular EWAs, but they have no relationship with employers. Instead, they provide a direct-to-consumer solution and charge subscription fees or request tips in exchange for cash advances. Given that these providers are not integrated with employers and seek repayment directly from employees, the transaction is akin to a short-term loan.
Early direct deposit is a benefit typically offered by digital banks and credit unions at no additional fee. With early direct deposit, the employee’s bank or credit union will deposit funds as soon as it gets a direct deposit notification from the employer, and before the payment process is settled (typically a two- to three-day process). Essentially, the bank acts on faith that the employer’s payment will clear. This can deliver funds to employees up to 48 hours before payday.
Instant pay is a new service that some gig economy employers offer workers when there is a direct line-of-sight from the job performed to the revenue generated—e.g., when an Uber driver gives a ride. These providers deposit funds instantly into the worker’s bank account or apply them to a pay card. Unlike EWA services, instant pay is truly instant. It’s available around the clock, and workers receive up to 100% of accrued wages.
DPB providers often package their offerings in a suite of services that address savings, financial education, budgeting, and expense tracking. These additional services, bundled with the core offering, create a holistic platform designed to address the CFPB’s four core tenets and empower individuals on the path to financial well-being. Ideally, this benefit gives employees greater confidence in their financial standing and goodwill toward their employers—which can result in higher retention, productivity and job satisfaction.
About 44% of U.S. gig workers have received advance payment of their wages, employers paid out $236 billion worth of advance payments in 2018, and the market is expected to grow.
For employers, this benefit can be a differentiator that helps attract and retain talent in a competitive job market. One early adopter was Walmart, which engaged Even in 2017 to provide its workers with real-time access to their wages.
As daily pay benefits are top of mind for corporate clients, institutions like Citi will continue to explore potential investments and partnerships to improve for treasury/payroll management.