One of the hottest new fintech apps provides a benefit employees value and it doesn’t necessarily cost employers anything – early wage access, inevitably shortened to EWA.
It’s still evolving among multiple providers, but at its core EWA offers employees access to the pay they have earned before the customary payroll cycle, useful when the paycheck, either paper or electronic, comes after rent or a car payment is due. The companies also have different rules on how often an employee can withdraw funds and how much they can take out.
Providers include PayActiv which recently signed with Walmart, sharply increasing the visibility of this type of service, ZayZoon and Branch.
PayActive on its web site says: “70% of workers say they’re in financial stress and more than 50% say it’s affecting their work.” It says pay advance programs will increase loyalty and reduce turnover.
By providing employees early access to money they have earned, employers help them avoid pricey payday lenders, late charges, and bank overdraft fees which alone total about $35 billion annually in the United States.
The early pay companies are adding features to their apps, including financial advice, overdraft warnings, and discounts at local stores.
The concept of advance pay has just exploded, said Timothy Flacke, executive director of Commonwealth, a mission-driven organization to hep people save. Advanced pay apps are old about 36 months old, he added.
“The thing we have observed is that people are using this to manage short-term cash flow needs. The volatility on the income and expense side is more dramatic than we had realized.
In many cases employers will pay for any charge for the early payments, typically $5 or less, because they consider the service so valuable in improved recruiting, better retention, and less financial stress for employees.
Harvard Kennedy School study shows that businesses that offer PayActiv EWA to their employees see a 19% reduction in turnover, the company said. Flacke said PWC has reported that 50% of employees spend three hours a week worrying about their finances, although he questioned how anyone could really know that with accuracy.
“But if you are employer, you have a stake in making sure people are not freaking out about getting through the month.”
Branch combines early payment options with offering supervisors a way to manage their hourly employees efficiently and workers a way to see what hours are available through their smartphones. For stores which have multiple locations in one geography, it provides a way to advertise openings across all locations to existing employees. Manager and employees can also use the app to chat and staff can trade shifts and hours.
Atif Siddiqi, CEO of Branch, said the app helps employees control their finances and provides some advice on budgeting.
It also helps workers deal with some unpredictability and provides earned funds instantly ahead of payroll cycles to help deal with income volatility, he added.
“They can see how much they are predicted to make based on their schedules and pick up added shifts.”
For employers in businesses such as fast food, warehouses and call centers, it is a benefit they can provide without raising wages.
“Their big problem is turnover of 100 to 200 percent year on year,” Siddiqi said. “Employers are looking for ways to give employees benefits without incurring more costs, like increasing wages,”
Employees often need extra shifts and companies can offer the work to people who are already trained and on the payroll. This reduces overtime and can save a manager four to eight hours a week in scheduling, while also making it easier to solve an unexpected absence such as an employee calling in sick or a change in delivery schedules, like a truck coming in early to a warehouse.
Kum & Go, a Midwestern chain of 400 convenience stores, was experiencing 160% turnover, according to a case study on the Branch blog. That meant hiring eight new staff a year at each store with an average hiring cost of at least $1,000. Instead of focusing on shifts in individual stores, it looked at its administrative districts, made up of about 15 stores in each. It uses Branch to display available shift openings across the district, making it easy to fill slots, leading to a 25% decline in overtime and fewer headaches for managers.
“We help them scale up or down,” said Siddiqi . “We have done a little bit in the artificial intelligence and machine learning space to help out with forecasts by looking at new variables, but our core is real-time mobile first.”
Employers are realizing that financial stress hurts productivity, he added, and some estimates place the cost at $500 billion a year across the country. Companies competing for hourly employees have to improve their offers, like mobile-based scheduling and advertising open shifts or partial shifts.
Kum and Go saw a drop in turnover to 90%, saving the company $2.4 to $4.2 million and improving the quality of life for its managers and staff by, among other features, providing a reminder two hours before a shift is scheduled.
Employers are becoming more receptive to using mobile first tools because that’s where the employees are at, Siddiqi added. Across the country, 78% of people have a smartphone, but in fast food, call centers and the other businesses Branch targets, many of the staff are millennials and 92% of them have smartphones.
Other users including flight attendants and trainers at American Airlines, Minneapolis-headquartered Target stores and distribution centers and another Minnesota-based company, Best Buy.
He sees Branch as more than a staffing and work awareness tool — Branch is helping users get their financial lives in order.
“The hourly worker demographic is underserved by traditional financial or bank services, so the smartphone is a great way to get them into the system. Hourly employees are dealing with bank fees on a regular basis, late fees, overdraft fees and high interest rates on short term loans. We see Branch as a way to help because we understand the end user in and out of work.”
After completing a shift, workers have the option to withdraw an advance on their wages for that shift at no cost for a three-day ACH transfer or $3.99 fee for an immediate trasnfer.
Once an employee gets paid, Branch withdraws the amount provided in advance along with the $3.99 instant delivery fee if used, from the employee’s bank account directly through an authorized debit agreement.
ZayZoon ties into corporate payments to let employees take up to $1,000 of money they have earned, and the amount is deducted from their next payroll. Like other providers it is learning as it goes and as it collects more data the cap on withdrawals might change, said Tate Hackert, the CEO.
Hackert explained ZayZoon’s goal:
“We set out to address the predatory space and provide employees access to short-term liquidity without encumbering them with debt by giving them access to wages they haven’t received yet.”
The typical advance is $100 to $150.
One surprise in EWA — it isn’t just hourly workers using it.
“What is really interesting is some customers who make $200,000-plus use it. A lot of our customers aren’t the use cases one might imagine, which is important in looking at wages on demand and comparisons to short-term lending.”
ZayZoon charges a $5 flat fee for advances and sends the money immediately using debit car rails. Like other providers, ZayZoon is adding some financial education to improve employee financial wellness.
“The U.S. is the 14th in world ranking for financial literacy, and only a couple of states have financial literacy requirements in high school education,” Hackert said. ZayZoon will offer more tools for financial wellness including an overdraft prediction calculator.
The pain inflicted on workers who have to waiting for pay has prompted solutions across the country and in other nations as well. The Economist this weeks reports on a UK company called Wagestream “which will advance part of a worker’s salary…the money is then deducted from the final pay packet,” it reported.
“Of course, allowing workers to get a salary advance is not a panacea. If their wages are not high enough to cover their expenses, they will still struggle.”
Penny Crosman in The American Banker recently reported that one or two early payment services are more like predatory payday lenders, so before signing up, it is worth checking the terms closely.
Payroll shortfalls are aggravated by the fact the U.S. still doesn’t have widespread real-time payments. (See my summary of the issue.)