The way banking and financial services are delivered has changed dramatically with the rise of digital technology. But the industry is still trying to crack the code, so to speak, to find the optimal way to get people to pay.
Perhaps the biggest payroll innovation over the past century has been direct deposit. And it was huge. But payroll departments still continued to pay workers on the first and fifteenth of the month, or twice a month, depending on the employer. It was just like that.
Until a few years ago, when a handful of innovators came up with alternative ways to manage workers’ compensation, especially as more Americans lived on paychecks and wages were stagnating for many.
One of the first innovations was the “get paid early” functionality first offered by the digital neobank Chime, then by other neobanks such as Revolut and Varo.
The idea was to allow clients to access payroll funds through direct deposit a few days earlier than it would normally appear in their account, in case those clients were unable to stretch their previous paycheck to. that they are paid again.
The main pilot:
One of the main reasons for prepayment, beyond building customer loyalty, is to help consumers avoid going to payday lenders to make ends meet between paychecks.
Several traditional banks have also started offering such services, including Fifth Third, based in Cincinnati, which allows customers to take out a cash advance on direct deposit. The advance can range from $ 50 to $ 1,000, with more money available over time.
The rise of “on-demand” compensation
The Early Access feature has been extremely popular, with many crediting it with a large percentage of Chime’s rapid customer growth. The functionality has now spawned other options, including payment “on demand”.
“Today, people can access anything they want on demand, from streaming entertainment to transportation,” says Seth Pelletier, senior product manager for the Dayforce Wallet product offered by technology company Ceridian. “In this context, waiting two weeks to get paid seems archaic. “
Pay-on-demand allows employees to access their earnings as soon as they have earned them, explains Pelletier. “Bills and expenses don’t wait for payday. With pay-on-demand, employers give people the ability to access the money they’ve already earned, so they don’t have to resort to other forms of payment, like credit.
The new paycheck options are also useful as recruiting tools as companies seek to differentiate themselves in a fierce war for talent.
A note of caution on prepayment plans
Some organizations have expressed a cautious view of early salary access programs. In a short article on the subject published in March 2020, the National Consumer Law Center notes that “First-wage access services claim not to be loans and not to be subject to state or federal lending laws, including limits and disclosures of fees and rates.
“What laws apply can be complicated,” the paper continues, “but conceptually, any service that advances wages and expects to be paid back later should be considered a loan. Just because a worker has unpaid wages (as many payday borrowers do) or the repayment is through payroll deduction, does not mean that an advance is not a loan. A $ 100 advance taken five days before payday with a $ 5 charge or “tip” equals an annual percentage rate of 365%.
( Read more: Beyond P2P: the future of real-time payments )
Then there is the fact that if a customer is continually paid two days earlier than normal through such a service, that earlier date becomes the “new normal”. Then consumers can simply change their spending habits by expecting an early paycheck and it doesn’t get “early” any longer.
“Think twice about whether you’ll be able to handle the next pay period if there’s a hole in your paycheck,” Lauren Saunders, associate director of the National Consumer Law Center, told BankRate. “Wean yourself off of this. Go out less if you need to next time.
Pelletier says pay-on-demand should be part of a larger financial well-being strategy that employers offer their employees.
“It’s an example of meeting the expectations of the modern workforce,” he says. “By evaluating key factors such as cost, compliance, and integration requirements with other financial wellness offerings, employers and their employees prepare for success.”
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Cabin crew’s tripartite partnership for real-time wages
Getting paid anytime, based on what employees have earned up to a point, is the idea behind the partnership between New York-based payment technology company DailyPay, PNC Bank and The Clearing House. The arrangement, using TCH’s real-time payment network, allows PNC to offer its clients the ability to “receive earned wages instantly, as needed, without disrupting the normal weekly or weekly payroll administration and process. the employer’s bi-weekly, ”according to a press release.
These real-time payments, statement notes, allow workers to receive funds instantly so they can better manage their cash flow and avoid the fees and high interest rates of payday loans and bank charges.
“The versatility of the RTP network enables new business models that provide us with opportunities to help customers differentiate the way they do business,” said Chris Ward, executive vice president and head of digital and innovation for PNC Treasury Management.
The PNC offering allows clients’ employees to access income as it is earned up to a certain dollar amount each pay period, rather than waiting for the next pay cycle. Workers can benefit from “an inexpensive way to quickly resolve financial emergencies, they can better maintain financial stability without taking on more debt, even in the face of unforeseen expenses,” a Paychex blog said.
Businesses also benefit from increased productivity, as employees will be less stressed by personal finance issues and better employee retention, notes Paychex.
To weigh the pros and cons
Mr. Pelletier of Ceridian says the addition of these new payroll options also does not require changes to the existing payroll process, including payroll funding, timing and closing. “This means administrators don’t have to spend time reconciling at the end of the pay period,” he says.
Pay-on-demand has advantages for workers, such as allowing them to handle unforeseen invoices, but also disadvantages such as onerous tax consequences.
On the other hand, the disadvantages for workers include potential consequences on fees and taxes. A Business News Daily article notes that employees must pay fees to access their on-demand wages, and that on-demand wages are generally not taxed, meaning employers must deduct these taxes from a future one. paycheck.
However, it seems that different forms of pay on demand are developing in companies. Although only a handful of fintechs and banks currently offer such services, that number is likely to increase, given the success to date. PNC’s partnership throws the weight of the country’s seventh largest bank behind the trend.