The way banking and financial services are delivered has changed dramatically with the advent of digital technology. But the industry is still looking to crack the code, so to speak, to find the optimal way to get people paid.
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The biggest wage innovation in probably the last century was direct deposit. And that was big. But payrolls continued to pay employees on the first and 15th of the month, or twice a month, depending on the employer. That was just the way it was.
Until a few years ago, when a handful of innovators came up with alternative ways to deal with workers’ wages, especially as more Americans lived paycheck to paycheck and wages stagnated for many.
One of the first innovations was the “get paid early” feature first offered by digital neobank Chime and later by other neobanks such as Revolut and Varo.
The idea was to allow customers to access direct deposit paychecks a few days earlier than it would normally appear in their accounts, in case these customers were unable to stretch their previous paychecks until they were paid again.
The main motivation:
A primary reason for early payment, in addition to causing customer stickiness, is to help consumers avoid going to lenders to make ends meet between paychecks.
Several traditional banks have also started offering such services, including Cincinnati-based Fifth Third, which allows customers to withdraw cash advances on a direct deposit. The advance can range from $50 all the way up to $1,000, with more funds becoming available over time.
The rise of ‘on-demand’ payments
The early access feature has been hugely popular, and many attribute it to a large percentage of Chime’s rapid customer growth. The feature has now led to other options, including paying on-demand.
“Today, people have on-demand access to everything they want from streaming entertainment to transportation,” said Seth Pelletier, Principal Product Manager for the Dayforce Wallet product offered by technology company Ceridian. “In this context, two weeks of waiting for pay feels archaic.”
With on-demand pay, employees can access their earnings once they’ve earned it, explains Pelletier. “Bills and expenses don’t wait until payday. With on-demand payment, employers give people the ability to access money they’ve already earned, so they don’t rely on other forms of payment, such as credit.”
New salary options are also useful as recruiting tools as companies look to differentiate themselves in a fierce war for talent.
A warning about early payment plans
Some organizations have taken a cautious stance on early access programs for wages. In a short article on the subject published in March 2020, the National Consumer Law Center notes that: “Early wage access services claim not to be loans and to be subject to state or federal lending laws, including fees and rate limits and disclosures.” .
“Which laws apply can be complicated,” the paper continues, “but conceptually any service that advances wages and expects to be repaid later should be considered a loan. The mere fact that an employee has unpaid wages (as many payday borrowers) or that the repayment is through payroll taxes does not mean that an advance is not a loan. A $100 advance closed five days before the payday with a $5 or “gratuity” fee is equivalent to an annual percentage of 365%.”
( Read more: Beyond P2P: the future of real-time payments )
Then there’s the fact that if a customer is continuously paid two days earlier than usual through such a service, that earlier date becomes the ‘new normal’. Then consumers can simply change their spending habits in anticipation of early pay and it will no longer be ‘early’.
“Think twice about whether you can handle the next pay period if there’s a gap in your paycheck,” Lauren Saunders, associate director of the National Consumer Law Center, told BankRate. “Just get rid of it. Take less the next time you need.”
Pelletier says on-demand pay should be part of a broader financial wellness strategy that employers offer their people.
“It’s an example of meeting the expectations of the modern workforce,” he says. “By assessing key factors such as cost, compliance and integration requirements with other financial wellness offerings, employers are preparing themselves and their people for success.”
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PNC’s three-way partnership for real-time wages
Getting paid at any time, 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 agreement, which leverages TCH’s Real Time Payment network, will enable PNC to provide its customers with the ability “to receive wages earned immediately, if needed, without the normal weekly or biweekly payroll administration and process of the employer,” said a press release.
These real-time payments, the statement notes, enable employees to receive money immediately so they can better manage cash flow and avoid high fees and interest rates from payday loans and bank charges.
“The versatility of the RTP network enables new business models that give us 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.
With the PNC offering, customers’ employees can access earnings as they are earned up to a specified dollar amount per pay period, rather than waiting until the next pay cycle. Employees can take advantage of “an inexpensive way to quickly resolve financial emergencies, better maintain financial stability without further debt, even when faced with unexpected expenses,” according to a Paychex blog.
Companies will also benefit from increased productivity, as employees will be less stressed from personal financial problems and higher employee retention, Paychex further notes.
Weighing the pros and cons
Ceridian’s Pelletier says adding these new salary options also doesn’t require changes to the existing payroll process, including funding, timing and termination of payment. “This means administrators don’t have to spend time reconciling at the end of the pay period,” he says.
Paying on-demand has advantages for employees, such as the ability to handle unexpected bills, but also disadvantages, such as heavy tax consequences.
On the other hand, the disadvantages for employees include possible consequences around fees and taxes. An article from Business Magazine notes that employees must pay fees to access their wages on demand, and these on-demand wages are typically not taxed, meaning employers must deduct these taxes from an upcoming paycheck.
However, it seems that various forms of on-demand payment are being adopted in the business world. While only a handful of fintechs and banks currently offer such services, that number is likely to grow given the success achieved so far. PNC’s partnership is throwing the weight of the nation’s seventh largest bank behind the trend.
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