Are Instant Payroll a System of the Future?

During a former employment, a few years back, when this amazing moment appeared, the secretary in a loud voice declared that the “eagle had landed.” Then as soon as possible, we each worked our way to her desk to get the Payment for our previous month’s working. If one gets paid once per month, it is a long period between payment, so these initial few days after a week or so of being broke were great. I can even remember when I waitressed and collected my small brown envelope of cash which was waiting at the end of each week!

Today many workers are paid electronically, but little else has changed.

Most workers suffer to stretch their money from paycheck to paycheck – a recent study discovered that over 50% of workers live with issues covering their overhead between pay periods, and nearly a third claimed an unexpected expense of around $500 could make them unable to pay other financial responsibilities. Another study discovered that almost one in three employees run out of money, even those earning over $100,000.  12 million Americans must use payday loans during the year, and each year $9 billion is collected in payday loan fees. The average annual percentage interest rate (APR) for a payday loans is 396%.

According to PayActiv, over $89B are paid in charges by the 90M people living paycheck to paycheck, that is the majority of the US population.  Instant payroll would each year put over $25B into workers accounts, just through savings from abusively high APR fees.

When desire forces innovation

We are on the verge of a new paradigm which has little to do with pandemics or shifting workplaces, and lots to do with why workers desire to receive their pay. Employees, not able to last between paychecks and tired of turning to abusive loans to fill the gap, need to access their hard-earned money as and when needed.  More than 60% of U.S. employees who have struggled financially between payment periods in the past six months firmly believe their financial circumstances would improve if their employers allowed them instant availability to their earned pay, free of charge.

Perhaps a few people could consider this a political issue, the fact is it is about financial health.  According to SHRM, 4 out of 10  employees are not able to pay an unexpected cost of $400.   payrll service  that found that less than 5% of big US companies with a majority of hourly-paid workers use a flexible earned wage access (FEWA) solution, but it’s thought that this will grow to 20% by 2023.

Why would an employee need to wait for days or weeks to receive pay for their time and skills?

Enhancing the worker environment
Giving employees access to their pay instantly could disrupt, perhaps even, deconstruct, the manner in which we collect pay and observe our paycheck. Currently the possibility is noticed, and, in many cases, companies use it to differentiate their company and bring in fresh talent. For example, to stimulate applications for recruitment,  Rockaway Home Care, a New York care facility, is promoting its flexible pay options on social media.

Others are providing on-demand payroll – when employees complete a shift, they can access their money as early as 3 a.m. the following day. Using an app, employees may move their pay to a bank account or debit card. Walmart is another case of a company offering its workers access to their paychecks.  Employees may access earnings early, up to eight times each year, without cost. The reaction from employees has been amazing, and Walmart is expecting increased adoption.  Meanwhile, Lyft and Uber each provide their drivers the ability to be paid once they have earned a specific amount.

The metamorphosis of payroll is not confined to the frequency of payments. Venmo, Zelle, and other app provide flexibility and transaction services that workers currently expect from their payroll.  They want to be able to access their earnings whenever they want to, not every 2 weeks or a monthly period. Most of this demand has come from the gig economy and Gen Z generations – who expect to be able to access the money they have earned when they want it.

The increasing rise of employees without bank relationships
In 2018 it was calculated that in excess of 1.7 billion adults worldwide don’t have access to a bank account. In America, a 2017 review estimated that 25% of households are either unbanked or underbanked – 7% unbanked and 17% underbanked.  The report discovered that people who either don’t have a bank account, or have an account, but still use financial services outside the bank system like payday loans to make ends meet. In the United Kingdom, there are over one million people without bank accounts.

There are several consequences of having no banking history. In some cases, it can result in difficulty getting financing or buying a house; it also presents companies with specific challenges. How do you process payroll if there is no bank account to transfer the money into? As a result, employers are increasingly searching for alternative ways to process payroll, specifically for hourly paid employees.  Some are leveraging pay cards, that are loaded electronically every time an employee gets paid. These pay cards function the way a debit card does, allowing owners to withdraw cash or shop online.

It’s clear that instant pay is something that’s going to be a part of the payroll wellness discussion for a while to come.