The average worker used to be paid weekly, now they’re paid monthly.
It isn’t hard to see how that could lead to financial planning problems. Fortunately, fintech has a solution, and that’s what I’ve been covering in The Fintech Times. It follows my debut with the title looking at whether challenger banks can move on from being ‘secondary’ banks.
In America the solutions are being called earnings on demand but in the UK, where the technology is newer, companies also refer to wage streaming, flexi pay and instant pay.
An employer hooks up a fintech provider into its payroll and HR systems so it can log how much a worker has earned so far in a month. The employee is then able to seek an instant advance of up to 40% to 50% of the available balance.
It’s a perk that makes it easier for employers to hire and retain talent. It also encourages workers to take on overtime because they don’t have to wait until the end of the month to reap the benefit.
Although the employer gets a more flexible, loyal work force, it is generally the employee who ends up paying for the privilege.
What are the transaction fees on earnings on demand?
I spoke to a few companies and transaction rates varied from from 4.5% to 1.75%. Sometimes the first couple of payments are covered by an employer but, from what I could tell, in the majority of cases employees are paying to access money they have already earned.
A chat with the CIPD finished off my research (link takes you to research on the impact of financial worries on worker performance). Their take is employers should be, at least, sharing the burden of transaction fees and ideally covering the cost of the service for workers. After all, they point out, workers give employers up to 30 days credit through their labour.
A key point is, they believe employers need to work on financial education for employees and to set up hardship funds they can borrow from to cover an unexpected bill. Setting up insurances is also advisable, so workers are covered against illness, boiler replacement and major work on their car.
Ultimately, it comes down to this. Tech is now so advanced that payrolls are automated and so going to back to a more regular pay cycle would not be difficult. Keeping employees working by the shift, yet paid by the month, is always going to lead to financial planning problems.
The fintech providers offer a hugely useful service which traditional banks, weighed down by legacy systems, cannot. However, the question remains.
Should employers move back to paying weekly? If not, should they offer earnings on demand apps for free?