The way banking and financial services are delivered have changed massively with the rise of digital technology. But the industry is still looking to crack the code, so to speak, on figuring out the optimal way to get people paid.
The biggest payroll innovation in probably the last century was direct deposit. And that was big. But payroll departments still continued to pay workers on the first and the fifteenth of the month, or twice monthly, depending on the employer. That was just the way it was.
Until a couple of years ago, when a handful of innovators came up with alternative ways to handle workers’ pay, especially as more Americans have been living paycheck-to-paycheck and as 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 enable customers to have access to direct deposit payroll funds a couple of days earlier than it would normally appear in their account, in case these customers could not make their previous paycheck stretch until they got paid again.
The Main Driver:
A primary reason for early pay, beyond engendering customer stickiness, 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 Cincinnati-based Fifth Third, which allows customers to take out a cash advance on a direct deposit. The advance can range from $50 to up to $1,000, with more money available over time.
The Rise of ‘On-Demand’ Pay
The early-access feature has been hugely popular, with many crediting it for a large percentage of Chime’s rapid customer growth. The feature has now spawned other options including ‘on-demand’ pay.
“Today, people can access anything they desire on-demand, from streaming entertainment to transportation,” says Seth Pelletier, Principal Product Manager for the Dayforce Wallet product offered by tech company Ceridian. “In this context, waiting two weeks for pay feels archaic.”
On-demand pay allows employees to access their earnings as soon as they’ve earned them, Pelletier explains. “Bills and expenses don’t wait until payday. With on-demand pay, employers are giving people the option to access money they have already earned, so they don’t have to rely on other forms of payment, such as credit.”
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 Early Pay Plans
Some organizations have expressed a cautious view towards early wage access programs. In a short paper on the subject published March 2020, the National Consumer Law Center notes that, “Early wage access services claim not to be loans and not to be subject to state or federal lending laws, including fee and rate limits and disclosures.
“What laws apply can be complicated,” the paper continues, “but conceptually any service that advances wages and expects to be repaid later should be viewed as a loan. The mere fact that a worker has unpaid wages (as many payday borrowers do) or that repayment is by payroll deduction does not mean that an advance is not a loan. A $100 advance taken out five days before payday with a $5 fee or “tip” is equivalent to an annual percentage rate of 365%.”
Read More: Beyond P2P: The Future of Real-Time Payments
Then there’s the fact that if a customer continually gets paid two days earlier than normal via such a service, than that earlier date becomes the “new normal.” Then consumers may simply alter their spending habits expecting the early paycheck and it no longer becomes “early.”
“Think twice about whether you’re going to 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 it. Take out less if you need to the next time.”
Pelletier says that on-demand pay should be part of a broader financial wellness strategy that employers offer to their people.
“It is 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 setting themselves, and their people, up for success.”
PNC’s Three-Way Partnership for Real-Time Wages
Getting paid any time, based on what employees have earned up to any given point is the idea behind the partnership between New York-based payments tech firm DailyPay, PNC Bank and The Clearing House. The arrangement, using TCH’s Real Time Payment network, allows PNC to offer its customers the ability “to receive earned wages instantly, as needed, without disrupting the employer’s normal weekly or biweekly payroll administration and process,” according to a press release.
These real-time payments, the statement notes, allow workers to receive funds instantly so they can better manage cash flow and avoid high fees and interest rates from payday loans and bank fees.
“The versatility of the RTP network enables new business models that provide opportunities for us to help clients differentiate the way they do business,” Chris Ward, executive vice president and head of digital and innovation for PNC Treasury Management, stated.
The PNC offering allows customers’ employees to access income as it is earned up to a certain dollar amount each pay period, rather than waiting until the next payroll cycle. Workers can benefit from “a low-cost way to resolve financial emergencies quickly, they can better maintain financial stability without going further into debt, even in the face of unexpected expenses,” states a blog from Paychex.
Businesses also benefit through increased productivity, as employees will be less stressed with personal finance issues and higher employee retention, Paychex further notes.
Weighing the Pros and Cons
Ceridian’s Pelletier says that adding these new payroll options also does not require changes to existing payroll process including the funding, timing, and close-out of pay. “This means administrators do not have to spend time reconciling at the end of the pay period,” he states.
On-demand pay has benefits to workers, such as allowing them to handle unexpected bills, but also negatives such as onerous tax consequences.
On the flip side, the downsides for workers include potential consequences around fees and taxes. An article from Business News Daily notes that employees must pay fees to access their wages on demand, and that these on-demand wages are typically not taxed, meaning that employers must deduct these taxes from an upcoming paycheck.
Still, it appears that different forms of on-demand pay are taking hold in business. While only a handful of fintechs and banks currently offer such services, that number is likely to grow, given the success seen to date. PNC’s partnership throws the weight of the country’s seventh largest bank behind the trend.