The Cost Of Waiting For Payday

For most of us, a large portion of our lives revolves around our paycheck. We plan our days, weeks and lives around its size and frequency. Until very recently however, how often we are paid has gone virtually unchanged since the Industrial Revolution. Across the Atlantic, our North American counterparts are ahead of the curve, typically receiving their salary on a biweekly or weekly basis. While for us Brits, the monthly paycheck is pretty standard.

Creating greater access to more regular pay

What I want to highlight in this article, is that it is not necessarily higher pay that is most needed for those earning relatively low incomes, but more regular pay. Payday can’t come quickly enough for many of us each month. Yet living paycheck to paycheck is a problem that most have accepted as a reality of modern life.

Typical monthly cash flow cycle (Source: PayActiv)

Waiting for payday creates a mismatch in income-expense cash flow, causing periods of cash droughts that push workers into unnecessary debt and fee traps. In the US alone, over $100 billion of earned but unpaid income is held every week from ninety million employees who live paycheck to paycheck, with less than $400 in savings.[1]

Many of the associated problems with modern working life are stress related. A large part of that stress can be linked to financial stress. 8% of the UK workforce admit to taking time off work because of financial stress. While 40% of employees state money worries have caused them stress over the past year.[2]

So what happens when we are caught financially short a few weeks from payday?

Traditionally, there have been two broad options available to us:

The first is to go into our bank overdraft. This is the easy and most popular option. Of the 60 million active personal current accounts in the UK, 5 million are permanently or usually overdrawn.[3] For banks, this is great business. In 2017, banks made over £5 billion from overdraft fees alone.[4]

The second option is borrowing from a third party lender. They were originally designed as one-off loans, quick financial relief to people with unexpected expenses. The result has been quite different. An alarming proportion of people have admitted to using payday loans to cover recurring expenses. In fact, 53% of borrowers have reported living expenses such as groceries and utility bills as their reason for taking out a payday loan.[5]

This overuse of payday loans is validated by the sheer size of the UK industry. In 2016, the payday loan industry was valued at around £200 million, with around 760,000 people using this facility as a way of bridging their income gap.

These figures make for stark reading when you compound them with what we are seeing with the spike in the zero-hours contract market. This is a type of contract where the employer is not obliged to provide any minimum working hours to employees, therefore severely limiting the amount of potential income employees take home. We have seen an increase of more than 500,000 people on this contract type since 2012, and the number of UK households now living below the “Minimum Income Standard”, sits at over one in three families nationwide.

It is clear that there is a liquidity problem for many in the UK. There would not be nearly 6 million people living on the financial cliff edge in Britain if there were genuine solutions to the problem of not having sufficient cash available for life’s regular expenses.

Who is tackling this big hairy problem?

The existing solution landscape can be divided into three broad business model categories:

Cash Advance: Option #1 — The first set of companies are essentially providing a cash advance function directly to employees or via their employer.

A notable example that is active in this space is California based startup Payactiv. They typically charge $5 every time a worker cashes out their pre-earned earnings. In some cases the employer may choose to absorb that cost on behalf of their workers, but in other instances the cost lies with the worker. So we are left with the employee paying for access to wages they are already entitled to.

Employer Credit: Option #2 — The second cluster of companies are providing employees access to affordable loans via their employers, in order to provide a sustainable alternative to using a payday lender or one’s overdraft facility.

Neyber & SalaryFinance are examples of British companies applying this model. SalaryFinance partners with employers to let their staff apply for loans of up to 20% of their salary at interest rates from 3.9% APR (annual percent rate). They are essentially turning the employer into a credit provider on behalf of the employee.

This approach has its pros and cons. On the upside its providing employees access to improved interest rates, due to their employer having a better understanding of their risk profile, compared to average lenders. The downside is that any potential beneficiary would need to be comfortable with their employer getting involved in their personal financial life. This parental relationship with one’s employer is arguably necessary when thinking about providing financial wellness at scale — but going a step further and positioning your employer as your financing partner is maybe a step too far?

Income Smoothing: Option #3 — The final set of businesses have developed a variety of saving and budgeting tools that help people think about their finances from a behavioural perspective. Applying nudges through goal setting and expense prediction functionality to their offering, that ultimately allows users to smooth their income volatility.

A standout example of this is Even, based in the United States. Launched in 2015, they are seeking to help turn lumpy paychecks into consistent ones. Their platform automatically squirrels away money during high-earning weeks and draws from that reserve to supplement smaller paychecks. If a user doesn’t have a savings buffer, it will spot them the money itself. It charges $3 a week for the service, but is increasingly working with employers to offer it for free.

The Even team have recognised there is a problem and are delivering a product that helps one aspect, but doesn’t tackle the root cause. Namely, a lack of access to already earned wages.

Employer driven financial wellness

Walmarts Financial Wellness Initiative (Source: Blog)

Surveying the various offerings in the market, it is clear to me that to fundamentally improve access to already earned wages for workers, it needs to happen via the employers. That way, employee financial wellness can improve at scale.

Walmart are a prime example of a leading large scale employer who have recognised the importance of improving the financial wellness of their employees in order to create greater value for the company as a whole.

In December 2017, Walmart teamed up with Payactiv and Even to provide financial wellness services to their workers. Jacqui Canney, Walmart’s Chief People Officer said:

“Traditional approaches to workforce well-being often focus solely on physical health, but we know from listening to our associates that financial well-being is just as important. We’re investing to give our people financial tools that help provide more stability in their lives, which we believe will empower them to be all they can be when they are at work serving our customers.”[6]

To illustrate why more companies in UK need to start following Walmart’s approach to employee financial wellbeing, here are the realities of the UK retail sector.

The retail sector alone employs around 2.8m people in the UK, 50% earn less than £8/hour. These are the most vulnerable and susceptible people to financial distress. Research shows that the number of retail workers seeking support to deal with payday lenders has increased by 300% in the last two years.[7]

Personal financial stress cost the retail sector £7 billion in 2016 due to employees taking time off work. Whilst 1.7 million hours are lost through employees taking time off because of financial stress.[8]

So, if employers in some of these most affected sectors can provide more regular access to earned wages, they will significantly decrease the associated costs currently caused by employee financial stress. This is substantiated by one US retailer whose workers used a pay advancement product to support their financial needs:

The retailer reported that 75% fewer unplanned absences and 85% of employees reported being more motivated and productive at work.[9]

So while at face value it may seem a stretch to ask employers to assist their workers with their personal liquidity issues — when put in the context of what that loss in productivity means to the company’s bottom line — the sell becomes a lot more compelling![1]

Platforms are seizing the opportunity

Lyft launched Express Pay in 2015 (Source: Lyft Blog)

Freelance platform businesses have long been portrayed as the villains when we talk about the employee vs contingent workforce business model debate. They have also been the innovators in the area of on-demand pay.

Lyft, in partnership with Stripe, built out an exclusive product called Express Pay in 2015, offering its drivers the option of cashing out their earnings every day. Within six months of launching the product, 40 percent of drivers were paid out via Express Pay. By September 2016, 50 percent of all driver earnings were paid out instantly. That equates to over half a billion dollars[10]

Here is one anecdotal testimonial that illustrates a use case;

“My friends and I were planning a vacation and I needed to pay for my portion of the trip by Monday. I told them — well, let me work this weekend and see what I can do. I drove over the weekend and come Sunday, I pressed that ‘Get Paid’ button and I made the money I needed to escape to the Bahamas with my friends.”[11]

This product offering proved so popular for Lyft, that Uber and many other ride hailing businesses along with food delivery businesses were forced to start providing an on-demand cashing out option to their drivers and riders in order to stay competitive.

If this type of user centric product design can be applied to the more traditional large employers, I believe some of the financial stress currently exhibited amongst these workforces can be alleviated.

An imperfect world

Now I am not saying that providing on-demand access to already earned wages is going to solve all financial stress related issues for all workers. But it would certainly help. What I am advocating for and what I hope I have articulated thus far, is that simply providing liquidity that people have a right to can go a long way in helping people manage life’s everyday expenses.

What I believe is fundamental is moving towards a situation where it is the workers’ choice to decide when to get paid, how to save and ultimately manage their finances.

For most people in the UK it is one dimensional, there is no choice. You get paid one day a month and from that starting point you work out how to get yourself to the next payday, and if you fall short, it’s your problem to solve.

My overarching belief is that it is not for the employer to make that decision. The decision of when someone should get paid must ultimately land with the worker. Access to already earned wages should be a right not a benefit.


If you would like to discuss the content of this piece or the topic further, please feel free to reach out to me:

Email: Archie@Anthemis.com

Twitter: https://twitter.com/cochrane_archie


Endnotes:

While there’s plenty of new entrants in the market addressing this issue, regulators are tackling it from a different angle.

Notably, the FCA in the UK have implemented caps on the amount of interest payday lenders can charge. Since the changes, no one has had to pay more than 0.8% a day on the amount borrowed. These steps have been so successful in alleviating the predatory interest rates that the FCA are considering extending the reforms to the bank overdraft sector.

I will explore this further in a later post.