The on-demand pay trend

It’s hard trying to make ends meet, no thanks to the surge of global events that have impacted the entire world in the past few years. With each passing year, increasing amounts of people globally have reported feeling the pinch of living costs, with low-income earners being the most affected of the population. According to a 2014 research by the American Psychological Association, 72% of Americans struggle with financial stressors, and of that amount, 22% face extreme stress concerning financial-related matters. In an updated study surrounding financial stress, the APA notes that 65% of Americans continue to struggle with money-related issues posed by the global events to date. While economic resilience has served as a key buffer in improving our situations in the past few months, the APA has warned the public that the stress levels are still higher-than-usual, which warrants our need to be vigilant about how our finances may affect mental wellbeing.

Accessing pay ahead of time

Amidst these struggling times, there seems to be a new trend that is emerging in the workplace - On-demand pays. With how common unexpected expenditures and healthcare bills are these days, employees worldwide are looking at ways to request earlier paychecks from employers, prompting employers to explore the possibility of an early pay.

The month-end payroll conundrum

Perhaps unique circumstances call for unique requests. Traditionally, paychecks are doled out at the end of the month, which begs one to question the practice - Why are payrolls scheduled to take place month-end? According to Forbes, the reasoning is simple. Back in the days, printing out paychecks for employees daily incurred great cost for the business. To quote Forbes on their example of Walmart,

“An employer like Walmart, with 2.2 million employees, would spend $800,000 per day—$290 million per year—just to mail out paychecks if they were cut every day.”

In today’s modern’s society however, the use of e-banking has streamlined employers’ ability to pay their employees on time. With certain companies adopting a more flexible policy with their payrolls too, employees are now seeking flexible payment options as a way to tide through the financially tough times.

Enter on-demand pay services

On-demand pay, otherwise known as Earned Wage Access (EWA) by financial experts, is the idea that employees can access their earned wages before payday. The idea is quickly becoming a much preferred option for struggling employees to pay their due bills. In Walmart’s case,

“...Walmart employees can get up to eight drawdowns on their salary ahead of scheduled payouts. Employees get the first eight drawdowns for free, but pay a fee for subsequent uses.”

How it differs from payday loan

Unlike on-demand pay services, payday loans are short-term, small loans that employees can undertake to pay off any immediate or emergency bills that may occur before payday. They operate on the principle that the borrower will return the loaned amount following their next paycheck, which usually takes place 2-4 weeks following the loan itself. Should the borrower fail to return the borrowed amount on time, the creditor may have the option of extending or rolling over the due date, or charge the borrower with a small interest rate. Meanwhile, on-demand pay services simply allow employees to access the amount they’ve accumulated up to the drawing date. Depending on the service provider, most would impose a cap on the amount drawn, and they may also charge the borrower a certain fee for the service. Some may operate on a part-payday loan, part-on-demand service model, such as the Walmart example referenced above.

Why on-demand pay services are a thing

The main attraction of on-demand pay services is its ability to enable individuals to pay off unexpected expenditures and avoid being charged late fees. However, it also comes with the following merits:

1. Unlike traditional debt collectors, on-demand pay service providers do not experience harassments from debtors for late payments

2. Even if the individual does not have any emergency or unexpected bills to cover, the ability to retrieve pays on an earlier date is a boon for many, and adds to the sense of financial security

The benefits not only apply to employees, it also benefits employers in the long run too. Namely,

3. It boasts greater retention rates for the employee, as employees may perceive early payments as a sign that their employers value their wellbeing

4. Earlier payments may maintain, if not improve employee productivity. As financial and life stressors may affect an employee’s ability to perform at work, having earlier payments may deter an employee’s productivity from dipping, which in turn minimizes an organization’s financial losses that is measured in terms of productivity

It’s clear that on-demand pay services are helpful for low-income earners and financially struggling individuals. The presence of early payment allows them to foot their bills off in time, afford necessities to help them keep going and create a safety net (or umbrella) for rainier days.

What experts are saying

In spite of the advantages that on-demand pay services offer, Assistant Head of the Department of Finance Oklahoma State University’s Spears School of Business Joe Byers believes the payment model may only serve to cripple individuals in the long run, as he believes that such payment options do not educate the public on the importance of finance management and financial stability, two crucial skills that are more important for individuals to pick up in order to sustain themselves through financially hardy times.

“It doesn’t teach you anything about long-term stability and how to handle things…For people who are good at budgeting their money, it could be helpful to get the money when it is needed to cover things like an emergency car repair… But for others it might provide immediate gratification and leave them in worse financial condition. “You may just be digging the hole deeper…”

Byers further added that instead of relying on-demand payment services to sustain oneself through the month, he recommended individuals to attend classes in personal finance management, a lifelong skill that will go far in teaching individuals on how to manage their finances. To add to Byers’ sentiments on the hazards of on-demand payment services, a survey by Australian insurance company Compare the Market found that 1510 Americans exhaust their paychecks within 9 days.

Are on-demand payment services all that bad?

In instances where individuals struggle to maintain prudence with their money, on-demand payment services may certainly result in a larger hindrance than help. However, when financial literacy is not a concerning factor in on-demand payment services, the payment model has certainly benefited many employees, such is the case with HR and payroll services firm ADP and Ohio-based customer care center InfoCision.

When InfoCision CEO Craig Taylor learned of ADP’s on-demand payroll software titled PayActiv, Taylor reached out to the firm with the intention of introducing PayActiv to the company in hopes that it would alleviate issues of financial stress for the employees. Alwynn Mellen, InfoCision's Director of Employee Engagement further added,

“We really saw the need to provide our employee base with a way to allow them to access their wages on demand…So many times, the unexpected expense happens — a car repair or medical bill — whereby employees need money immediately rather than waiting until payday. We were looking for a solution to help provide that stopgap… The entire process is automated; we send data from ADP to PayActiv three times daily so that employees can get their money on that same day for the hours that they've worked, even for that same morning. It is a great opportunity for employees.”

According to ADP’s findings, the use of PayActiv into the company’s payroll system sees 70% of the company’s employees utilizing the software, with the company experiencing a productivity increase measuring up to $700,000 in less than a year following its introduction. Another survey conducted by American multinational financial services firm VISA among 1,000 employees in the US in 2019 found that companies that practiced on-demand payment options retained 89% of their employees. Meanwhile, 79% of respondents have indicated their preference for an employer that practices on-demand payment models, showing just how effective and crucial the practice can be for many employees.

Can you still ask your employers for early payroll if they do not practice on-demand payment?

Although on-demand payment services are slowly becoming a well-known concept for many employers, a portion of organizations and businesses generally prefer the old-fashioned payroll method of paying employees nearing month-end. Even before on-demand payment services became a thing, the idea of requesting for an earlier payday from your employers has remained a viable option for financially struggling employees, with the golden rule being one should ask for payroll judiciously.

Typically, one should exercise caution when requesting employers for an early payroll, given money can be a contentious subject. Should you find yourself needing to request for earlier payroll, you should be ready to provide a good reason for the request, and to insist to your employers that the request would (hopefully) be a one-time off incident. Furthermore, the request should be accompanied with an actionable plan stating the employee’s intention to complete all work prior to the early payroll, if possible, or a proposal outlining the employee’s agreement to complete a particular work in exchange for the unique arrangement.

It’s only a matter of time…

There is no doubt that many of us are struggling to make ends meet in today’s trying times. With wages remaining the same globally while living costs and healthcare bills continue to rise, we foresee that it’s a matter of time before employees worldwide begin to catch on to the concept of on-demand payment services. However, it’s important to note that while on-demand payment services exist to help struggling employees get through tough times, those struggling financially should not view the practice as a long-term solution to mounting bills and unexpected expenditures. At the end of the day, it is prudent management of one’s finances and financial literacy that are key when it comes to managing money in the long run, and not early access to one’s wages.