Why can’t every day be a payday? Same-day pay gains ground, despite dangers

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Why can’t every day be a payday? Same-day pay gains ground, despite dangers

Generations of workers have waited until the end of the week or month to receive their pay, but fintech companies are disrupting how workers get their money.

For many, this idea of ​​a daily wage could not be better timed.

With the consumer price index hitting 9.1% in June and low-income workers struggling to meet their expenses, early access to earnings can provide much-needed support to Americans who live paycheck to paycheck.

In fact, nearly 80% of American workers say they would be interested in applying for a job that pays them the same day they work.

That’s a 30% increase from 2018, according to research in partnership with generational research firm Center for Generational Kinetics and free on-demand payment platform Instant Financial.

“More frequent payments can help households pay their bills when they’re due,” Michael Walden, an economist and retired professor at North Carolina State University, said in an email.

“Doing this won’t solve the inflation problem for workers, but it will help.”

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How does prepayment work?

Advance payment or daily wage is usually provided by third-party companies like DailyPay and Instant Financial who partner with employers to allow workers access to earned wages.

This is not considered a payday loanaccording to a 2020 advisory opinion from the Consumer Financial Protection Bureau, as long as the worker does not access more funds than they have earned and pay no fees to access those funds.

Instant, for example, is designed as a free service and allows workers to access up to 50% of their salary after a shift. An instant card works like a prepaid debit card, so you only have a limited balance at a time and cannot be overdrawn. Alternatively, you can transfer your salary to an external bank account once a week.

Instant Financial CEO Tal Clark said a 50% threshold encourages financial well-being. “We’ve found that’s the right amount to make sure they get to the end of the pay cycle and still have some of their pay left,” he says.

Keep in mind that these companies may still charge fees in certain situations, such as when transferring money to an external bank account too quickly or too often. With Instant, you’ll pay a standard convenience fee of $2.50 per transfer after the first of each week.

Some employers experimenting with prepayment include franchises like Walmart, Kroger, McDonald’s and Wendy’s – as well as companies such as HCA Healthcare, Westgate Resorts and nursing agency IntelyCare.

Walden notes that the retail and restaurant industries are sectors that struggle to attract workers to the current job marketoffering same-day pay could therefore be a way to attract new hires.

There are also other ways for employees to access their payroll before the traditional payday, says Rachel Gittleman, financial services outreach manager for the Consumer Federation of America.

Some employers make funds available a day or two earlier, and some banks allow access to funds earlier than the official payment date via direct deposit.

Some experts warn early payment access can drain savings

Early salary access can have some downsides if not used responsibly.

“Workers paid by the hour tend to have unstable incomes, and therefore [early wage access] can serve as a revenue-smoothing tool,” says Gittleman.

However, she thinks there are serious concerns about whether workers spending their wages today will end up with a hole in their pockets. next week’s budget. A bi-weekly payday may force consumers to budget, while early access to payment may encourage them to increase their spending.

This concern is supported by a 2021 study published in the Journal of Consumer Research that found a relationship between increased payment frequency and increased spending, due to the consumer’s subjective perception of wealth.

“If we take someone who gets paid once a month and give them their salary every day of the week, our data suggests that they would end up spending over $250 more throughout the year, or more than double what the average American spends on books, newspapers and magazines combined,” Wendy De La Rosa – a Wharton professor of marketing and co-author of the study – told the Penn Today newspaper at the University of Pennsylvania.

“It has real dollars behind it, and it can have real implications for consumers’ financial well-being.”

What you need to know before accessing the prepayment

Gittleman says that every consumer’s financial situation is different, but it’s important to point out that there are some salary early access products that can be more harmful than others.

Always look for the free option first, she advises. Be careful of hidden feesor voluntary tips — which some platforms may encourage instead of imposing a flat fee.

Fees can be difficult to compare between products, but if you look at the interest you’d pay to manage a credit card balance or withdraw a cash advance, prepayment fees can still be high.

“If you access $50 two days before payday for $2, that’s an exorbitant APR,” Gittleman says.

And don’t forget to save and build an emergency fund to boost your financial stability.

Clark says employees should access payroll responsibly, but should also have the option of early access available to them if they need it.

“We believe we can provide this ability to access your salary, while putting in place safeguards that help reinforce financial accountability,” he notes.

Gittleman also suggests that employers who offer early access to wages should provide their workers with the financial tools to manage their money.

“I really think consumers and employers should see this as a lifeline — an option when they’re facing economic distress or struggling to make ends meet,” she says.

“But for employers who offer this as a benefit, it should be offered in a suite of savings tools and other financial wellness options. So that this is not the only option for consumers.

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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.

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