One day, the monthly paycheque may be history. While Inflation is underway, a trend of on-demand wages is gaining traction. Do these programs really help people manage their spending, or do they simply perpetuate a hand-to-mouth mentality? Written by Best Bizz.
The same phenomenon would occur across the UK’s offices every month before a certain virus restricted us to our homes. Once payday rolled around, employees would spend their cash on a night out with co-workers. If someone had suggested an after-work drink a few days earlier, many colleagues would have said, ‘I’m sorry.’ Not possible. I’m strapped for cash.
The culture of payday millionaires has a name: the ‘payday millionaire culture’. According to research conducted by financial advisers Portafina, the average person spends five percent of their monthly disposable income within 24 hours of receiving it. Interestingly, even this alarming figure improved on earlier findings in 2017 when Portafina found that people blew over 40% of their leisure spending on the first day and over 80% in the first week.
The phenomenon has been explained by life coach Jane Evans, who says, “For most of us, payday is reward day.”. After working hard, it only makes sense to reward ourselves with that longed-for new gadget, break or outfit. Before long, this will become a habit, because we get sucked into a reward loop. When the dopamine hit wanes, we look for a new payday treat.
In an attempt to deal with this income rollercoaster – feeling wealthy one week and struggling the next – some employers have begun introducing employer salary advance schemes (ESAS), also known as ‘on-demand pay’. A loan scheme such as ESAS allows workers to receive up to half of their salary before their official payday, sometimes with an additional fee. In many instances, such schemes are widely viewed as better than payday loans, which, for many workers, may seem like their only option when they run out of money.
80% of workers would be interested in on-demand pay, according to a survey by Ernst & Young, for a range of reasons, including better budgeting, easier savings, and cover for emergency expenses. As Bloomberg research shows, one in four payroll professionals in the UK believes that on-demand pay will improve the employee experience.
The trend of on-demand pay across the pond
They are being packaged as a form of employee benefit, and are already popular in the UK. A survey of American adults from 2022 found that over 60% of those working in retail, manufacturing, and construction would like to have access to their wages before payday. More than half of respondents considered this benefit to be more attractive than added paid time off.
When the first lockdowns began, the demand for ESAS schemes soared, with millions of users downloading apps such as Earnin and Dave. In the UK, there has been a growing interest in these schemes, with companies such as Wagestream and Salary Finance providing them (and Earnd, until recently). During the pandemic, Earned worked closely with the NHS to provide financial assistance to nurses and other health care workers. Unfortunately, this experiment came to an abrupt end in spring 2021 when the UK arm of the company went bankrupt.
The cost of providing an ESAS scheme is typically borne by the workers themselves. This is an advantage for small businesses, but it also presents a potential downside for workers, since they will receive less pay overall if they get paid earlier. Nevertheless, some schemes may be employer-funded but come without cost to employees. A good example is Earnd (before it closed).
On-demand pay brings what risks?
In spite of the fact that on-demand pay carries less risk than payday lending (where high-interest rates can catch borrowers by surprise), there have been accusations that the concepts are too similar. Regulatory agency FCA is concerned that giving workers early access to their wages may simply lead to them spending the money too quickly – thus exacerbating the very issue that the schemes are intended to solve. To prevent wage earners from falling into a spiral of debt, the FCA has recommended that ESAS schemes be more transparent, actively monitored, and in constant communication with their users.
According to Portafina’s research into the ‘payday millionaire’ culture, young workers (aged 18-24) are most likely to spend their money early on. It may be that junior employees are the ones most likely to benefit from an ESAS scheme as an employee benefit. People may not necessarily be able to spread their spending if they receive their wages on the day(s) of their choosing. Many workers struggle to moderate their spending habits, while others simply earn too little to cover their living costs and emergency expenses.
Even if many people prefer to choose your own paydays so that their money arrives close to when they need it, this reveals a deeper problem: a general lack of savings or emergency funds. Approximately a quarter of Brits have no savings at all, and one in ten spends more than they earn, according to a study by Skipton Building Society. In 2022, the situation is likely to stay the same. Paying employees at different times of the month is unlikely to resolve these underlying issues, which must be addressed with a more rigorous approach to saving and money management.
Does on-demand pay make sense for me as an employer?
Rolling overpayments isn’t a new idea. It’s been done for years. People like gardeners, babysitters, and dog walkers are accustomed to getting paid on the day they perform their duties, so why shouldn’t full-time employees be paid the same day? Technology now makes this more realistic for businesses – but there are caveats.
A few things to consider for employers who are considering offering an ESAS scheme to their employees. Do you or the employee have to cover the cost of the benefit? Secondly, consider the possible impact on your cash flow. An important benefit of a monthly payroll is that it is a regular, predictable cost. If your employees are paid on demand, this could make things more erratic, even chaotic, so it will be important to set regular dates (even if they do it more than once a month). Consult your accountant about how to make this work. Additionally, you may want to create disincentives so that staff won’t change these dates too frequently.
Additionally, you may wish to limit the scheme to established employees, i.e. those who have completed their probationary period. You should also keep in mind that the purpose of the scheme is for you to attract and retain good workers, so make sure you promote the benefits and use them as a recruitment tool.
Additionally, employees may be facing other issues such as managing their spending that extend beyond the issue of a monthly wage. Managing their finances with the help of an expert can be equally beneficial to some employees who need assistance in making their money go further and will find free or subsidized financial advice a very attractive benefit.