Instant pay apps give you quick access to wages – but there’s a catch
Sure, birthdays and holidays are great, but if you live paycheck to paycheck, paydays are some of the happiest days of the year. While many employees wait a week to a month to get the money their business owes them, new apps from fintech startups like DailyPay, FlexWage, and PayActiv are giving employees at places like Goodwill, McDonald’s, and Uber a faster access to wages – sometimes even on the same day they have timed their hours.
With traditional pay cycles, “people put in for hours, but the money is not accessible to them,” Safwan Shah, CEO of the payment app PayActiv, said in a telephone interview. âHaving small amounts of money helps them manage their daily lives better. It reduces their stress and they make better decisions.
Sounds good, doesn’t it? Advocates like Shah argue that faster access to wages can motivate hourly workers to work longer (since they will reap the rewards faster) and can reduce their reliance on predatory payday loans with sky-high interest rates. which can leave borrowers in an interminable situation. debt cycle. That’s because taking out a single $ 100 payday loan for two weeks could eat up over $ 130 on your next paycheck, once you factor in interest and fees. Repeat this every two weeks and you lose hundreds of dollars for the year, which equates to a full month’s rent for many.
Yet even as same-day payment apps take off – Instant Financial reports that more than 175,000 workers at over 60 companies are currently using their Instant service – there is also concern that the apps are encouraging people to overspend, leaving them with insufficient funds for basic items like rent and car payments.
âTo think that they are some sort of magic solution is a mistake. Or to think that they won’t create their own new problems is also a mistake, âJohn Thompson, senior vice president of the nonprofit Center for Financial Services Innovation, said in a telephone interview.
Here’s what you need to know about this new class of paid apps – and the main pros and cons of using them.
How Instant Payment Apps Work
The wait until payday can be very long if you only get paid a few times a month, especially if you’re one of the three in four Americans who reported living paycheck to paycheck in 2016. .
And although the highest paid employees are more likely to have the means to make ends meet until their next direct deposit, for example by using credit cards or even by borrowing from friends or family, when you are a minimum wage worker, your only option to get quick cash might be payday loans with high interest rates. Part-time workers can face similar hurdles in paying their bills if their hours vary so much that they receive surprisingly light wages just before the rent is due, for example.
The new generation of instant payment apps aims to give you access to your pay as close as possible to when you earn it. âFor the employee, it’s about helping them manage their cash flow elegantly and profitably,â Frank Dombroski, CEO of FlexWage, said in a telephone interview.
Each service works a little differently. With DailyPay – which is used by hourly workers at DoorDash delivery service, Maids residential cleaning service, and facilities management company Kellermeyer Bergensons Services – employees can access 100% of their accrued and unpaid net wages for a fee. fees of $ 1 to $ 3 per transaction. The money can be deposited directly into their bank account or put on a prepaid card or payroll card on the same day. “You can get it instantly, every day,” Jason Lee, CEO of DailyPay, said in a telephone interview.
At Maids, which has some 150 locations across the country, around 250 workers use the service, said employee experience manager Zara Black. The average withdrawal is $ 65, which workers often use for bills and unforeseen emergencies like a flat tire or repairing their roof. Workers typically withdraw funds once or twice a week.
âThe employees love it. It’s a great recruiting tool, âsaid Black, who added that most team workers are full-time employees working 35 hours a week and are given a week of paid leave after their first year. (Any additional leave is unpaid.)
Another app called Earnin allows workers to withdraw up to $ 100 per day and $ 500 per pay period before receiving their regular paycheck. Although it does not charge any fees, it gives workers the option of “tipping”. The service then withdraws the funds directly from your checking account once you’ve been paid.
Other instant payment apps give workers more limited access to their funds or charge higher fees. FlexWage, for example, only allows workers to receive up to 70% of their unpaid wages between regular paychecks (for a fee of $ 3 to $ 5 per transaction). PayActiv gives them access to 50% of their take-home pay for every 30 hours worked for a fee of $ 5.
And Instant Financial allows employees to withdraw half of their daily take-home pay every day at no cost: instead, they charge employers $ 1 per month per employee enrolled in the program.
What are the advantages of instant payment apps?
Employers love instant payment apps because they say it helps reduce absenteeism. Rebecca Kyeretwie, manager of a McDonald’s in Tampa, told the the Wall Street newspaper that she previously had to find replacements to cover about 10 hours a week when others did not come to work, but now that employees can be paid straight away, “people are begging to come to work now.” (Hourly workers typically receive little or no sick pay or vacation pay, with a few exceptions, so if they miss a job because of the flu, they don’t get paid.)
Likewise, DailyPay reports that 73% of its users say they are more motivated to work because of the app, Lee said. The company also polled its users on the use of the funds and found that 94% use it to pay rent, cell phone bills, or utility bills.
Getting early access to your payroll can save you money when the alternative is to pay an overdraft fee of $ 33 because you are missing $ 10 to cover your gas bill, or worse, by signing up. a payday loan, which often has an average annual interest rate of over 300%. Since you have already earned the money, this is not a loan and you never have to pay interest, although some instant payment services charge a one-time and small fee to send the funds to you before. on payday.
There is also academic research supporting the applications. A 2017 working paper by Todd Baker, senior researcher at the Mossavar-Rahmani Center for Business & Government at Harvard Kennedy School, found that fintech products, including FlexWage and Pay Activ, âoffer financial benefits to employers by reducing employee financial stress, improving employee engagement and satisfaction, decreasing turnover and absenteeism.
Another article from the American Institute for Economic Research came to similar conclusions, noting that instant payment apps like PayActiv are “an advantage that makes working at their company more attractive.”
What are the disadvantages of instant payment apps?
Receiving your paycheck immediately after earning might seem perfectly fair and reasonable, but it could also put you in financial trouble if you don’t plan your spending for the month.
Specifically, having access to your payroll earlier could cause you to spend more than you planned, leaving you short at the end of the month for essential bills like rent, student loans, or utilities.
Hardee shift supervisor Barbie Roland told the the Wall Street newspaper, for example, that her bi-weekly salary increased from $ 900 to $ 500 when she started using the Instant Financial app. “I said to myself: did I really insist on accepting that many times? “
This kind of mindless spending is what worries consumer advocates. “It’s cheaper than a payday loan, but I’m afraid people will get into the habit of spending their paychecks early and end up paying to access their paycheck regularly,” Lauren Saunders, associate director, told NerdWallet of the National Consumer Law Center. .
And while it makes sense to get your paycheck as soon as you earn it, “in a way, employers actually help you save money by only paying you at the end of the month,” said Jonathan Morduch, professor of economics at New York University. Newspaper.
Just as credit cards can make you spend money that you don’t have, seeing a high balance on your debit card or checking account can make you use money that you are better off. put in an emergency fund, savings account or retirement plan.
The genius of many 401 (k), for example, is that they invest a small portion of your income before you even see it. Research indicates that when contributions to such plans are automated, workers save more than three times as much as when they are not. (Better yet, the money you invest lowers your taxable income, which can also put you in a lower tax bracket.) And since most Americans don’t save enough for retirement, suddenly a behavioral thumb to get us to do it can only help.
Saving for your golden years can seem like a luxury when you barely earn enough to cover basic necessities, as is the case with many low-paid and hourly workers who use instant pay apps. But even setting aside $ 100 a month at an annual interest rate of 5%, you’ll get around $ 15,000 in 10 years – or more than $ 150,000 in 40.
At the very least, workers who get paid ahead of their regular payroll cycle should consider creating a monthly budget that helps them understand how taking payment early to cover a bill will affect their ability to pay others ultimately – as should anyone who wishes. stay on top of their finances.
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