You worked on Monday. Why not get paid on Monday?

Published May 29, 2016

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New York - It was a find - a better apartment with a lower rent. Amber Thompson jumped on it, and gave her landlord 30 days' notice.

Shortly before the 28-year-old Gonzales, Louisiana, hospital recruiter was scheduled to move, she found out her landlord required 60 days' notice. She would have to pay an extra month of rent for her old place on the same day she’d be paying the first month’s rent on her new place, on top of her other bills. Her pay-cheque wouldn’t arrive in time to cover it all.

Read: New job? How to talk about pay

It's cash crunches like Thompson's that lead many people to pile up credit card debt, bounce checks, or turn to payday lenders, which charge high interest rates and fees for making loans against your pay-cheque. The result can be further fees for late payments and overdrafts, and a financial spiral.

Thompson had another option. Her employer, Baton Rouge General Medical Centre, had signed on with a service called PayActiv that lets employees withdraw a portion of the money they earn, as they earn it, without waiting for a pay-cheque. The transaction fee is $5. Thompson, one of the 400 or so employees who enrolled to use the service, walked to the PayActiv ATM in her building and took out $400.

Financial gap

PayActiv just won a Best of Show award at FinovateSpring 2016 for its use of technology to ease the “cash flow struggles of working families”. It is one of a raft of young financial technology companies with names like FlexWage, Activehours, Clearbanc, and Even that were launched to fill a financial gap. Weekly and bi-weekly paychecks don't fit the way many people work anymore. In a sign of the times, ride services such as Lyft and Uber have rolled out Instant Pay and Express Pay services for their drivers.

“So many of our financial services today are based on a stability of lifestyle and income that very few people have now,” said Ryan Falvey, who oversees the Financial Solutions Lab at the Centre for Financial Services Innovation. The Lab supports companies working on creative services that help Americans improve their finances.

“Everyone has this mindset that waiting to get paid is somehow good,” said PayActiv's chief executive officer, Safwan Shah. “Is waiting to get paid something that can create forced savings, or does it cause problems for low-income people? We’ve done studies to prove that what we are doing is actually helping people save more.”

That doesn't mean having constant access to your earnings is risk-free. Activehours, which lets consumers choose what to pay for transactions through what it calls “tips,” helps employees with budgeting, said Ram Palaniappan, chief executive. “If you need to spend, you check if there are earnings in the app, and if there aren’t, you need to work more before you spend,” he said. “It’s very much like business, trying to make revenue meet expenses.”

And the percentage of earnings that employees can take, and how often they can take it, may be limited by employers. For now, Baton Rouge General caps withdrawals at 50 percent of wages earned and a maximum of $500. An employee can’t take out another loan until the first one is repaid out of his or her pay-cheque.

Other companies may set the limit at 75 to 80 percent of earnings and limit the service's use to once a pay cycle, said FlexWage CE Frank Dombroski. Dombroski founded the company after six years at JPMorgan, where he managed the firm's commercial payments solutions business.

Less stress

The pitch to employers is less financial stress on employees and improved productivity. The service is often positioned as a financial wellness benefit that can increase retention. PayActiv's Shah said being able to tap earnings this way can lead to better financial behaviour. He compared it to grazing on food, rather than bingeing.

“Access to money in small dollar amounts when it’s needed has far more value than waiting to be paid and, in the interim, getting into a debt trap, a la payday lending,” he said.

It’s too early to measure the results, though some companies offer positive anecdotal evidence.

At Baton Route General, CFO Kendall Johnson was leery of PayActiv. “We were very concerned that this would become another form of a recurring loan,” he said. So far, though, employees are using it when they have cash flow problems and need something like car repair, he said, and not turning to it every month. He's seen a decrease in the number of employees using cheque-cashing sites and payday lenders, which call Baton Route General to verify employment.

Michael Fox, CE of Goodwill of Silicon Valley, says PayActiv's service has been “fairly successful” in a pilot program with about 300 employees. When Fox was in southeast Asia getting a global MBA, he saw how small financial mishaps could create disasters. “Something happens in a family where they need $200 to $300 now, and it starts this whole domino effect, and can even lead to unemployment,” he said.

A few years ago, Fox saw one employee go from owing about $500 to a payday lender to owing several thousand dollars within a few month, he said. Goodwill gave the employee a loan so he could pay off the high-interest loan.

Scale needed

These early-stage companies need to scale up while keeping the cost of acquiring customers low, and are likely to face increased regulatory scrutiny as the sector grows. Shah said PayActiv has had over a dozen meetings in the past two years with 25 to 30 people associated with the Consumer Financial Protection Bureau's Project Catalyst “in the spirit of keeping them updated”.

Project Catalyst's “mission is to encourage consumer-friendly innovation in markets for consumer financial products and services,” according to the CFPB web site.

Dombroski said FlexWage has been working with Project Catalyst on a study to quantify the impact of financial stress. The CFPB said in an email that it “meets regularly with a range of industry and advocacy stakeholders” but generally doesn't “comment on or discuss specific products.”

“I don't think the Consumer Financial Protection Bureau has put a broad eye on these companies yet, because the numbers aren't there yet,” said Sam Maule, digital practice lead for NTT Data Consulting. “The onus is on these companies to educate the regulators.”

It also falls to them to educate customers about how the product is meant to be used, said Cherian Abraham, a payment expert at credit-tracking company Experian. “It's harder for companies like these, because their customers have been called unprofitable by the traditional financial institutions,” Abraham said. “So they have a tougher job.”

BLOOMBERG

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