Instant pay apps give you quick access to wages – but there’s a catch

Sure, birthdays and holidays are great, but if you live from paycheck to paycheck, paydays are one of the things to do. the happiest days of the year. While many employees wait from a week to a month to get the money from their business owes them, new apps from fintech startups like DailyPay, FlexWage and PayActiv are bringing workers to places like Goodwill, McDonald’s and Uber faster access to wages – sometimes even on the same day they counted 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. “Having 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 hours (since they will reap the rewards faster) and may reduce their recourse to abuse payday loans with exorbitant interest rates that can leave borrowers in a bind 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 – the equivalent of a full tank. month’s rent for many.

Yet even as same-day payment apps take off – Instant Financial reports that more than 175,000 employees at more than 60 companies are currently using their Instant service – there are also concerns that the apps are encouraging people to spend too much, leaving them with insufficient funds for basic expenses like rent and car payment.

“To 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, ”John 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’re only paid a few times a month, especially if you’re one of the three in four Americans who report 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 card or even loan friends or family – when you are a minimum wage hardworking, your only option for getting 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 a surprisingly light pay right before to 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. “For the employee, it’s about helping them manage their cash flow elegantly and profitably,” 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.

“The employees love it. It’s a great recruiting tool, ”said 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 ability to “tip. “The service then withdraws the funds directly from your current account after being 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 generally receive little to no sickness or vacation pay, with some 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 $ 33 overdraft fees because you are missing $ 10 to cover your gas bill, or worse, take out a payday loan, which often has an average annual interest rate of more than 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, “deliver financial benefits to employers through reduced employee financial stress, improved employee engagement and satisfaction, decreased employee turnover and absenteeism rate ”.

Another document from American Institute of Economic Research came to similar conclusions, noting that instant payment apps like PayActiv are “an advantage that makes working in their business more attractive.”

What are the disadvantages of instant payment apps?

Receiving your salary immediately after you earn it may seem perfectly fair and reasonable, but it can also put you in financial difficulty. Hot water 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 on a regular basis,” said Lauren Saunders, associate director at National Consumer Law Center. Nerdwallet.

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 a emergency fund, savings account or pension plan.

The genius of many 401 (k) s, for example, is that they invest a small portion of your income before you even see them. Research indicates that when contributions to such schemes are Automatique, workers save more than three times as much as when they don’t. (Better yet, the money you invest decreases your taxable income, which can also put you in a lower tax bracket.) And given that most Americans don’t save enough for retirement, any behavioral boost to get us there 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 receive a salary before their regular pay cycle should consider creating a budget this helps them understand how collecting early to cover a bill will affect their ability to pay others in the end – as should anyone who wants to stay on top of their game. finances.

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