A Look at the Future of On-Demand Pay Services

Last Updated on December 20, 2022 by admin

The growth of the gig economy has meant that more people are exploring work options as independent contractors. With this change comes new ways to bill and pay for services. Paychecks may not come in a regular pattern for gig workers and independent contractors, which can make it difficult to budget and organize personal finances. Yet it’s not just gig workers who may face challenges with their pay schedule; many full-time employees are restricted by their monthly or biweekly payments, which are not designed to accommodate emergencies or surprise costs.

One service has emerged as a potential solution to this problem: on-demand pay. Also referred to as earned wage access (EWA), it enables employees and workers to bypass the traditional pay cycle and access a portion of the wages they’ve already earned.

Unlike payday loans, these services allow employees to access their next paycheck in advance. This way, they are not borrowing money from a lender, but from their future self. When their original payday comes around, that paycheck is adjusted by deducting the amount that was already paid out, which reduces any financial risk for the employer.

As a premise, on-demand pay services are a compelling option for both employers and employees who feel constrained by current payment schedules — especially during a pandemic. As a new solution, however, there are still several details to address before on-demand payment becomes a default tool.

How On-Demand Pay Services Have Gained Traction

Solving a Need

At the heart of it, there is a real need for many people to have more flexible access to their income. A recent study by EY found that 70% of individuals in the U.S. and U.K. experience financial stress on a regular basis. Of those respondents, half face financial shortfalls between pay periods every four months on average. Despite this common problem, there have been limited fixes — until on-demand pay services.

These tools let employees choose when and how they are paid. Instead of having to wait for a particular day to receive income, employees can opt to receive a proportion of their paychecks in advance to help cover expenses. These services provide a much safer and more affordable way for people to access money, particularly in the case of emergencies or unexpected costs. Unlike payday loans, there is no interest. Instead, users pay a small transaction fee.

Encouraging Good Relationships

With more flexible money management, employees can avoid predatory loan sharks and redistribute their own earnings as needed. This can provide a boost to overall financial health, even in times of need, as it avoids creating long-term debt. Figuring out how best to redistribute money across the month can also lead to greater financial literacy over time.

On-demand pay services can also improve the employer-employee relationship. It’s a low-risk option for employers as these payments were already due to be sent and the overall amount remains the same each month. Still, by offering a more flexible payment schedule, employers can show they trust and empathize with their staff, which may, in turn, foster company loyalty. This is especially true if the employer agrees to cover the transaction fees. In exchange, employees experience less stress and the overall work environment is healthier.

How to Make These Services Sustainable

It’s not surprising that the market has seen significant adoption of on-demand pay services. Employer Salary Advance Schemes grew exponentially during the pandemic, with one U.S. provider Earnin reporting 5 million downloads in the Google Play store in April 2020 alone. In order for this approach to succeed long term, there are a few important issues to consider.

Improved Regulation 

As with any innovative financial tool, regulation is on the horizon — and it’s a good thing too. There is the potential risk of payment changes impacting worker status, with employees potentially losing protections or full-time benefits if they stop being paid in the traditional way. Employees, employers, and service providers must all stay on top of any new regulations, to ensure that these programs do what they intend in a compliant manner.

Thoughtful Service Provider Selection

Each on-demand pay service is a little different, particularly with regard to how they assign fees. In some cases, it’s the employee’s responsibility; in others, it’s the employer’s. And then there are the providers that split the fee between both parties. Depending on employers’ priorities, they need to be thoughtful with their choice of provider. Covering all transaction fees may not be practical for company stability, but the gesture may be worth it for improved relations with employees.

Education Policies and Informed Adoption

While on-demand pay services provide important financial coverage for users, these tools should not be used on auto-pilot each month. Instead, these services should be seen as useful resources for times of need or emergency; they are supplements to a larger personal finance strategy. Employers who offer on-demand pay should therefore make sure that this service is not offered in a vacuum, and should provide financial guidance to their employees. By placing on-demand pay within a larger context of financial planning, employers can ensure that this service provides long-term benefits, as well as short-term relief.

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