Wednesday, July 6, 2016

New Payday Options for Making Ends Meet

For decades, most American companies have paid their workers once every week or two, minimizing the administrative costs of frequent paydays and maximizing the interest the companies earn by keeping the money in the bank.

And for equally long, workers have complained about the unfairness of waiting for their paychecks.

But now, thanks in part to the gig economy, a small but growing number of employers and start-ups are testing ways to give employees faster access to their wages. A variety of options — some involving payroll cards, and others using A.T.M.s and other methods — have recently hit the market, permitting people to take home their pay as soon as they have earned it.

On one hand, this could be good news for people who live from paycheck to paycheck. If the trend catches on, it could reduce the demand for products like payday loans, which workers use when they run short of money, but which charge very high interest rates. On the other hand, the services that are providing on-demand wages charge fees every time a worker uses them, so there is a trade-off.

From the employer’s perspective, instant payment for a day’s work has the potential to motivate employees to work longer hours — after all, instant financial gratification is a powerful productivity incentive.

In the ride-sharing market, same-day earnings payouts moved rapidly from an experiment to an industry standard. In November, Lyft began offering its drivers the option of cashing out immediately instead of waiting for their weekly payday. More than a third of them have used the feature, which costs 50 cents a transfer, and Lyft has paid out $200 million, executives say.

Uber started testing a similar system in March, pushing drivers’ earnings to a prepaid debit card from GoBank. Last month, it made the option available to nearly all of its 450,000 active drivers in the United States.

Start-ups are also circling. DailyPay, a New York company that lets on-demand workers collect their earnings faster for fees of $1 to $1.50 a day, has enrolled thousands of drivers and delivery people.

“I’ve been surprised at how fast it caught on,” said Harry Campbell, a driver who writes about the industry on his blog, the Rideshare Guy. “It became a competitive advantage. Once Lyft had it, and it was really popular, Uber had to have it too.”

But gig services are a niche part of the job market. Fast cash has long been a perk for waiters, bartenders and other tipped workers. Most Americans draw their paychecks from companies with more rigid financial systems. In that market, there has been little incentive for change — until recently.

Even among those with steady jobs, financial insecurity is pervasive, and some employers are starting to look at how they can help. Giving raises is expensive. Giving people quicker access to their accrued earnings doesn’t have to be.

Eight months ago, Goodwill of Silicon Valley began testing a system that lets its workers use an A.T.M. near the company’s cafeteria to withdraw up to half of the wages that they have already earned from their next paycheck, to a limit of $500. It was an instant hit. More than half of Goodwill’s 300 eligible employees have used it at least once.

Michael Fox, the company’s chief executive, said he was initially skeptical but became a convert when he saw what a big difference the option made for some workers.

“When you have people living on the edge, very small things can cause a rapid acceleration into very bad conditions,” he said. “If you’re just $60 or $90 short, and can’t make a rent payment or buy medicine, it spirals. One little thing creates a huge disaster.”

Goodwill is using technology from PayActiv, a start-up in San Jose, Calif., that uses employers’ wage and hours information to estimate their employees’ earnings. For a fee of $5 per transaction — of which Goodwill pays half as a courtesy to its workers — PayActiv advances the cash. On payday, it recoups the money directly from the employer.

PayActiv’s founder, Safwan Shah, talks with a missionary zeal about the potential impact. “The biggest bank in this country is the bank of the employer, and two to three weeks of salary for most people is stuck there,” he said. “This is a corporate responsibility issue.”

Getting employers to view it that way, though, is an extremely hard sell. Frank Dombroski knows. He has been making the pitch for five years and is only just starting to see signs of momentum.

Mr. Dombroski’s company, FlexWage, of Mountainside, N.J., also advances employees part of their earned but unpaid wages, but unlike PayActiv, it doesn’t use its own money to fund the transactions — it pulls cash directly from employers’ coffers. That is the most financially sustainable approach, he says, but it appeals to only the most highly motivated employers.

“I would be lying if I didn’t say it’s been a struggle, but we kind of knew that going in,” he said.

He thinks the tide is starting to turn. A new partnership with ADP, a big provider of payroll services, has helped FlexWage get on the radar of bigger businesses. The company says it is finalizing deals with two employers that would double the 8,000 people currently using its system.

“There’s been so much attention to the high cost of short-term lending, like bank overdraft fees and payday loans, that employers understand a lot more clearly now the dire need,” Mr. Dombroski said. “We don’t have to convince them that there’s a problem any longer. Now we need to convince them there’s a solution.”

by Stacy Cowley, NY Times |  Read more:
Image: Andrew Burton for The New York Times