Amid the Coronavirus-centered headlines are the warnings that the U.S. economy may tip into recession. A sizable chunk of the country’s population may risk falling behind on their financial liabilities, unless the ways they get paid fully embrace the digital age, breaking the weekly/biweekly paycheck cycle.
Especially vulnerable are the 16 percent of gig economy workers – nearly 16 million individuals in all – who live paycheck to paycheck, with no financial safety net.
In the Pay Advances Playbook: Breaking the Paycheck to Paycheck Cycle report, a collaboration between PYMNTS and Mastercard, we noted that 75 percent of more than 2,200 individuals surveyed were at risk of being buffeted by financial shocks, as they have little or no savings on hand to meet financial emergencies.
Extrapolate those findings a bit, and the implications are ominous for the gig economy, which, at an estimated 96 million individuals, is now roughly a third of the workforce.
Those who represented “financially secure” gig workers – who were able to not only cover the bills, but also save some money for the proverbial “rainy day” – comprise a minority of the group, at about 25 percent.
Payday-Dependent and Payday-Centric – and Vulnerable
The data points to a thin-to-perilous cushion for the gig workers who aren’t (perhaps yet) struggling to pay the bills – an implied 68.6 million individuals.
The “payday expectant” and the “payday-centric” groups – at a cumulative 71.5 percent, (and a respective 41.9 percent and 29.6 percent) of the survey – have savings for emergencies, but paychecks are consumed by everyday expenses. The “payday-centric” workers do not have savings at all, but are at least able to meet expenses.
The joint efforts between Mastercard and PYMNTS found that “payday-dependent” individuals may struggle the most if tethered to the conventional model of waiting to get paid through conventional pay cycles. They comprise 16.3 percent of gig workers, implying that 15.6 million workers live paycheck to paycheck without savings. It stands to reason that these are the same individuals who may find it necessary to tap into high-cost loans, which might make their states of financial well-being even more perilous.
Allowing all of these groups to get paid earlier, on demand as needs arise and through electronic means, can reduce the friction of day-to-day financial management.
Of course, one size does not fit all when it comes to getting paid for project work. Gig work can be sporadic and payment terms can be extensive (depending on the client). That increases the importance of cash flow management skills (timing paydays and expenses), which can be adversely impacted by exogenous events.
Against that backdrop, offering access to earned wages in advance, and in lieu of traditional weekly or biweekly pay cycles, can make all the difference between financial management and financial disaster. The rule of thumb, after all, has been that most consumers would be unable to cover a financial emergency equivalent to $400. And with more than 55 percent of payday-dependent workers taking on gig work to support themselves or their families, having early access to funds can be critical.
As many as 53 percent of paycheck-to-paycheck workers would use pay advances to cover bills and expenses. A significant percentage of payday-dependent and payday-centric respondents, at roughly 27 percent and 24 percent, see the avoidance of loans as a key benefit of advance pay options. Almost 40 percent of both groups see financial stability as a benefit of pay advances.
All told, it is the payday-dependent, payday-expectant and payday-centric groups who are most interested in pay advances – and significant majorities of those groups would be at least somewhat interested in switching to providers who offer such options, indicating that the providers that do not offer such functionality might get left behind.
There’s an upside for the platforms and companies, too, as gig workers are willing to pay for that access. Most individuals would be willing to pay fees ranging from 1 percent to 5 percent.
Not Just Gig Workers
It’s worth noting, too, that the advance payment option is of course not strictly confined to gig workers.
In an interview with Karen Webster, Jon Schlossberg, CEO of Even, said that closing the gap between wages as they are earned and paid for full-time and hourly workers can help break the paycheck-to-paycheck cycle.
The firm has worked with Walmart since 2017, offering its Instapay feature, and more than 400,000 of the commerce giant’s workers have signed up for the Even app.