B2B Payments

Combating The Payday Loan With On-Demand Wages

FinTech firms that provide workers with wages on demand (i.e., before payday) emerged with the cash flow challenges of low-wage, hourly workers in mind. Yet, in the U.K., rising costs of payroll administration, intensifying compliance requirements and complex tax rules have led companies of all industries and sizes to rely on monthly paydays, rather than weekly or biweekly payouts — a shift that has spread the cash flow crunch to employees beyond the shift work space.

Peter Briffett, CEO of U.K. FinTech Wagestream, told PYMNTS in a recent interview that the cash flow constraints of having to wait for a single day to receive wages every month can be dangerous to the financial wellness of professionals. A single, expensive incident can force these professionals into debt via bank overdrafts or credit cards — or worse, Briffett said, into the payday loan cycle.

“In the U.K., 85 percent of employees are paid monthly,” Briffett said.”That’s probably because payroll is expensive, administrative-intensive and the fewer times you can do it, the better — from an employer point of view. But that tends to not help the employee.”

Wagestream connects employees to their accrued wages at any point during the payroll cycle for a flat fee. The company recently announced a $51 million funding round for its solution — led by Balderton Capital and Northzone, which provided equity, and Shawbrook, which provided debt. Other backers included Joseph Rowntree Foundation, the London Co-Investment Fund, QED and Village Global.

Briffett explained that Wagestream was among the FinTech firms in the space that had initially assumed low-wage, hourly workers would make up the majority of adopters. However, as monthly payroll has spread in the U.K. and Europe, he’s been finding a range of employee types that use the tool — and some interesting knock-on effects for employers as well.

While there are obvious benefits to an employer promoting the financial wellness of employees, in the hourly worker field, Briffett said access to wages in real time has strengthened the mental connection between work and payment. Shift workers using Wagestream tend to sign up for more shifts, he noted, because access to wages on demand brings the financial rewards of doing work closer, strengthening employee retention for employers in this field.

A similar trend can be seen in the gig economy space, where Uber is in the minority of enabling daily payouts.

“Uber realized quite quickly that unless they pay their drivers every day with daily cash-outs, they had an issue with staff retention and the ability to get drivers to do more rides,” Briffett explained. “Flexible payments for gig workers are fundamental. Paying people in lump sums every 30 days is not necessarily going to work for every worker.”

Combating The Payday Loan Industry

The impact of connecting workers to wages on demand isn’t only having an impact on employee wellness and retention in the hourly, salary and gig worker spaces. Briffett noted that there could be broader effects on the employee financial wellness space.

While it’s possible for employers to facilitate on-demand wages to their workers, the administrative burden of running payroll more than once a month means the majority of companies are unwilling to pay employees more frequently, or whenever a worker may want. The alternatives have forced professionals into debt, with Briffett adding that he considers the worst-case scenario to be taking out payday loans.

“One of our key missions is to destroy the payday loan completely,” he said, pointing to the high fees and interest rates of short-term financing.

It’s an industry that U.K. regulators have more aggressively pursued in recent years. Last October, the U.K. Financial Conduct Authority (FCA) published an open letter to CEOs of the payday loan sector, urging them to more closely scrutinize underwriting processes and compliance. Watchdogs ramped up oversight of the sector following the collapse of Wonga, which was once the U.K.’s largest payday lender, brought on by a slew of customer complaints.

Yet, there are also concerns of bank overdrafts, with analysts at consumer advocacy group Which? finding that, in 13 out of 16 reviewed cases, an employee would have paid more to obtain a bank overdraft than a payday loan.

With the administrative burden of payroll preventing employers from connecting workers to wages on an on-demand basis, the opportunities for FinTech firms to fill this space are on the rise. Briffett said he expects the industry to grow from a niche to a mainstream service, providing an alternative to debt for workers.

There is also opportunity in the U.S., he noted, where — although workers still tend to get paid every two weeks — payday lending is a highly scrutinized sector. At the same time, the gig economy is introducing a larger population of professionals without consistent access to wages.

“I understand why employers have gone to monthly payroll, but, in some cases, it doesn’t help the employee,” said Briffett. “It’s almost people’s fundamental right to have access to earnings when they decide to use them.”

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