Does anyone really know why a paycheck every two weeks is standard? Today, it seems arbitrary, but there was once a place for it, when payroll was entirely paper-based and required time to process.
Today, in a tight job market, a trend has emerged that is keeping employers competitive: flexible alternatives to the two-week pay cycle. The high cost-of-living has already led companies like Walmart to offer instant pay, and big staffing agencies like ADP are following suit. And recent research shows that flexible pay options allow for more flexibility in budgeting.
To date, flexible pay options have been largely relegated to hourly, low-income workers — and it was a perception I’ve built a business around. As the economy became more reliant on freelancers, gig workers with Lyft and UpWork could make a decent living. But those workers are part of a large corporation that pays regularly; for “solopreneurs,” a client pays when they pay — and 30 percent of the time, it’s late.
I experienced this myself when I was freelancing. A client’s check was late, and I almost missed a mortgage payment by a hair.
Flexible Pay Options See Demand From White-Collar Workers Too
Now, companies hiring white-collar workers and other high-earners are considering flexible payroll options as well.
Why? Because even salaried workers experience unexpected, costly emergencies, like surgery for Fido. They, too, stretch themselves thin during certain life events, from buying a house to paying healthcare deductibles to front-loading costs for a vacation. No wonder the employee-first model — which yields lower turnover rates — has integrated a financial wellness component. Larger companies can eat the cost of such a program because they will see a positive ROI in employee engagement; smaller businesses competing for the same candidate pool can use instant pay as a way to differentiate themselves from the competition.
In the last few years, this has spurred a slew of fintechs and alternative financing apps offering fair and affordable alternatives, in part because of advanced technology like data analytics. The demand is there; without alternatives, employees face a 50 to 400 percent-plus APR ( i.e. 4 to 33 percent-plus interest per month) on a payday loan. Given that half of adults in the United States can’t even afford a $400 emergency and most live paycheck-to-paycheck, the volume of people thrown to the sharks isn’t small.
What It Takes to Bring Instant Pay to Your Organization
If instant pay is so great, why hasn’t it become the standard for everyone?
Some banks, like Bank of America, refuse to accept these services, to the point where it’s often listed in the FAQs. But banks could benefit from this model. If an employer offers instant pay via direct deposit to an employee’s checking account, the bank could require the employee to have an account (and branded debit card) with them (to monitor credit, etc.). A bank could see a boost in account volumes if they worked with a national employer to lock in a minimum amount of new accounts generated or minimum volume deposited. (A conundrum exists: banks are notoriously slow to adapt to new technology but are constantly prowling for new opportunities to boost deposits.)
Larger companies see a challenge in doing this at scale; they would need hundreds of HR staff for managing payroll (especially if global), so they outsource. Integrations have further entrenched this model; functionalities that allow payroll admins to quickly transfer data into QuickBooks and then Paychex has made outsourcing an easy choice.
So, naturally, the market has been waiting for these middle men to offer an instant pay option. Until the cost of living began to skyrocket, white collar professionals had not demanded it. Perhaps they didn’t even think it possible.
And of the options out there that do service massive companies like Walmart, there are some downsides. For example, there’s a long integration period for those wanting daily pay when it comes to making sure the payments app is fully connected to the company’s payroll platform in order to ingest accrued earnings not yet paid. There’s also the challenge of verifying thousands of incomes, and then recouping pay directly from those thousands of workers. What happens if a worker has overdrafts?
Technically speaking, bringing this solution to salaried workers is no different than the process of rolling it out to contract/hourly employees — assuming the company is also using one of the ubiquitous payroll platforms. Without a doubt, this instant pay offering is in its nascent phase, and still requires an alternative financing partner to serve as an intermediary between the payroll platform and the payee (end user) to expedite the flow of funds. This progressive solution poses logistical challenges which may scare off large, conservative companies that live by the motto “if it ain’t broke, don’t fix it,” especially if there’s no monetary benefit to the employer.
Upstart Financing Providers Keep Costs Down and Delivery High
Despite these structural friction points, alternative financing providers have flourished, and appear intent on upending the outdated, but universal norm of the payroll “schedule.” Each fintech has a different model that allows them to keep costs down and delivery high. For example, many have a much lower customer acquisition cost vs. a bank, and that translates to lower fees.
Qwil collects from the business, not the freelancer, and does one bulk debit at the end of every pay period to efficiently collect on the aggregate balance paid out to employee base/contractors (instead of chasing hundreds of people). For large enterprises, simplicity and ease of use often trump cost. The roadblock that keeps instant pay from replacing the salaried employee model at many employers is this: when your employees are making a comfortable living, does yet another employee-friendly perk outweigh the ease of making no change at all?
Only time will tell, but it’s quite clear that the explosion of financial wellness “as-a-service” companies have generated enough interest (or perhaps fear on the part of employers in high turnover market segments) that old-school industry bellwethers have made the executive decision to jump onboard.
New services arise from growing demand, and the number of startups in the space speak to the need — and it may well get to the point where businesses that don’t offer this option get left behind.
About the Author
Johnny Reinsch is co-founder and CEO of Qwil, a fintech startup that helps SMBs pay freelancers instantly, internationally. Prior to starting Qwil, Johnny was an SVP of strategy at Xapo, a bitcoin wallet. He entered fintech after a career as an M&A lawyer. This year, Qwil was named one of the top 10 innovators in fintech, and is a finalist for Lendit’s list of top emerging lending platforms. He resides in San Francisco, and holds degrees from the University of California.