Can fintechs lessen financial stress for low-income employees?
16th Jan 2019
Australia took a starring role in the October 2018 edition of The Economist, pitched as the success story of the developed world. But, despite Australia’s growing economy and low unemployment figures, daily financial stress for many Australians is a reality. Almost one in five Australians would struggle to find $1,000 to cover an emergency expense, and one in three Australians spend everything they earn.
I observed a similar discrepancy on a recent trip to the USA: even with a robust economy, 28% of Americans are struggling to save and turn to high-cost credit products to pay bills. American fintechs (companies which use technology to support financial services) have seen an opportunity to disrupt the short-term high-cost credit market by offering services aimed at improving the financial health of American workers.
This article looks specifically at ‘employer-based’ fintechs and how the impact of their services may be a win-win for both financially stressed employees and cost-conscious employers.
What are employer-based fintechs?
To explain what an employer-based fintech is, it’s useful to profile a leader in the market. PayActiv is a US-based fintech which partners with employers to provide financial services to their employees. PayActiv’s core product is the ‘Earned Wage Access’, which leverages the typical two-week or four-week payroll period during which employees are accruing wages that they cannot access until the next payroll date. On the PayActiv mobile app, an employee can see an estimate of the hours they have worked and the earned funds they have accrued but have not yet been paid. The employee can choose to access these earned funds through the PayActiv app (up to $500 per period). The employer then reimburses PayActiv by deducting from the employee’s next paycheck. The funds can be used to pay a bill directly or can be transferred to the employee’s bank account.
PayActiv charges a membership fee of $5 per employee for each pay period in which the earned income advance service is used. But, according to PayActiv, in over 50% of cases the membership fee is paid or subsidised by employers – so employees pay a smaller fee or no fee at all. The full suite of PayActiv services includes an automatic savings product where an employee can allocate hours worked towards savings, as well as mobile-based financial management tools.
What are the benefits for employees?
Credit products are available at a low cost
A recent study conducted by Harvard Kennedy School found that PayActiv’s income advance product is much less expensive for American consumers than other forms of short-term credit, like a payday loan.
In the Australian context, a payday loan of $100 can cost a consumer around $24 in charges over a one-month period. PayActiv’s charges for an equivalent loan would be only $5, making it around 20% of the costs of the payday loan (assuming that the employee is actually charged the full membership fee).
The salary link is critical to the affordability of PayActiv’s products and the viability of its business model. By allowing access only to accrued wages, PayActiv takes on a minimal credit risk in making and collecting on its advances.
Financially excluded employees gain access to financial services
Provided they have some accrued wages, any employee is eligible to access the PayActiv income advance product, regardless of their credit score or liabilities. As a result, this product may be seen as promoting financial inclusion for those employees who cannot access traditional forms of credit due to their poor credit scores.
A criticism of the PayActiv product is that early access to wages is just delaying an employee’s financial stress until their next payday. In response, PayActiv argues that where a financially stressed employee needs access to funds, it is better to access PayActiv’s cheaper product, as compared with other forms of short-term credit. PayActiv also claims that consistent use of the PayActiv platform allows employees to work towards rejoining the traditional lending market in the future.
What are the benefits for employers?
There are significant benefits for employers in partnering with a fintech like PayActiv to provide access to financial services for employees. For example, the Harvard Kennedy School study found that employer-sponsored financial products may improve employee retention, with turnover rates 19% lower among users of PayActiv.
There are indirect benefits for employers too. Financial exclusion has been shown to negatively impact social, emotional and health outcomes, and financial stress can impair a person’s decision-making abilities. By supporting employees to improve their financial wellbeing, employers may benefit from a more engaged, productive and healthy workforce.
At home, businesses like Employment Hero are starting to offer Australian employers tools to allow their employees to access a portion of their salary on demand. Many Australian employers, particularly smaller businesses, have offered this kind of flexibility to employees for years on an informal basis. New fintech options could make this process easier, more cost-effective and more efficient. However, as this industry proliferates, further research is required to determine whether accessing salary in advance can in some circumstances also exacerbate financial hardship.
Dana Beiglari started her career as a lawyer at the commercial law firm, Allens. Her passion for social justice law led her to Legal Aid NSW. Dana is a Senior Solicitor in the Consumer Law practice group. Her team of 10 solicitors assists some of the most vulnerable people in NSW to access their consumer protection rights in credit and insurance matters. Dana was recently awarded the Ascham Leadership Scholarship to research initiatives used overseas to improve access to affordable and suitable credit for disadvantaged consumers.
The views in this article are the writer's own and do not reflect the views of Legal Aid NSW.
The views and opinions expressed in these articles are the authors' and do not necessarily represent the views and opinions of the Australian Lawyers Alliance (ALA).