Look to your left, now look to your right. More than half the people within your eyeshot are low and moderate income (LMI) earners — the barista at Starbucks, the checker at the local supermarket, the ticket-taker at the movie theatre, the customer service representative taking your call.
According to the Bureau of Labor statistics, 73.3 million adults, or 55.5% of all American workers, are LMIs. What do all these people have in common? They can’t get access to their pay when they need it. Their companies decide when they will get paid.
LMIs have something else in common. They struggle to make ends meet and are held prisoner to a system that leaves them financially powerless. Employees provide services to their companies every day, but companies don’t pay their employees every day for their work.
Companies have an incentive to delay payments to employees. It’s convenient to run payroll periodically rather than daily; this avoids costs and potential errors. More importantly, companies get to keep wages in the bank between pay periods and earn interest on it. This system is completely useless and will soon be obsolete.
As power shifts from employer to employee, organizations will have to reframe the social contract between themselves and their workers, which will have to include the types and delivery mechanisms of rewards to their workforce. What makes managing these challenges even harder is the current conditions related to the shrinking labor force. Employees are harder to find and even harder to keep. According to a survey conducted by LinkedIn, the top two things that employees want are:
- Mental health support. COVID-19 brought into crisp focus that employees need organizations to accommodate their mental health needs.
- An employer that makes a difference. Employees are looking for their organizations to not simply focus on making profits, but to be part of “the solution,” making the lives of their employees better and, by extension, making society better.
The Big Solution
Perhaps the best and easiest solution to address both individual and social needs is earned wage access (EWA). EWA provides workers on-demand access to wages they have earned but not yet been paid while not requiring employers to take on additional costs or financial risks. One might think of EWA as the new “New Deal” (more on this later). This is how it works:
Employers contract with an EWA provider. Most providers do not charge for their service, so this is free to the company (no charge for set-up, no on-going fees/charges). And, since the provider fronts the payment, there is no financial risk to the company. The provider’s system integrates with the employer’s payroll system, eliminating time-consuming programming or technology issues. At the end of each pay period, the employer completes their normal payroll process, with one small exception: a transmittal payment is made to the EWA provider for the money advanced to employees during that pay period.
Employees download the app associated with the EWA benefit provider to their smartphones, laptops or desktops. Employees do their normal daily work, and at the end of the day, the employee taps on the app and either has their daily net wages transferred to their bank account instantly (for a small fee) or the following day (for an even smaller fee.)
For example, Tapcheck offers employees the ability to have up to 70% of their net daily wages transferred to their account every day, with a maximum transfer of $200 per day, for less than a normal ATM withdrawal fee.
Everyone Benefits! Too Good to be True?
EWA has been around since 2012, so there has been sufficient time for the product to be examined and challenged. More than a dozen studies have reviewed different aspects of the impact of EWA — banking, lending regulatory compliance, consumer protections, economic development impact, employee motivation and corporate outcomes.
The majority of studies have highlighted the positive outcomes for employees, communities, suppliers, customers and shareholders/companies, those constituents that, according to the Business Roundtable, are the new focus of the corporation.
EWA directly and indirectly supports the organization in achieving these purpose-driven goals. All constituents mentioned above win.
The greatest beneficiaries of the EWA product are the employees of the organization. They benefit financially and psychologically, and ultimately become better, more confident, longer-tenured employees. Financial benefits include avoiding the detrimental impact of:
- predatory payday loans, which have APRs that can be as high as 400%;
- bounce-check charges, which can run as high as $1,300 per year; or
- charging on credit cards, which have average interest rates on balances of close to 25%.
These alternatives to the liquidity that EWA provides can easily cost LMIs upwards of $3,000 per year, the equivalent of one-to-two months of earnings.
Psychological benefits include the stability resulting from eliminating financial liquidity triggers, and a critical sense of control. PwC reports that during work hours, employees spend on average three hours a week worrying about their finances. Removing money distractions allows employees to be more productive, achieve higher levels of self-efficacy and enjoy their work — all important elements of employee engagement and retention.
Low-income neighborhoods may be the second greatest recipient of this benefit. Research has shown that by providing residents with EWA and disposable income up to 15% of wages, three positive results are generated: more stable communities, lower crime rates and heightened overall local economic activity and development. In fact, a 1% decrease in poverty leads to a 2.16% decrease in total crime.
Suppliers benefit when employees are authentically doing their jobs and contributing to supply chain management efficiency. Those three hours a week focused on financial issues adds up to 150 hours per year. That’s time not spent working and not being attentive to their jobs.
The top three values that customers typically look for in products or services are customer service experience, functionality and price. Employees who are happy, engaged and focused on their work deliver great customer service experiences. Prices are more likely to be stable if the cost of labor is managed, which results from lower levels of employee attrition or absenteeism.
When employees are engaged at work, they are more productive and less likely to quit or take unplanned days off. This alone is a huge benefit for companies. But the benefit of EWA goes beyond that as companies that offer EWA also report more applicants for jobs, higher levels of productivity and higher levels of employee morale.
EWA — the New “New Deal”
In the 1930s, President Franklin D. Roosevelt successfully created the New Deal to lift the country out of the Great Depression. Today, we are faced with a similar challenge caused by the pandemic and “the Great Resignation.” There are similarities between the New Deal and the benefits provided by EWA. The New Deal focused on 3 R’s: relief for the poor, economic recovery and financial system reform. EWA will achieve comparable outcomes:
- Relief: Allow workers access to their earned wages when they need them to help avoid the poverty associated with costly measures to provide liquidity.
- Recovery: The shortest path to economic recovery is to get people money (stimulus checks), to allow people to get access to their earnings faster, or to enhance the disposable income of LMIs. The $3,000 per year that LMIs spend on interest and fees totals $51.1 billion, which could be spent in their local communities.
- Reform: EWA demonstrates private sector commitment to employee well-being by taking a more active role in consumer protection.
There are several organizations that offer EWA products, such as Daily Pay, PayActiv and Tapcheck. Several of these organizations provide a utility calculator so that companies can simply enter selected information and quantify the expected financial improvements associated with lower attrition, higher retention, lower absenteeism and higher levels of productivity. The proof is in the numbers.
According to Kayling Gaver, founder of Tapcheck, it’s critical for organizations to offer EWA to their employee population, at all levels: “If e-commerce sites and social media news feeds are providing custom recommendations to us, it’s only natural that the same expectation extends to our work life. Now is an opportunity for employers to get ahead and help address the overall wellness of their employees, and by extension, their companies, customers and communities.”
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