INVESTMENT

On-demand pay: Is it for staying here?


Millions of people around the world rely on regular salaries and plan their budgets based on pay-days. But the lockdown has made personal budgets much more challenging. Many workers have lost their jobs and many are now working from a distance again. Growing closer to public concerns about the future and immediate financial security is the added stress of working from home and the logistical challenges.

In the midst of such unforeseen emergencies, timely pay has become more important and a growing number of employers in need of cash have come to rely on the Employee Salary Advance Scheme (ESAS), also known as on-demand pay. In the blink of an eye, ESAS has become quite popular with workers in both the UK and the US who want to be financially well-off within pay-days.

ESAS gives workers initial access to up to half of their salary, usually a fee. The main advantage of on-demand payment as opposed to pay-based nnding or pay-day loans is that the worker does not have to borrow any money. In addition, ESAS usually costs less than traditional credit loans and can thus be a cheaper and less risky way to get cash quickly.

On-demand salaries are not just for low-income earners. ESAS offers more personal money options that make its potential client base much larger.

According to a recent EY study, 0% of survey respondents indicated that they would use a form of on-demand pay. Their purpose is to run the gamut. Some see ESAS as an emergency cost or a better budget and more savings.

From an employer’s perspective, ESAS can help improve organizational well-being by strengthening employee finances. Indeed, on-demand pay is becoming a permanent feature of many employee benefit packages, especially in the United States and the United Kingdom.

In most cases, ESAS providers charge employees directly, thus making the service free or almost free for employers. Several companies, including InstaPay and Flexwaz, have implemented mixed models where fees are shared between owners and employees. And offers on-demand pay solutions for Earnd employees.

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So how did the Covid-1 pandemic epidemic increase in ESAS space?

In the early days of coronavirus-related economic displacement, the demand for ESAS solutions skyrocketed. For example, US provider Earnin reported more than 5 million downloads in the Google Play App Store in April 2020. The cash advance app Dave saw its monthly active user %%% in March 2020 and the app was downloaded more than a million times in April 2020.

The increasing increase in on-demand wages over the months is a direct reflection of the urgency and opportunity to meet the financial needs of the so-called non-prime market. Desires in this segment tend to be more liquid-centric, with an emphasis on overdraft protection and on-demand payments, as opposed to major markets where high-yield savings accounts, yield search through robot advisors and the like are at the forefront.

Another recent trend for ESAS providers targeting the public, healthcare and education sectors. For example, Wagestream, Salary Finance and Arnd are actively collaborating with the National Health Service (NHS) in the UK. What makes the public sector so attractive is that it is a major access point for millions of workers. In the United Kingdom and the United States, for example, the total number of public sector employees is about 25 million. In order to compete effectively in this sector, ESAS providers are moving towards a freemium or employer-fee model as a means of gaining a wider customer base and paying fees through supplementary services.

Further development of ESAS solutions will depend on regulatory environment, consumer acceptance and employer policy. Yet, there are indications that on-demand wages may eventually become an integral part of our daily lives. Already one in four salaried professionals believes that on-demand pay is an essential part of improving an employee’s overall experience.

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To be sure, ESAS also carries innate risks that may limit its widespread acceptability. In particular, the Financial Conduct Authority (FCA) highlights the lack of credit control, low cost transparency, and the “vicious cycle” of reliance on such schemes as major risks. Although ESAS is a cheap alternative to payday loans, regular use can be costly over time.

To mitigate potential risks and protect ESAS consumers from inadvertently enduring debt cycles, the FCA recommends transparency, proactive monitoring, and keeping users informed and up-to-date about their financial situation.

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All posts are the author’s opinion. As such, they should not be construed as investment advice, or the opinions expressed do not necessarily reflect the views of the CFA Institute or the author’s employer.

Photo Credit: © Getty Images / hsyncoban

Natalia Pelekh, CFA

Natalia Pelekh, CFA, has created a distinct background on the edge of finance and technology. Currently, he is a Chief Business Analyst at Sikkim, a global digital solutions company operating in Fortune 500 companies and fast-growing companies worldwide. He was previously a business analyst at SoftServe, a technology company that specializes in consulting services and software development. The main focus of his work is large fintech projects for companies worldwide in Europe and the United States. Prior to entering the digital industry, she was an assessment and business modeling analyst at EY. Natalia is an active member and speaker of the CFA Society.



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