How digital payments are changing how people get paid
- Instant Financial is working with service industry employers to allow them to access a portion of their paycheck early.
- Among consumer peer-to-peer money transfer providers, many see payroll as an opportunity.
The monthly or bi-weekly paycheck seems to be an area largely untouched by financial technology, but that’s slowly changing. Technology is allowing employees to be paid more frequently, letting them access some of their paychecks to cover unexpected expenses.
For many employees, the traditional pay schedule just doesn’t meet their needs.
As many as 12 million people in the U.S. each year resort to payday loans to cover things like rent and utilities, according to Pew Research. One tech company, called Instant Financial, is working with service industry employers to let workers access some of their pay before payday — a move it says reduces the need to seek payday loans.
“How we pay people hasn’t changed since the industrial revolution,” said Steve Barha, CEO of Vancouver, Canada-based Instant Financial. “The check is an instrument that’s evolved and it’s gone electronic through direct deposit and debit cards, but the benefit has been a cost reduction and security for the employer — the problem is the frequency for the employee.”
The company, which operates in Canada and the U.S. and said it has 50 business clients, has since the beginning of this year offered a service to businesses that lets hourly wage workers collect up to 50 percent of earned wages upon completion of a shift. If the employee opts to join the program, funds are transferred to an Instant Financial account and can be accessed through a debit card immediately after the shift. Employees initiate Instant account payments through a mobile app.
Instant charges employers a dollar per month for each employee who uses the service — it’s free for the employee. Barha said 150,000 employees are currently paid through the service, and most of them are employed in service industry businesses where franchisees have decided to make the option available. Examples include McDonald’s, Dunkin’ Donuts and Outback Steakhouse.
“It’s all about putting the employee in control and having access to earned income, while staying out of predatory lending practices,” he said.
As for its impact on legacy payroll systems, Barha said it can be operated in parallel with them. “Payroll systems are great at what they do, and what we have can stand alongside the payroll system.” In addition, limiting the amount of funds accessible to employees ensures payroll deductions can be made on schedule.
In addition to a simple way to access a portion of a paycheck in advance, it’s a nod to financial inclusion, aiming to help those with limited means stay away from payday lenders, whose interest charges can go into triple digit percentages. These customers may also may find it harder to access affordable loans and lower-cost credit products.
Payroll is just beginning to embrace new models as peer-to-peer consumer digital payment vehicles like Venmo, Square and Zelle gain steam. Some of these companies are already in the payroll space (Square, for example, has a payroll product called SquareUp), and others see it as a potential area for growth. Bank-backed peer-to-peer payments network Zelle is being used to pay insurance claim recipients, so payroll seems like a natural extension. Early Warning, the bank-backed consortium that runs the Zelle network, said payroll is a potential opportunity, but no customers are using it for that purpose now. “We would look at this similar to how we look at corporate disbursements, like we already offer with the corporate Red Cross,” said Jeremiah Glodoveza, vp of marketing and communications.
Paychex, a payroll services provider for 650,000 clients across the U.S., declined to comment for this story.
For Barha, at the heart of Instant Financial’s mission is to get at the root of a structural problem that can now be fixed with technology.
“How we pay people is inefficient and broken, and it lags for the employer and employee expectations; we’re going to change that.”
Photo credit: Flickr / Andy Nguyen (image has been cropped)