Say you were going to tear down the old employer-employee relationship and rebuild it from scratch. You’d probably still offer money for labour, whether based on hours worked, services rendered, sales closed or contractual obligations fulfilled. That’s a given. But would you force your workers to wait two weeks to get paid, even when the money—their money—just sits idle in an account? Why not pay them as they earn it, in real time?
That prospect is becoming a possibility, thanks to a handful of financial technology startups like FlexWage, DailyPay, PayActiv and Activehours. These firms are creating ways for employers to give workers access to earned income as soon as shifts end—an appealing offering, at a minimal cost. But before this type of remuneration becomes commonplace, there are ingrained habits and expectations to overcome.
“We just take it for granted that pay comes biweekly,” says Steve Barha, CEO of Instant Financial, a Vancouver-based startup that has developed a pay-as-you-go solution for employers. But for the one-quarter of North American workers who are one paycheque away from defaulting on their bills, having access to funds right away would mean a great deal.
Years ago, bosses had the discretion to give employees advances on their pay. But the advent of outsourced payroll in the 1980s and ’90s made that all but impossible, giving rise to an odious alternative: payday loans.
Payday lending is now a US$100-billion business worldwide, Barha says. (A 2015 estimate from the U.S. Consumer Financial Protection Bureau put industry revenue in that country alone at US$46 billion.) Factor in the other ways the working poor get dinged—bank overdraft charges, cheque-cashing premiums and late-payment fees—and Barha figures those who can least afford it spend US$200 billion each year just trying to get what they’re owed.
“A significant portion of the North American population lives in that world. We say give them their own money,” Barha says. He predicts employers that pay their employees daily will enjoy higher retention, lower absenteeism and a willingness to put in extra hours.
Practically speaking, Instant Financial’s solution is a software application that can be overlaid on common enterprise payroll systems, such as PeopleSoft, ADP and Ceridian. It takes control of just the pay-disbursement function. Instead of setting up direct deposit with employees—an administrative burden in industries with high turnover—or, heaven forbid, paying workers with paper cheques (each one costing the employer an average of US$2.47), Instant issues each staff member a debit card that will work in just about any retail environment. Workers can also transfer money from the cards into their bank accounts.
Instant makes money on retail transactions the same way credit-card companies do, with its fee coming out of the merchant’s take. Currently working with unnamed firms on a beta test, Instant is also exploring charging employers in return for reduced payroll-disbursement costs.
“This isn’t a solution for everybody,” Barha admits. His startup, which received $1.2 million in seed funding this year from Real Ventures, is currently targeting large employers in the service industry. But other app makers are working on this problem as well and developing solutions for different situations. Most are, essentially, providing a bridge loan—same as the payday lenders, if less costly—which involves a charge to the employee. There’s also movement on the employer side toward pay-as-you-go, especially in the so-called gig economy. Ride-sharing firms Uber and Lyft have begun to offer drivers the option of payouts at the end of their shifts—Uber with prepaid debit cards and Lyft with money transfers.
Preoccupied as they are with a constantly evolving regulatory environment—this year, for example, Alberta capped fees at $15 per $100 loaned—payday lenders have not devoted much attention, so far, to the threat posed by fintech. “This industry exists because there is a clear demand for it,” says Tony Irwin, president of the Canadian Payday Loan Association, which represents most of the large players. “If alternatives are created that are scalable, that is something that could have an impact on our industry.”
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