Cash Advance Payments

Pay-as-you-go gets workers paid more frequently, but bad for budgeting

In the United States, Walmart, an early adopter of pay-as-you-go, only allows employees to collect their pay once during each week of its two-week pay period.Kamil Krzaczynski/Reuters

Seeking ways to attract workers amid Canada’s record labor shortages, some companies are turning to a perk that Walmart and other large US employers have used for years in the United States. : give employees the opportunity to receive their pay well before payday and sometimes as often as each working day.

Apps that allow users to collect their pay before payday gained popularity in the United States during the early stages of the COVID-19 pandemic, when the health emergency took its toll on many family budgets. . In Canada, they are attracting the attention of employers hungry for a competitive edge in what has become a struggle for new hires.

“For companies struggling to attract and retain workers and trying to control wage costs in a high inflation environment, offering benefits like this becomes a very important tool in your toolbox,” said said Seth Ross, who runs Dayforce Wallet, the advance-pay service of human resources software company Ceridian HCM Holding Inc. Ceridian is based in Minneapolis, but run from Toronto by co-chief executives David Ossip and Leagh Turner.

Pay-as-you-go is an easy argument for employers: come work for us and you won’t have to wait for payday to cash out the wages you’ve already earned. And service providers argue that flexible access to income can help workers pay for financial emergencies or unexpected expenses without resorting to costly debts like credit cards and payday loans.

Alan House, director of human resources at OTG Management, which operates restaurants and retail stores at airports in the United States and Toronto, said his company adopted Dayforce Wallet ahead of what it expected to be. a labor shortage as travel resumed.

So far, he said, the added payroll benefit has been a hit among existing employees and new hires on both sides of the border. “It was a win both from a recruiting standpoint and then, I think, overall from a retention standpoint.”

Ceridian, which is leading the charge to expand early access to wages in Canada, said it currently offers the service to more than 1,100 employers north and south of the border. Canadian fintech Koho Financial Inc., which has partnered with payroll service provider ADP Canada, also offers a similar service, called Instant Pay, which gives users access to up to 50% of their earned pay as well. often than every day of the working week. .

But early research from the United States, where various financial service providers have offered a range of prepayment options for years, suggests that getting paid more often doesn’t necessarily benefit workers.

Smaller, more frequent payments can ease our worries about whether we’ll make it to the end of the month and create an illusory sense of wealth, said Wendy De La Rosa, professor of marketing at the Wharton School at the University of Pennsylvania. .

“And as a result of that, because I feel a bit richer, I’m more likely to spend more on things that are usually discretionary spending like eating out,” she said.

A recent paper that De La Rosa co-authored with Stephanie Tully of the Marshall School of Business, University of Southern California found “a natural relationship between higher payment frequencies and increased spending.” The research, based on income and spending data of more than 30,000 consumers from a US financial services provider, showed that consumers who were paid more often consistently spent more.

Getting paid monthly or bi-weekly also has other potential benefits, said Mariel Beasley, director of Duke University’s Common Cents Lab. Having to wait until payday makes us more likely to avoid or postpone, say, that dinner party if we don’t have enough money in the bank, she said.

“Paychecks are a forced savings mechanism,” she said.

Particularly towards the end of the payroll cycle, seeing a smaller balance in our checking accounts helps us better assess the trade-off between spending and keeping what’s left over, she said.

The traditional payroll cycle has another benefit, Beasley argues: A larger, less frequent paycheck makes budgeting easier. From rent to mortgage payments to utility costs, most people’s big mandatory expenses are monthly, she said. It helps that the frequency of our paychecks roughly matches that of our biggest bills, she noted.

And that’s not to say the human brain isn’t generally adept at summarizing smaller numbers, she added. Lots of small paychecks make mental calculations more difficult.

Still, there are arguments for more flexible access to income, say consumer advocates.

Not having enough cash is a significant problem for low-income households when paychecks and bills don’t line up perfectly, Ms. De La Rosa said.

And cash on demand can be a welcome alternative to payday loans, which provide a small sum of money at exorbitant interest rates to be repaid when the borrower receives their next paycheck, Ms Beasley said.

While some payday advance apps in the United States have come under scrutiny for charging fees and inducing users to tip for services, others offer the service for free.

Ceridian, for example, claims that Dayforce Wallet is free for employees or employers. Instead, the company makes money from interchange fees, the transaction fees that merchants pay when a customer uses a credit or debit card to make a purchase, according to Ross.

This is because when employees request funds through the Dayforce app, the money is deposited into a reloadable Mastercard debit card (from there, users can also withdraw it in cash at an ATM or transfer it to their Bank account). When they use the card, Ceridian gets an interchange fee reduction, Ross said. Unlike other prepay apps, which estimate earned wages, the company uses its payroll software to calculate take-home pay, including taxes and other deductions, in real time.

Koho also offers pay on demand and a reloadable prepaid Mastercard. Although depositing funds to the card is free, transferring the withdrawn payment to another account costs $3.50 per transfer.

To avoid becoming a slippery slope to overspending, prepaid services need “guardrails”, Ms Beasley said. These safeguards could be limits on the amounts or frequency of withdrawals. Prompts that ask users what kind of expenses they’re cashing their paycheck for early could also help curb the spending instinct, she added.

In the United States, Walmart, an early adopter of pay-as-you-go, only allows employees to collect their pay once during each week of its two-week pay period.

Its InstaPay feature is part of a money management platform called Even that includes budgeting tools. For example, the app can highlight users’ upcoming bills and let them know how much they have left to spend after mandatory expenses and savings.

“The app’s cash flow management feature is the core component, and it’s the first thing associates see when they open the app. This design feature has proven effective in keeping users informed of their current cash balances and focusing on budgeting for their needs,” Walmart spokesperson Josh Havens said via email.

At OTG Management, approximately 50% of U.S. employees have signed up for Dayforce Wallet since the company launched the benefit in December 2020. In Canada, where it became available in June last year, 30% have signed up so far. In both countries, workers seem to use payday advances “on occasion”, according to House.

The company has a regular weekly pay cycle and allows employees to access their pay as often as daily, although Mr House said this does not appear to be the norm.

Mr Ross said Ceridian allows employers to set the parameters for how they want employees to access the payday advance.

Koho’s Instant Pay users who rely on the reloadable Mastercard also have access to the company’s suite of money management tools, the company said.

Yet even with safeguards in place, on-demand pay is no substitute for higher wages, Ms. De La Rosa said.

In a world where wages don’t keep up with the cost of living, “the fundamental problem of underpaid people is still there,” she said.

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