By Ram Palaniappan, Founder and CEO, Earnin
Almost two-thirds of the U.S. population lives paycheck to paycheck, even among those earning six figures. These employees often rely on payday loans, advances, credit cards and overdraft extensions to make ends meet as they wait for the rigid two-week or four-week payday. This pay cycle is outdated. It was established back in the Industrial Revolution. Prior to this time period, people were paid every day. During the Industrial Revolution, industrialists were more powerful than labor and decided to move pay to a batch system, because it was more efficient for them. Workers didn’t have a choice. If labor was more powerful, they would have gotten paid 2 weeks before they went into work. To put this in the context of today, imagine Google telling you your search results will be shared with you in two weeks, or waiting two weeks to watch your favorite Netflix movie?
Today, the financial burden on individuals and households continues to worsen with inflation and stagnant wages. To keep up and stay competitive in a tight labor market, companies need to take a closer look at the benefits most valuable to employees today. Employees need to feel empowered, and one way to do so is to provide them access to their earnings as it’s earned, removing the hurdles of cash flow timing from standard payment cycles.
Employee satisfaction directly impacts a business’s bottom line and helps set a positive company culture. In 2019, John Hancock estimated that the cost in financial stress per employee per year amounted to $1,918 in lost productivity and absenteeism. This number is now at $2,412. This directly impacts businesses, as financially stressed employees are 77 percent more likely to leave for another employer and spend 2-5 hours a week dealing with personal finances at work, also impacting productivity. When employers provide a solid foundation and the right resources to boost financial health, employees can focus on pursuing greater goals and objectives that uplift their organization.
As employers look to adopt solutions that support employees and their holistic wellbeing, those that tackle the challenges associated with the speed of money will increase employee satisfaction, motivation and productivity, and experience better retention and recruitment.
Living Paycheck to Paycheck: It’s More Than You’d Expect
An unexpected financial challenge, such as a flat tire or a health emergency, can make cash flow especially tight. This is why financial wellbeing solutions are vital for those living paycheck to paycheck. People get paid every two to four weeks, but bills, subscriptions and emergencies don’t wait for payday. This reality means that when workers do not have access to earnings, they are forced to turn to payday loans or pay high bank fees, like overdrafts and non-sufficient funds. In addition to fees, people may have to miss more work because they can’t afford child care that week or a car repair. The cycle continues.
This financial stress can weigh on them and directly impact their work. Employee financial stress cost employers $4.7 billion per week in lost productivity. Financial wellbeing needs to be a top priority for businesses, especially those that recruit and retain large populations of hourly workers who may need additional support and resources to reach their financial goals when their access to pay is limited to the two-week window.
A report from J.D. Power explored how inflation has caused stress among Americans and therefore leading them to seek increased pay frequency. The report found that 51 percent of workers would consider switching jobs simply for more frequent payments, including 76 percent of hotel/food service workers. Living paycheck to paycheck comes with unique challenges that can be addressed if employees have access to pay as it’s earned.
The Role of FinTech Solutions for Financial Wellbeing
Fintech solutions that cater toward Earned Wage Access (EWA) free workers from rigid payment cycles, giving workers access to their money as they earn it. EWA makes it possible for workers to access and save the money they earned without mandatory fees or recourse. More companies are choosing EWA solutions because they enhance employee benefits and increase retention, especially in the era of The Great Resignation.
During the pandemic, an industry study uncovered how early access to wages impacted people finding that 92 percent of employees felt the services helped them achieve at least one of their financial goals in 2020. Additionally, 88 percent of respondents believed that having access to wages as they earned them during the pandemic was essential to their financial wellbeing.
Employees want to know their holistic wellbeing, including financial wellbeing, is top of mind for their employers. It’s especially true as not many other aspects of life happen every two weeks. The world doesn’t work in this cycle anymore as on-demand and streaming is now the norm.
The Path Ahead to Financial Empowerment
Employers have discovered that access to financial support can lead to a significant improvement in employee retention. Further, employees dealing with less financial stress are more productive and able to positively impact employers, individuals and the broader economy.
To help address this, businesses need to determine and offer competitive salaries based on market changes to the cost of living due to COVID-19. Next, it’s essential that fintech solutions offered by employers be affordable, easy to access and offer employees more choices that tailor to their needs. This can be extremely helpful in supporting those who need it most. Offering EWA can be beneficial for both the employee and employer because the employee gets paid right after they work and the employer secures workplace satisfaction, which enhances productivity.
Along with extending financial support, human resource leaders need to offer financial resources related to budgeting and saving. To manage the payday gap, employees need access to tools that create personalized financial plans and manage expenses, savings and more. Technology tools to track earnings and expenses will also be valuable to upgrading an individual’s financial health.
As more companies struggle to hire and retain employees in a competitive labor market, new benefit offerings are one way companies can stand out from the competition. Offerings that put employees in control of their finances while addressing their unique financial needs can be beneficial in meeting their goals.
About the Author
Ram Palaniappan is the founder and CEO of Earnin. He is a critically-acclaimed financial tech entrepreneur whose mission is to create products that make money work better for everyone. Earnin aims to free people from the traditional payment cycle and give them control of their money, starting from when they earn it.