Explores three important considerations when it comes to offering access to earned wages.
One question we often get from well-meaning employers is, ‘Won’t access to earned wages get my people into financial trouble?’
I co-founded Humanforce Thrive when I saw a friend go into a debt spiral after taking out a payday loan. I thought there had to be an alternative, particularly for those who don’t have easy access to credit, and now there is. It’s known by several names - on-demand pay, earned wage access and flexible pay.
Whatever you call it, for many it’s a lifeline. Here’s the kind of feedback we get:
“Our baby decided to come a little early which meant we didn’t have any nappies or clothes that fit him because he was a little bit small. Humanforce Thrive was actually a bit of a lifesaver. It meant we could get some funds quickly before payday to buy him things that fit.”
There are three things to consider when thinking about the overall impact of access to earned wages on employees.
Senior people in businesses are likely to have easy access to savings and credit that can be used when an emergency pops up. What’s more, any interest they may be charged is likely to be less significant in the grand scheme of things given their level of pay.
Others in the same businesses are unlikely to be in the same kind of financial situation. Young people, those who have recently moved to Australia and casual workers can face barriers in terms of accessing affordable credit. An individual must be over 18 and an Australian citizen or permanent resident to be eligible for a credit card. More than one in three people in Australia who don't have access to a moderate amount of credit are aged 18 to 24 and four in 10 are employed.
So for many, an unexpected bill or car breakdown can completely derail their monthly budget. In these instances, having the flexibility to cover that expense instantly and not pay interest can make a meaningful difference.
Earned wage access is not a silver bullet. It’s a way to prevent financial disasters from happening and ultimately build financial resilience. Earned wage access works best when it’s offered alongside other meaningful tools that can help employees see how much they’ve earned, build their savings and seek financial education or talk to coaches.
Put simply, earned wage access is one part of a holistic financial solution.
Some employers choose to cover the fees so that their employees wouldn’t need to pay to access their earned wages. This opens up the opportunity for employees to be really strategic with their money.
One option people take advantage of is to put the money straight into their offset account to reduce the amount their home loan costs them. Another way people use earned wages is to pay off credit cards or put money into savings earlier. For example, if you know you’re going to pay $200 to your credit card when you’re paid, if you transfer that amount out earlier in the month you’ll reduce the amount of interest you’re charged.
Read more in our latest Impact Assessment.
I can’t speak broadly for all earned wage access providers. When employers are looking at different offerings, they should consider how the provider talks about the access component (e.g. is it marketed as for emergencies or for going out to dinner?) and also the range of tools on offer to employees.
The data that Humanforce Thrive has gathered by analysing over 1 million transactions and 2,200 anonymous interviews, found that seven in 10 people using the app feel more in control of their finances.
But more specifically, when looking at usage of the access component of the app, the analysis found that usage decreases over time for the average employee as they become more financially resilient.
Twelve months after making their first withdrawal, the average person makes fewer transfers a month, transfers a smaller percentage of their pay throughout the month and also transfers later in the pay cycle.
In the month of their first transfer, the median user makes a total of two transfers. Six months later, the median decreases to one transfer per month. In other words, after six months 50% of people are making at most one transfer per month, where previously they were making two.
In the first month of app use, the average first transfer occurs nine days before payday. By the end of the first year this has extended to 8 days before payday, meaning employees are waiting slightly longer each month before choosing to access their earned wages.
Finally, in terms of average amount transferred, this drops from 22% of salary in the first month to 13% of salary by 12 months.
All of this indicates that the ability to access earnings without being charged interest can help people absorb financial shocks while also building their ability to live within their means. But earned wage access isn’t something that should be relied on and we don’t want to see increasing usage month on month.
Earned wage access is a way to absorb financial shocks without worsening your situation. When the fees are completely covered by employers it also opens up a range of opportunities.