By Ram Palaniappanfounder and CEO, Earnin
almost two thirds of the American 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 while they wait for the stiff two- or four-week payday. This payment cycle is out of date. It was established in the Industrial Revolution. Before this time period, people were paid every day. During the Industrial Revolution, the industrialists were more powerful than the workforce and decided to move the payment to a batch system, because it was more efficient for them. The workers had no choice. If the job was more powerful, they would have been paid 2 weeks before starting work. To put this in today’s context, imagine that Google tells you that your search results will be shared with you in two weeks, or that you wait 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 remain competitive in a tight job 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 that is to give them access to their earnings as they’re earned, removing the cash flow timing hurdles of standard pay cycles.
Employee satisfaction directly affects a company’s bottom line and helps establish a positive company culture. In 2019, John Hancock estimated the cost in financial stress per employee per year to be $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, which also affects the productivity. When employers provide a solid foundation and the right resources to drive financial health, employees can focus on pursuing larger goals and objectives that improve their organization.
As employers look to adopt solutions that support employees and their holistic well-being, those that address the challenges associated with the velocity of money will increase employee satisfaction, motivation and productivity, and experience better retention and recruitment.
Living Paycheck to Paycheck: It’s More Than You Expect
An unexpected financial challenge, such as a flat tire or health emergency, can make cash flow especially limited. This is why financial wellness solutions are vital for those who live 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 don’t have access to income, they are forced to resort to payroll loans or high bank fees, such as overdrafts and non-sufficient funds. In addition to fees, people may have to miss more work because they can’t afford childcare that week or a car repair. The cycle continues.
This financial stress can weigh on them and directly impact their work. Employee financial stress costs employers $4.7 billion per week in lost productivity. Financial wellness should be a top priority for businesses, especially those recruiting and retaining large populations of hourly workers who may need additional support and resources to meet their financial goals when their access to pay is limited to the two-week window.
A report by JD Power explored how inflation has caused stress among Americans and thus prompted them to seek a higher frequency of payment. The report found that 51 percent of workers would consider changing jobs simply for more frequent payments, including 76 percent of hotel/food service workers. Living paycheck to paycheck presents unique challenges that can be addressed if employees have access to pay as they are earned.
The role of FinTech solutions for financial well-being
Fintech solutions that accommodate Earned Wage Access (EWA) free workers from rigid pay cycles, giving them 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 improve employee benefits and increase retention, especially in the era of The Great Resignation.
During the pandemic, a industry study found out how early access to pay impacted people and found that 92 percent of employees felt the services helped them achieve at least one of their financial goals in 2020. Additionally, 88 percent of those surveyed believed that having access to wages as they earned during the pandemic was essential to their financial well-being.
Employees want to know that their holistic wellness, including financial wellness, is top of mind for their employers. It’s especially true because so many other aspects of life don’t happen every other week. The world no longer works in this cycle as streaming on demand is now the norm.
The road ahead to financial empowerment
Employers have found that access to financial support can lead to significant improvement in employee retention. Additionally, employees who face less financial stress are more productive and can have a positive impact on employers, people, and the economy as a whole.
To help address this, employers should determine and offer competitive wages based on market changes in the cost of living due to COVID-19. Then, it is essential that the fintech solutions offered by employers are affordable, easily accessible and offer employees more options that suit their needs. This can be extremely helpful in supporting those who need it most. Offering EWA can be beneficial to both the employee and the employer because the employee is paid right after work and the employer ensures workplace satisfaction, which improves productivity.
In addition to extending financial support, HR leaders must 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 spending, savings and more. Technological tools to track income and expenses will also be valuable in improving a person’s financial health.
As more companies struggle to hire and retain employees in a competitive job market, new benefits 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 reaching their goals.
About the Author
Ram Palaniappan is the founder and CEO of winning. He is a critically acclaimed fintech 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 put them in control of their money, from the moment they earn it.