Warnings on the rise over unregulated payday advance plans
The latest jobs numbers may be a comforting read, but the numbers behind the headlines tell a different financial story.
About 9 million people have had to borrow more money than usual due to the pandemic, according to the Office for National Statistics (ONS).
The government’s leave program, which has protected around 11 million jobs, is also set to end soon, which is expected to lead to higher unemployment figures and see more people taking on debt.
If your income has declined or you are short of money, one solution is to use an employer payroll advance plan (ESAS).
They are also known as Access to Earned Wage (EWA) programs and have grown in popularity over the past year or so as workers find themselves unable to wait until the end of the month to get paid.
Often described as “welfare” devices, they allow workers to access their wages earlier. It is not possible to withdraw all the money, and most companies allow people to access 50% of their regular salary earlier, for a small fee.
One of the most well-known companies in this space is Wagestream, which charges workers £ 1.75 to access up to 50 percent of their pay before payday. He says employers subsidize most of these costs and that he offers a range of wellness products alongside this program.
Elsewhere, the Revolut financial app has launched a new payday advance system. He says it’s an alternative to expensive payday lenders and controversial Buy Now, Pay Later services.
He is in talks with companies to enroll them in the scheme, which will allow workers to withdraw up to half of their wages early with a fee of £ 1.50 per transaction.
However, while programs like these may be less expensive than other short term loan options, they are not without criticism.
First, there is a cost to accessing that money early, which is usually a transaction fee instead of interest charged on the money. Most companies don’t do credit checks either.
Then there is a larger issue of financial management.
On the one hand, they could be a lifeline if someone needs a little extra cash, doesn’t want to use an expensive short-term lender, and can’t wait for their paycheck to come to an end. month.
But are they just the least of the other evils? If that same person is already strapped for cash, they’ll have a hard time budgeting when they get their paycheck on payday and that’s 50% less. This could cause them to either repeatedly withdraw their wages earlier, or opt for more expensive options to help them out.
Rachel Harte, head of financial planning at digital coach Claro, says: “Facilities like this can make it too easy to access instant unsecured credit, thus encouraging unhealthy financial habits.
“Payday advance systems aim to give employees greater ownership of their pay and cash flow, and in some circumstances this can be beneficial. However, if used as an unsecured regular credit facility, it can lead to poor financial health and well-being. “
Payday advance programs are not yet regulated by the Financial Conduct Authority (FCA) and offer no protection under the Financial Services Compensation Scheme (FSCS), which protects up to £ 85,000 of your money if a business goes bankrupt.
A recent review of the FCA unsecured credit market said that these programs may offer low-cost borrowing as an alternative to expensive short-term loans, but said they should be used with tools to encourage better money management and savings habits. .
The CIPD said in response that the programs can be a useful way for workers to deal with unexpected financial emergencies and can help them avoid taking on high-cost credit.
However, he said they should be offered alongside other measures including a living wage, a guarantee of enough hours to receive a decent income, a fair wage, the opportunity to save for the future. , benefits that provide emergency support, the possibility of career advancement and financial education.
Responding to the comments, a spokesperson for Wagestream said, “15 million workers now enjoy flexible pay – the way we were paid before extended, locked-in pay cycles were invented to save money. money to employers and banks. This created what experts call the “locked pay liquidity trap” for millions of adults.
“As major charities, the regulator and the CIPD have stated, EWA solves this problem if delivered responsibly, as part of a larger financial wellness program like Wagestream – which offers education. , coaching, budgeting and savings, built around flexible compensation. Employers need to do their research and understand the difference between stand-alone EWA and a larger financial welfare service that includes EWA. Fortunately, the impact of EWA as part of a larger wellness program is no longer open to speculation. Data shows that a responsible EWA surpasses global benchmarks for financial inclusion, reduces pre-existing debt cycles, reduces the need for predatory credit, and reduces stress in the process.
The alternatives to payday advance plans depend on your overall financial situation.
Using existing savings or your income is still the best way to pay for an unforeseen event, but many people are unable to do so, especially in today’s economic climate.
If you are able to get a credit card with a 0 percent interest period, it will usually be cheaper. However, they are only beneficial if you are able to clear a credit card balance before you start paying interest. The best products are also only reserved for those with excellent credit scores.
Payday loans are the more expensive option and can often push people into trouble with debt, while dipping into an overdraft can also cost a lot of money, in interest or in daily fees.
Using a credit union is a good alternative if you have a bad credit rating and don’t want to go the route of short-term lenders. They should also be able to offer financial advice.
Charities like Step Change can also provide free, independent help if you are struggling with your finances.