Do Earned Wage Access Tools Make Workers More Productive?

We no longer buy disposable cameras when we go on vacation. Because we have smartphones. We no longer make our own playlists (or mixtapes for you GenXers). Because we have Spotify. Soon we may no longer let our employers determine when we get paid. Because we have fintech.

This thought was triggered this week when we read about an Indonesian company called Gaji Gesa raising a fresh round of capital. GajiGesa is just the latest company to offer something called earned wage access. It’s a broad term covering the various platforms that allow employers to offer payment flexibility to their employees. No more monthly or bi-weekly paydays. As long as the wages have already been earned, the employee can access them. They will pay a small fee for this privilege. But what they will not pay is usurious interest to payday lenders.

Specifically, GajiGesa has launched an app called GajiTim, which it calls an “employee management system” targeting Indonesian SMBs with five to 100 employees. The app’s features include granting employees access to earned wages before payday. As an aside, Indonesia has a massive SMB market, numbering 60 million.

Offering this capability isn’t new. The payroll company Gusto launched FlexiblePay all the way back in 2018. The feature lets employees define their pay schedule. That is assuming their employers activate this feature in their payroll application. And Square launched Instant Payments in 2020 as part of its payroll solution.

A Growing Global Trend

The number of fintech startups offering this capability around the world is expanding rapidly. This is particularly true in developing markets, where low-wage workers often turn to high-interest small loans to keep the lights on between paydays.

The South African earned wage access platform Floatpays, for example, commissioned a study using its own customers as subjects. The study found 76% of workers sampled say they run out of money before the end of the month. And it found that most of the workers who accessed pay advances used the money for basics like food, transportation, utilities, and healthcare. The survey also found that 20% of Floatpays customers say the service helped wean them off of payday loans.

Floatpays provides its wage advance solution for free to employers. It charges workers taking the advances a transaction fee averaging around 22 South African Rand, or about $1.50. The company is just one of a growing number of earned wage access platforms popping up just in South Africa. Others include SmartWage, Paymenow, Level, and others.

The problem is also widespread in the U.S. According to a summary of stats on payday lending from Credit Summit, 12 million Americans use payday loans every year. And of those, 70% use the funds to cover everyday expenses. So it’s no surprise that the list of U.S.-based earned wage access platforms is also growing. Some of the players on this list include DailyPay, PayActiv, and Branch.

Notable New SMB Initiatives from Gusto, Mastercard

Is EWA Really Transformative?

So why is it so important to disrupt the biweekly paycheck? As noted, many workers, particularly at the lower end of the wage scale, are broke well before payday. And this creates stress that leads to bad decisions like taking out predatory payday loans which plunge workers into a debt spiral. And this, of course, leads to more stress. A key pillar in the case these platforms make to employers is fundamentally self-interested. By offering earned wage access to their workers they can improve productivity. They would argue, and it stands to reason, that a stressed-out worker is a less productive worker.

While this correlation may pass the smell test, it hasn’t been conclusively proven. Earned wage access does help smooth out a workers’ cash flow. And certainly, at minimum, anything that takes demand away from predatory lenders is a good thing.

But earned wage access doesn’t solve the underlying problem. So many workers, in both developed and emerging economies, are just not earning enough money to cover basic living expenses. And there are really only two answers to that challenge. One is higher incomes, in the form of a higher minimum wage or access to better-paying jobs. The other is government subsidies. Since Localogy Insider isn’t a public policy publication, we’ll leave it to others to carry on that debate.

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