Payday Loans, Salary on Demand and Payroll
I grew up in a farming family. What kind of season we had dictated the income the family received, and for many years the family only got paid once every 3 months.
You read that right, 3 months!
My parents had to make sure that the payment they received lasted for the next 3 months to cover groceries, clothes and anything else we needed, and we didn’t have a credit card to fall back on. While they existed they were difficult to get and expensive to use.
Eventually as I got older, my Mum returned to work as a nurse and was able to supplement the family income on a more regular basis, and over time, with good management of our farm and income, money became less scarce, but it was never what one could call ‘easy’.
Going into adulthood, I was lucky enough to find my way into a payroll career and although (like most young adults) I made a few poor choices from time to time (thanks Mum & Dad for getting me out of trouble on more than one occasion) I am luckier than most having had some amazing role models in my life to teach me the importance of living within my means, and getting to work in a career that gave me the skills to understand the finance system and how to avoid the traps of bad finance.
Not everyone has had this exposure, and not everyone has been as lucky as I to be in a position that they feel financially secure as they get older. There is also a real shift in the need for people to have instant gratification to ‘get it now’, and it is no longer about keeping up with the Jones’ next door but keeping up with the trends across the globe and this is starting at a younger and younger age.
It is also much easier to access instant credit and the threshold imposed to access this type of credit is extremely low.
Research shows that in Australia, as little as 38% of employees are unable to access even as little as $1000 in an emergency, 1 in 2 people report that financial matters cause them the most stress, and more around 30% of adults have a Buy Now, Pay Later account… and this was before we were struck by a global pandemic.
Instant credit can be found in several forms. Buy now pay later, pay day loans, in store finance products and many more. While these forms of credit are not particularly new, they are getting easier to access with the introduction of apps and instant application services.
A more recent development in this space is salary on demand services. The introduction of these services into the market are, at least in part, trying to address some of the reliance that people have on things like pay day loans allowing people to instead access their own money already earned, but yet to be paid, with the support of their employer.
Despite salary on demand services being limited to your own earnings, are they really any better than a pay day loan?
In some respects, yes. They tend to have lower or no fees, low or no interest rates, and employers are able to put in place safety nets and business rules to help limit the risk for their employees (such as not allowing it to be used on Friday and Saturday nights to avoid inebriated decision making) and with some industries heading towards a ‘gig economy’ style of employment, there could be some good use cases for these types of services to accommodate those circumstances, but for those people who don’t have the skills to manage their money well in the first place, who are more likely to access these services, the question of whether they will still end up in a cycle of robbing Peter to pay Paul and end up going to down the instant credit path anyway, digging the hole even deeper than it was to begin with is one that is still worth asking.
What has this got to do with Payroll?
It is about more than whether your payroll team have to manage a salary on demand service. In payroll we are often privy to the emotional manifestation of financial distress and can be an opportunity for the business to support their employees in this space and truly add value.
The cost of financial stress is estimated to be in the billions per year (anecdotally similar to the annual GDP of Estonia) in lost productivity, diminished operating IQ and the cost of credit and banking services overall, so this is not a small value to add.
Research shows that most people who are in financial stress wont even confess to their partner, so given the right tools and resources payroll can be a conduit for employees needing support and education in this space.
So you are considering putting a salary on demand service in place for your business, should you?
If you are considering salary on demand services for your business, make sure you do your research and really understand the pros and cons for this type of service and the impact it could have on your employee’s financial wellbeing.
Think about the reason you are even considering such a service and whether it is truly for the benefit of your employees, or just following what others are doing because it seems ‘cool’ and ‘edgy’ or the sales rep for the service has made it look bright and shiny.
Ensure that if you do go ahead with this type of service, that you also establish a financial wellbeing program with access to support and education for all employees in your business.
Make sure the education programs you put in place are widely spread and attendance is encouraged by many people from all parts of your business to take the sigma away from attending group education sessions and allows people to ‘hide in plain sight’
Provide access to confidential support as an alternative to group sessions (similar to how EAPs work).
Consider the impact on your ‘front line’ (such as your payroll or HR teams). Not so much from the administration of the program (technology these days is pretty awesome, and your payroll team can work all kinds of magic) but more so from the emotional and personal impact on those that are supporting the program who may become overwhelmed when faced with someone in financial distress.
What is the alternative?
You want to provide a value add for your employees, but salary on demand services aren’t the right fit for your business?
There are lots of other ways you can support your employees, including in the financial wellbeing space. Your employees can be a great source of ideas and concepts that you can use to build on, so think outside the box, and if you want to know more about how your payroll team can support you in this, Payroll Edge Consulting can help formulate a strategy to embed these concepts into your payroll culture.
Gemma McDonnell-Mossop
Independent Payroll Consultant
If you would like to read more about payroll in Australia, then keep and eye out for more by following Payroll Edge Consulting. To contact us and arrange a free one hour consultation on whether we can help you develop financial wellbeing as part of your payroll strategy, contact us at info@payrolledge.com.au