Economy

On-Demand Pay: A $1 Trillion Shift

By Seth Ross, GM, Dayforce Wallet and Consumer Services, Ceridian

On any given day, Ernst and Young (EY) estimates $1 trillion is locked up in employer payrolls in the U.S. and 36 other developed countries. What would freeing that capital do for the financial wellness and wellbeing of the workers who have already earned it? We have seen that technology has the ability to democratize access to information, products, and services, making systems more efficient and removing friction. Not surprisingly, financial technology or “FinTech” is doing the same for the payroll industry, as the emergence of on-demand pay shifts funds much faster from the payroll of employers to the pockets of workers.

Globally, EY research reveals that 70% of workers today are paid monthly or every two weeks, yet 80% of workers reveal an appetite to use solutions that give them access to already-earned wages before the traditional payday.

It is well known many people live paycheck to paycheck, with research showing 42% of full-time workers in the U.S. find it hard to meet household expenses on time each month. The global health pandemic just magnified the issue of financial insecurity, especially among the most vulnerable.

Financial control versus financial distress

Having greater financial control via faster access to wages is a big deal to many people. For far too long, the financially strapped have had few good choices to meet obligations if they run out of money before payday. 

Payday loans – often a necessary option for underserved and underbanked communities –– can carry fees that amount to an annual percentage of 300%, the Center for Responsible Lending reports, plus credit cards can charge over 20% in interest and fees. In addition, many lower-income workers faced billions in overdraft fees last year. When you take these facts together, the conclusion is clear – in 2021, employees deserve the right to access the money they’ve rightfully earned instead of facing undue financial stress waiting for a traditional payday. 

Heightened focus on financial wellness

A lack of financial wellness and employer flexibility yields higher employee turnover, particularly among hourly and lower-wage workers. Plus, financially stressed workers are twice as likely to change jobs, which means additional hiring costs for people leaders and, often, reduced employee morale. It should come as no surprise that the financial wellness of workers has become a bigger focus for many employers, especially since the pandemic.

Almost three-quarters of workers with increased financial stress would be attracted to employers who care more about their financial well-being, and the same is true for 57% of workers who didn’t experience increased financial stress, indicates PwC’s recent employee wellness financial survey.

Last year at Ceridian, we launched an industry-first, on-demand pay solution, Dayforce Wallet, for clients of our human capital management (HCM) solution. A recent review of customers who use Dayforce Wallet shows they’ve experienced 42 percent lower voluntary turnover among those employees using the solution[1]. The same study showed Dayforce Wallet customers experienced a five percent higher close rate on open positions and a nine percent faster time to close for open roles.

Fixing a payroll infrastructure built for the 1940s

The workplace has changed. From gig workers to an elastic workforce and beyond, the need to modernize the traditional pay experience has evolved alongside these seismic workplace changes. Yet, how employees are paid has not.

“Today’s pay cycles are based more on ‘historical momentum’ than any intentional decision that biweekly or monthly works best for those involved,” says Emory Nelms, a researcher at Common Cents Lab out of Duke University. While the Consumer Financial Protection Bureau, in a recent review of on-demand pay, concluded that the longevity of standard pay periods “appears to be largely driven by efficiency concerns with payroll processing and employers’ cash management.” 

For employers, using legacy technologies built on batch processing has forced them to implement fixed cycles and pay their employees in arrears – that is, for work completed in a previous pay period instead of the current one. This long-standing precedent places employees on their back foot financially, and in today’s climate, exacerbates the economic hardships faced by many Americans. Yet, with advancements in technology, employers can now design a holistic wellness strategy that includes access to on-demand pay benefitting both the employer and employee. 

There’s a clear case now to disrupt the conventional pay practices as they exist today.

For those employers that have balked at on-demand pay “out of fear”, the Consumer Financial Protection Bureau (CFPB) issued an order making it clear that “employer-based programs are essentially providing the employee access to his or her own money, and thus cannot be credit.”

As we emerge from a borderless, post-pandemic world, technology will be a critical driver to help remove traditional barriers in the world of work and facilitate the flexibility and immediacy the future demands. Savvy employers will look to solutions like on‑demand pay to facilitate this new working economy – differentiating themselves, improving their employer brand, and setting their businesses up for future success.

Within five years, we see on-demand pay becoming the norm and, eventually, streaming pay – where funds “flow” into one’s account at the end of each workday or shift. Workers will take back control of this $1 trillion opportunity, and we all stand to benefit.

[1] Versus our broader group of customers

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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