It is very easy for many who are new to the fintech space to think that financial technology is an exclusive term for payments technology, and while there is some truth to this, it does not tell the entire story about fintech. However, in June, The Fintech Times is looking to indulge this belief as we look to discuss hot topics surrounding both sending and receiving payments, like buy now pay later (BNPL), early paydays and much more.
Rounding out our focus on early paydays. we compare a new offering to reach the market with an old archaic one. The offerings in question are salary finance and payday loans. With both promising money to help ends meet before the official payday, they share a lot in common. However, payday loans charged a lot of interest, often keeping those who used them in a vicious cycle of having to take out another loan to pay off the interest and so on.
While theoretically salary finance, an overarching term for cash advances, schemes or any other ways that staff can draw down funds before their pay date, is a way of avoiding the need for a payday loan, are they really that different as employees must pay a fee in order to use the service? We reached out to the industry to hear their views:
Salary finance provides a competitive edge
Jim Colassano, SVP, product development and strategy at The Clearing House, looks at the benefit that choice can bring to a company, “TCH’s RTP network is domestic only at this time. For employees who need access to earned wages, early wage access (EWA) does provide them with another option for receiving earned pay in a timely manner and provides employers who offer EWA a competitive edge when looking to attract and retain workers.”
Challenges of payday loans have shifted to salary finance
Ian Wheeler, chief executive and founder, Income Group, explains how the fees associated with salary finance don’t solve the problems for the people who were previously using payday loans, “Payday loans played on people’s misery – offering an easy fix or solution with many underlying issues, which we’re all aware of. Although salary finance looks like the viable solution to payday loans, it also comes with obstacles. Many workers who relied on pay-day loans needed every penny to count. Charging workers up to £2 each time they want to access salary finance to withdraw their wages is unacceptable and effects wellbeing. The resultant challenges of payday loans have sadly shifted to salary finance.”
Viable in moderation
Raf De Kimpe, CEO at Fintech Week London, notes that a one-off fee is not the same interest, so as long as the salary finance is not relied on too often, it is a good technology, “Just as with many different products across the fintech industry, the introduction of salary finance is a good thing. It gives employers something to brag about to potential new employees, showing the flexibility of the company, as well as showing it is up to date with the times and a smart strategy for spending, lending and investing. The problem with salary finance is if it is used on a regular basis. Much like buy now pay later (BNPL), when used in moderation, the tech is fantastic at alleviating stress as people know they can afford what they are paying for. However, if it is abused, users can easily find themselves in debt paying off late fees.
“Salary finance is similar. If used in moderation, the tech is great at alleviating short-term stress or creating investment opportunities, and the fees to access it won’t be detrimental. If it is used too often, these fees will add up and that is when the similarities to payday loans can be made.”