A growing pack of payment fintechs may revolutionize the way employees are paid, thanks partly to one California entrepreneur, Safwan Shah, who believes every day can be payday.
Safwan founded San Jose-based Payactiv in 2012 and the company has partnered with some of the biggest U.S. payroll service providers, including Automatic Data Processing (ADP) and Paychex, to bring his vision of "earned-wage access" to life. That approach, which has already been adopted by some big U.S. employers, lets employees tap the pay they've earned before the end of a typical pay period.
Payactiv was ahead of a host of rival fintechs offering variations on that theme. They include Oakland, California-based Even, founded in 2014; Minneapolis-based Branch Messenger, started in 2014; Palo Alto, California-based Earnin, also launched in 2014; New York-based PayDaily rolled out in 2016; and New York-based Clair started in 2019. All of the companies let employees access pay early, though their business models differ.
"In less than a decade, this nascent market has impressively achieved national scale, hundreds of thousands of employer partnerships, millions of users, and billions of dollars in transactions," Law Professor Nakita Cuttino said in an April Northwestern University Law Review article.
Shah contends he is mission-driven to give lower-income workers access to earned income before payday because it helps them avoid high-interest-rate loans, exorbitant late payment bills, or checking account overdraft fees. "If you are paid less you must be paid more frequently," he said in an interview last week.
But clearly it's not just about treating employees fairly. The new pay practice also improves workers' performance, and therefore company productivity, he says. In addition, it can help companies attract talent in a fiercely competitive labor market, he adds.
On a grander scale, Shah argues that more widespread adoption of such practices would bolster economies worldwide because large sums of money now held in companies' accounts would circulate in the marketplace.
For younger workers, there may be the additional benefit of moving away from traditional banking systems, said AlixPartners Managing Director Mark Flamme. "In the current environment, there are a lot of things about this that appeal to a younger demographic," he said in an interview this month.
Nonetheless, some consumer advocates are asking tough questions about whether the new payroll services create pitfalls for employees. "These programs also have downsides that have been much less emphasized," Cuttino said in the Northwestern article. "Although the gatekeeping role that employers may play when partnering with earned wage access programs has the potential to facilitate improved pricing and service terms in the fringe financial market, such a role also masks significant costs that are not fully disclosed to employees."
Cuttino proposed a national regulatory framework to impose consumer protections "such as uniform price disclosure, ability-to-repay rules, optional amortization mechanics, mandatory credit reporting, and a right-to-rescind assignment."
Some state lawmakers, including one in Georgia this year, have also become concerned enough about the new early-pay services trend to consider laws that would regulate the services. Consumer advocates have scrutinized the industry for some time, and some states have considered whether to regulate the industry as it does payday lenders, Flamme said.
So far, mega-retailer Walmart and e-commerce giant Wayfair have signed on for Payactiv's services. Overall, there are 2,000 U.S. businesses using the Payactiv service, Shah, said. He declined to name other customers.
Employers consider payroll flexibility
Payroll services provider Paychex contracted for Payactiv's earned wage access product so it could offer employer-clients a competitive edge, Paychex Product Strategy Manager Eric Wade said in a recent interview. "Employers in order to compete for workers are going to have to pay their employees faster," Wade said.
Rival ADP has similar thinking. "What employees are expecting in terms of flexibility when it comes to pay is changing," ADP Canada Vice President Khadir Ahmed said at the Payments Canada Summit conference last month. "As employers, (and) as companies that are operating in this digital age, we need to think more expansively about these types of things," he added.
Publicly-traded Paychex still has a low number of corporate clients opting for the earned wage access service, Wade said, but the number who are interested more than doubled between 2018 and last year, according to surveys that Paychex performed, he said. Wade declined to say how many clients have the service. Employers are in the middle of a growth spurt with respect to the earned wage access concept, he said.
No fees in some cases
With Payactiv's service, there is no change in cash flow for the employer. Payactiv provides money to the employee and collects from the employer on its regular payment schedule. The employer and the employee get the service for free if the employee moves the wages to a Payactiv debit card and then Payactiv makes money off the interchange fees when the employee spends the money. If the employee moves the wages to a different card or account, then Payactiv charges a fee from $1 to $1.99 per distribution. Payactiv also lets employees tap their earned wages for payment directly to certain services, like rides from taxi-alternative Uber.
Uber has spearheaded alternative pay models for its own employees, giving them "instant" access to their wages up to five times per day, for free if the wages go to an Uber debit card, potentially including a monthly fee, or for 50 cents per distribution if they are sent to a different debit card or account.
Privately-held Payactiv lured $100 million in financing last year to buttress and expand its operation. Competitors offering their own approaches to upending the standard pay cycle are also attracting money.
On-demand pay fintech DailyPay last month landed $175 million from investors and sourced $325 million in credit capital to fuel its business of enabling employers to let employees pay themselves before the end of a standard pay period. For a $2.99 flat fee, employees can receive payments from what they've earned, or the employer can agree to cover the fee.
Mega-grocer Kroger, Warren Buffet's Berkshire Hathaway conglomerate and healthcare facilities company HCA Healthcare are among the 300 companies that have signed on for DailyPay's services since it was founded in 2016.
The equity investment is fueling further expansion of that core payroll service, and DailyPay's moves into entirely new markets, DailyPay Chief Innovation Officer Jeanniey Walden said in interview last month.
Clair, a fintech that enables employers to pay hourly and gig workers when the employees want, has recently raised $15 million in additional capital, bringing its total funding to $19.5 million. The company partners with human resources tech companies and gig work companies to give workers free access to their earnings before their usual payday. Neither employers not employees pay for the service. Rather, Clair earns revenue under a partnership with Mastercard via a Clair debit card when employees use it to buy goods and services.
Shah believes that within 10 years earned wage access will be widely available, not just for low-wage workers, but also for salaried employees. There is no reason to hold this money, particularly in light of how low interest rates are, and there is so much benefit to companies not holding it, he said. Still, Flamme contends there's no real incentive for white-collar workers to demand such a change or for their employers to shift to it.
If Shah's prediction does materialize, it may be with new regulations or laws aimed at keeping checks on the new pay practices.