On-Demand Pay is a solution that allows employees to access their earned but unpaid wages before their scheduled payday. You might have heard similar terms like on-demand pay, wages on-demand, early wage access — all mean the same thing.
The concept is fairly simple to understand. In traditional models, we see employees usually get paid either weekly, bi-weekly or monthly. Even though employees work daily, they can only access their wages when it's time for their paycheck. On-demand pay allows employees to access their earned wages daily as soon as they complete their shifts. In much simpler terms, on-demand pay makes it possible for employees to withdraw their earnings whenever they want.
On-demand pay is typically provided by third parties like OrbisPay. Essentially, it involves pairing the on-demand pay providers with the HR technology provided by the employer. Once established, employees are able to view and access their available earnings. For employers, there is no effect on cash flow as funds are fronted by the on-demand pay provider and later claimed when the company runs its pay cycle as normal.
So, what is the need for such a solution and how did it come about? Let's find out.
History of On-Demand Pay
A payroll system in the United States such as it is practiced today was first established in the mid-1930s after the Social Security Act was signed, which started the process of collecting payroll taxes for the first time in January 1937.
Later around 1942, during World War II, the American government initiated the implementation of a mass payroll tax on employers. This essentially also meant counting the number of hours employees were working to calculate applicable taxes. It took companies much longer to deduct and send tax collections to the government without modern technology.
In order to maintain a balance between paying workers regularly and collecting payroll taxes efficiently, checks became the primary method of disbursing payroll and submitting tax collections. Additionally, most companies adopted the two-week or monthly pay cycle that prevails today. It was because of checks that employees started to know how much and when exactly they would be getting paid.
Jumping forward to the 1970s, ACH was introduced which made it possible for employees to receive their wages directly in their bank accounts through direct deposit. This was a breakthrough in technology at the time and made it much more convenient for workers to receive their salaries in the comfort of their homes. There was no longer a need to go to your nearest bank to deposit your check in order to receive wages. Although, this did not mean an end to checks, as many employees in the US continue to receive their wages via checks to date. (Nacha, 2019)
Even though the technology had advanced and receiving wages became more convenient, there was still a problem that needed to be addressed. The time it took to receive your wages. Even today, wages are dispersed at regular intervals set up by the employers. The employees pretty much had no say in how and when they wanted their wages despite the fact that they worked each day without having access to their own earned money.
Payday lenders to the rescue?
In the early 1990s, payday lenders saw this as an opportunity and started offering loans to employees who were in need of quick cash to cover their financial obligations. Payday lending quickly grew to prominence as more and more people started leaning towards payday lenders to make their ends meet. Life was happening fast, and some simply did not have enough time to wait for their paycheck to hit their account.
However, behind the seemingly workable solution lay a grim reality: interest rates and penalties. Picture this – payday loans have an average interest rate of 391%. And that’s if the debtor is able to pay back in two weeks' time. This means paying a $60 fee on a $400 loan. Comparatively, credit cards' APR ranges from 12-30%. (Hoevelmann, 2019)
The majority of the employees who resort to payday loans are those with low credit scores and those who do not have access to any form of credit because of this. Payday lenders see an increased risk in giving credit to such employees, which explains one of the reasons for such high rates.
However, critics worry that payday loans are bad for employees since it traps them in a vicious cycle of getting instant relief with long-term debt as they keep failing to repay within the timeline. Additionally, debtors end up paying more than they borrowed due to late payment fees and penalties. (Singletary, 2015)
For US workers living paycheck to paycheck, liquidity became a major concern in coping with financial emergencies. Financial distress was a reality for many as they waited between earning and accessing their wages.
FinTech enables new technology - On-Demand Pay
The 21st century saw exponential growth in technology. Cloud computing was a major hit as it gave convenience to many business operations, including payroll management. It made most paper processes redundant, and employees could now be paid much easier with the additional help of data storing.
As the payroll industry continued to innovate and grow, there was a surge in automation and benefits offered to employees. This made it possible for on-demand pay to emerge.
While on-demand pay is only a few years old, it has rapidly gained widespread attention over the past decade, and the number of providers has grown exponentially in the last few years.
The demand for on-demand pay was further fueled by the economic effects of the COVID-19 pandemic. Emergency costs rose sharply for many, and those living paycheck to paycheck simply had no money to cover those costs.
On-demand pay is a growing industry with a promising future. With the growing demand and awareness, more and more companies are partnering with providers to offer this innovative benefit that pledges to improve the financial well-being of employees.
What drives the hype?
As the U.S. economy recovers from the pandemic, businesses are looking for ways to grow. There is a tremendous challenge in attracting and retaining talent, which is proving to be a tough task at the moment. Employers are already offering increased salaries and benefits to compete in the tight labor market.
On-demand pay is a strong contender to combat the financial stress of employees. When 40% of the US workforce is unable to cover a $400 emergency expense, it makes sense to give them access to their earned wages to meet their financial needs.
“Our research is showing that financial stressors are not only negatively impacting employees, but are costing the employers. Stressed employees are found to be less productive, take more time off to deal with financial matters, are more likely to leave the company for higher compensation, and are more likely to cite health issues caused by financial stress. These findings evidence a direct correlation between an employee’s financial well-being and a company’s bottom line and may help justify an investment in a financial wellness program.” (Allison, 2017)
It’s not just the financial side of things. There is growing evidence of increased employee loyalty for those who are offering on-demand pay. Recent research from Harvard Business Review reveals that almost 60% of the US workforce thinks that their employers should offer on-demand pay. Advisory firm Gartner further expects that one in five companies will offer on-demand pay by 2023. (Wood, 2022)
The positive effects of on-demand pay are not just in theory. According to PwC, employers who are offering on-demand pay see an increase of 36% in retention. By being able to retain employees, businesses are also able to keep their hiring costs down. (Meyers, 2020)
Does the future belong to on-demand pay?
In a short span of time, on-demand pay has been able to attract the attention of employers, employees, and industry experts. Financial well-being took a great hit amid the pandemic, and more employees are seeking innovative ways to recoup. Financial stressors negatively impact the workforce, forcing employers to hunt for the most suitable offerings for their employees.
On-demand pay is quickly emerging as a tool that addresses these issues at hand. Long before the pandemic, retirement savings were a big thing. Now, people want greater control over the money they earn in order to handle immediate expenses that can arise.
Just like remote culture or a 4-day workweek was never a thing 3 years before, on-demand pay is changing the landscape of how employees get paid. And at a very fast pace.
As the word keeps spreading, one thing is clear – on-demand pay is a promising new benefit that favors all those who use it. The future belongs to on-demand pay.