On Demand: The Future of Payroll WagesBy Nima Pourshasb | Wed, 09/01/2021 - 12:58
The on-demand economy is not only changing the way people obtain entertainment, mobility, connectivity and career development services but also the way they receive their salary.
The trend is growing globally to offer payment of the salary already earned (pay on demand) without having to wait for the payroll date. The objective is clear: to empower employees to choose the best way and moment to receive their already earned income.
In the US, large companies such as Amazon, Best Buy and Walmart offer this benefit with an exponential scope. Walmart, for example, benefits more than 300,000 workers (and their families) with this service. In Mexico, we are following the same path. Various companies, such as Edenred, Total Play, Mabe, Rappi and ICA, are already providing this benefit, which is especially appreciated in times of crisis.
Thus, there is already a large list of innovative companies that have decided to use financial technology for the financial benefit of people, generating an unquestionable social impact: minu in Mexico; DailyPay, PayActiv and Rain in the US; Wagestream in England; Refyne in India; and Xerpa in Brazil. According to Gartner, 20 percent of hourly workers in the US will have their salary on demand in 2023. It is expected that in the next decade, more than half of workers worldwide will receive their wages worked when they need it without having to wait for the payroll date.
Why is this payroll revolution happening?
The first reason is very simple: It makes perfect sense that we can access what is ours whenever we want. The legally earned salary already belongs to us. If we quit a job or the company fires us, it has the obligation to give us our salary already worked. In a world where our food, our music, our movies, among other things, are on demand, why not get our salary — the most important element of our financial life — in the same way?
Remember that the biweekly payment is relatively new. Two hundred years ago, when we all worked in factories, it would have been unthinkable to finish working hours and go home empty-handed. With payroll payments through bank transfers and the inspection via withholdings, payment changed to biweekly. The reason? The company would have to calculate taxes and other deductions, so paying the worker the salary already earned would create too much administrative burden and impact the company's cash flows.
Although charging on days 1 and 15 is a mechanism that aims to facilitate the procedures associated with payments for companies, the reality is that these dates hardly correspond or are adjusted to the cycle of recurring expenses of people — and much less respond to unforeseen events or emergencies.
Another relevant reason for this change in paydays responds to a need for liquidity. The liquidity gap is profound in Mexican society. Seventy-five percent of workers live from paycheck to paycheck with average wages of $550/month, 33 percent take loans out to cover their recurring basic expenses, and only 12 percent have a savings account. The country has 5,000 lenders and 10,000 pawnshops. Unsecured loans have APRs of 400-plus percent.
In addition, according to a Harvard Business School study, users of on-demand pay are significantly less likely to leave the firm when compared to non-users. This relationship appears to be robust to controlling for worker characteristics, and exhibits an economically significant magnitude: a hazard model specification suggests employee turnover is reduced by 15 percent. The relationship is particularly pronounced for low-skill workers.
For today’s consumer who lives in an on-demand economy, not having access to the motor of their financial health — earned wages that legally belong to them — is surprisingly outdated. It generates high anxiety and forces absurdly sub-optimal financial decisions in a country with no usury laws. The pandemic has jump started the momentum and urgency for this correction, and Pay On Demand can help build a resilient and financially empowered workforce.
In this way, having access to the salary already worked is a win-win that offers important advantages for both employers and employees. On the one hand, it allows employees to feel empowered and calm when deciding when to withdraw their income to meet their financial needs with their own funds resulting from their effort. On the other hand, it allows companies to take care of their human capital to attract and retain talent, increasing productivity by 20 percent by reducing their financial concerns and also reducing the high cost of turnover that new hires imply.
With new technologies and the use of apps, the immediacy in salary collection is a reality that gains an even greater boost in these times of crisis and emergency to respond to the lack of liquidity that many families may be facing when they see their income diminished, either due to the loss of employment among any of its members, or due to the adjustment of salaries and benefits that many companies have had to apply to make the continuity of their businesses viable.
Nima Pourshasb is CEO and Co-Founder of minu. He has extensive entrepreneurial experience creating and growing technology companies in different countries. He created his first company for Latin American consumers, FormaFina, with offices in six countries in the region. In Mexico, he collaborated at Banco Sabadell as head of personal banking. He was born in Iran, grew up in Spain and did his postgraduate studies in both London and the US. Follow him on LinkedIn and Twitter. The opinions published in this column belong exclusively to the author.