For decades, payday has come every two weeks for most Mexican employees. Although this remuneration method remains popular, millions of Mexicans are living paycheck to paycheck. An on-demand pay model is emerging to reduce the length of time between each payday. Its main benefits are solving liquidity problems while providing education toward financial wellness, emphasize finance experts.
“Acess to liquidity is a deep-rooted problem in Mexico. With an average monthly salary of MX$11,000 (US$550) and 70 percent of the population living paycheck to paycheck without saving anything, salary on demand is logical. People can have access to their money whenever they need it. In a world where everything is to order, it makes no sense that the most important element of your financial life is not,” said Nima Pourshasb, CEO and Co-Founder, Minu.
The biweekly payment, known as the quincena in Mexico, has not always been popular. In the 1800s, people working in factories received daily payments. “It would have been unthinkable to finish working hours and go home empty-handed,” Pourshasb said. With payroll payments moving through bank transfers, salary payments became a biweekly occurance. The salary earned by employees is calculated by the employer, which takes taxes and further deductions into account. This makes it difficult for companies to administrate their cash flows daily.
While most people continue to get paid every two weeks or even once a month, the technology to pay employees in real time, or as often as they prefer, already exists. “Thanks to the market penetration of specialized companies that provide on-demand pay, employees are increasingly showing interest in this payment model,” said Belén Meza Croskey, CHRO, iVoy, adding that the model benefits both employers and employees while offering additional advantages to the latter. “The solution must not be limited to paying wages, it must be accompanied by financial education. You have to give employees the necessary tools to improve their financial lives,” emphasized David Roa, CEO annd Co-Founder, Klinc. While there are both B2B and B2C solutions, some have no cost for employees, he added.
On-demand pay can be an important tool for companies to retain talent. In the US, the total nonfarm payroll quit rate rose to 3 percent in Nov. 2021, according to the Bureau of Labor Statistics. More than 4 million US citizens have quit their jobs every month since July 2021. Moreover, 88 percent of employees would consider taking a lower-paying job with better benefits over one that paid more but had inferior benefits, a recent survey found.
Market opportunities for on-demand pay represent a value of US$1 trillion across OECD countries, according to EY. “This grants a prominent role to employers and financial services companies to provide employees access to this liquidity and, in so doing, create meaningful societal utility at a limited frictional cost,” says the firm. In addition, 70 percent of individuals in the UK and US regularly experience financial stress. Half of these individuals have faced a financial shortfall between pay periods and encounter this issue every four months approximately.
“On-demand payment boosts talent retention. It represents freedom for employees. It is absurd to pay every other week; companies should pay interest for using their employees’ money. Regarding financial stress, it is a great, flexible tool to fix people’s financial problems,” said Courtney Devon McColgan, CEO and Founder, Runa.
The method has great potential in Mexico and it promotes financial knowhow, stated Diego Villarreal, CEO and Co-Founder, Castor. Unlike credit cards, “on-demand pay creates that knowledge and strengthens the relationship people have with money. People can better understand how much money they are able to spend each day,” he added.
In Mexico, an individual’s level of financial education is closely tied to personal factors, according to Deloitte: “A person with a higher academic degree and higher salary is more likely to have more knowledge about the various financial products, while a person with lower education and income levels will have less knowledge on the subject.” According to the most recent National Survey of Financial Inclusion (ENIF), Mexico’s population suffers a considerable lack of knowledge regarding the characteristics of financial products.
While the technology to make on-demand pay the most popular payment method is already viable, some companies remain reluctant to switch. What is more, most SMEs are usually not aware of the solution’s benefits, agreed industry experts. Nevertheless, in problematic times brought on by a global pandemic, the solution may catch on much quicker than it did before.