Salary advance schemes: beneficial or detrimental to workers?

Workers who use employers’ payday advance schemes to access wages before payday have been warned their reliance could lead to problematic debt, while others say they ‘have a place’ on the payday market.

The rising cost of living could encourage more people to use these programs, according to the regulator, the Financial Conduct Authority.

Payday advance schemes typically allow employees to access part of their monthly income before payday in exchange for a lump sum of around £1 or £2.

Operators of specialized schemes such as Openwage, Fastpaye, FlexEarn and Wagestream are not currently regulated by the financial watchdog because they technically do not provide loans to employees using their services.

But the FCA observed that early access to pay is “often promoted as an alternative to high-cost credit”.

As part of its annual report, it stated: “When used in the right way, ESAS [Employer Salary Advance Schemes] can be a convenient way for employees to deal with unexpected expenses and occasional short-term cash flow.

“However, growing demand for the product may increase given the rising cost of living, particularly from consumers and employees who may have limited credit options.”

Peter Tutton, head of policy at debt charity StepChange, said that while well-designed early wage access programs “have the potential to benefit those who might otherwise turn to forms of ‘borrowing more unsustainable’.

But he added: “These products carry certain risks, including the lack of effective accessibility checks, a lack of transparency on costs, the potential harms associated with addiction and repeated use, a lack of visibility of credit information and default priority which may not be in the interest of the borrower.

Income fluctuations and financial difficulties

Last year, the FCA published the Woolard review of change and innovation in the unsecured credit market, which concluded that given the small size of the early wage access market, it would be disproportionate to introduce a bespoke regulatory regime.

The review recommended that this be kept under review in light of any emerging issues. And the FCA said so far it had seen no evidence of harm emerging but was “monitoring this closely”.

Tutton said: “The risk of poor outcomes from using these plans is higher for certain groups of employees, such as those with low financial literacy, those living in or at risk of falling into poverty, or those whose income fluctuates.

“The risks of poor loan performance appear to be highest when products are aimed at ‘gig economy’ workers whose incomes are unpredictable.”

He also warned that workers using payday advances were often unaware that it would affect their income tax, national insurance and earned income assessment for Universal Credit payments.

“This can lead to unexpected large swings in income that could cause or contribute to financial hardship,” Tutton said. “Employers may not be effective in assessing the suitability and benefits of products, particularly if they have weaker connections to workers and employees.”

Not all employers offer early wage access programs, though it’s becoming a more common addition to company benefits in both the public and private sectors, according to benefits consultancy Mercer.

Its recent Financial Wellbeing Index report found that employer support for more direct workplace financial support or debt solutions was an important and growing area, now offered by around one in three organisations.

Payday loans are currently the most common debt-related benefits, followed closely by access to salary or payday advances.

The report also revealed a clear trend between Early Access usage and average salary.

“Companies that pay most of their employees around the UK median wage or less are significantly more likely to have a debt solution in place than those with higher average wages,” the report says.

Jeremy Milton, director of Mercer’s wealth management team, said: “From a benefits perspective, we know some employers give loans for subscriptions, education, hardship and other reasons. .

“If these are provided interest free they can be tax free up to £10,000 which is quite an attractive advantage over some of the alternatives.”

But he added that while he was “open-minded” about early wage access programs, “when launched in isolation as a tactical solution, they could, if not used correctly, risk do more harm than good or create new bad behavior”.

How does Early Salary Access work?

Access to salary or salary advance companies is facilitated by the employer, so employees can register or apply for an advance through a linked online portal or application to access a portion of their salary earlier in the month rather than waiting for their scheduled payday.

Since an employee is effectively borrowing their own money, they are technically not loans and currently do not qualify as traditional credit.

This means that employees’ credit is not checked and there is no interest to pay, although a fixed fee of a few pounds is paid each time an advance is taken.

This may or may not represent good value because the cost of borrowing depends on the advance taken and how many times it is used over a period, Milton warned.

There are limits to the maximum advance, usually 40% or 50% of the monthly salary level, with most plans placing a limit on the number of times it can be used in a certain period.

Milton said: “In general, we feel that while they may be beneficial for some employees on some occasions, payday advance programs primarily target symptoms of poor financial well-being and do not help improve the root cause.

“Even though they are generally significantly cheaper than some other short-term, high-interest alternatives, they could be seen as condoning the behavior of paying a small fee for quick access to cash.

“In the long term, this behavior will have a negative impact on employees’ finances due to the repeated payment of fees for small advances versus arranging or using an interest-free overdraft with their bank.

He added: “We have seen little hard evidence so far to prove that they help people better budget for the long term or make real change, but we recognize that they have their place and are preferable to other possible solutions, such as payday loans. ”

In its latest statement, the FCA noted that major ESAS vendors are developing a code of practice in line with one of the Woolard review recommendations.

“We will continue to engage with vendors as the code develops,” he added.