Beware the hidden threat inside on-demand pay apps

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Employers have started to roll out a new benefit touted as a way to transform the lives of their employees.

A new generation of on-demand pay apps offered through employers is marketed as a low-cost technological solution to break the two-week pay cycle by allowing workers access to their pay between pay periods, sometimes even daily. In addition to promising financial empowerment for employees, these apps are said to improve retention and recruitment for employers, something especially important in the tightest labor market in decades.

But behind this new technology is a threat largely overlooked by employers and, often, their workers: Not all of these apps are created equal, and some carry real risks.

I’ve worked in financial technology throughout my career, with a particular focus on expanding services for the “underbanked,” people who may not have access to traditional financial tools. The reality is many of these apps are simply wolves in sheep’s clothing — the modern-day equivalent of a payday loan marketed under the kinder, gentler lingo of “financial wellness.”

Other platforms, however, give workers access to their own money at no cost. This distinction is critical. It represents the difference between offering employees what is in essence a payday loan and providing them with a real benefit that can improve quality of life and have an immediate positive impact (and it’s why I founded my own company). For bosses genuinely interested in helping their staff, it’s paramount to learn the difference.

See also: Walmart’s ticket to employees’ financial security: Advance payday, budgeting help

Payday lending 2.0

The financial and emotional costs of traditional payday loans, small advances from short-term lenders who often impose high interest rates and charges, are well documented — from crippling debt to spin-off effects on health and family stability.

Given the potential harm they pose — and negative press they generate — no employer interested in growing or even just maintaining their business would put a “fast cash” outlet in their staff lounge. But that’s essentially what’s happening when employers partner with on-demand pay apps that charge workers for accessing their own money.

In many cases, employers aren’t even aware of the true risks and costs involved when they offer this service to their workforce. The fees imposed to employees, rising in some instances to $5 per transaction, may seem small. But, considering that employees often use these apps to withdraw only modest amounts (sometimes as little as $20) and the fact that many will become regular users, the costs can quickly add up.

At a company of 1,000 employees, where each worker uses this service once a pay period at a cost of $5 a transaction, the annual additional cost borne by employees comes to $130,000. At the largest employers, with hundreds of thousands or even millions of employees, workers could easily end up footing a tab in the tens of millions of dollars — just to access their own pay.

Right now, apps that are charging employees fees and other charges are flying under the radar of lawmakers because they’re new and not well understood. But when the shine rubs off, and watch dogs start to add up the overall cost of these services, regulators may well start paying attention — in much the same way that we’ve seen a crackdown on short-term lenders in recent years.

Deeper still, these fees send a discouraging, even punitive message to employees. There’s something demoralizing about being charged a fee or subscription rate in order to access your own money to pay for necessary expenses. This is very much death by a thousand cuts, and it runs counter to the promise of most of these apps — and the intention of employers who promote them — to improve employee wellbeing.

Getting the cost-benefit balance right

Despite the potential problems, the reality is that these on-demand pay apps do fill a need. There’s a reason payday loans are still widely used, after all, despite high interest rates. More than 75% of Americans live paycheck to paycheck. When cash falls short ahead of payday, short-term loans become a necessary evil used to pay for basics like groceries, bills, diapers or deal with emergencies.

So, what’s the solution? Certainly it’s not limiting access to emergency financial relief for the millions of people who have a hard time making their paychecks stretch. Instead, the way forward lies in leveraging this technology to enable both employees and employers to see benefits. Rather than charging employees to access their own money, employers can instead empower them to control their pay flow.

With this approach, employers fund a powerful benefit that supports (rather than exploits) their own workforce, while seeing real returns in terms of recruiting and retention — with reductions in turnover of as much as 20%. Nor does this have to be cost prohibitive for employers. By using economies of scale and subscription models, annual fees for employer-funded apps often work out to a fraction of the cost of employee-funded programs.

Technology has certainly made it easier to increase pay frequency, solving a financial pain point too many people have lived with for too long. Now we need to get the balance right about who should pay for these life-changing services so they can lead to positive outcomes for all.

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