In January, U.S. Commerce Secretary Wilbur Ross sparked outrage for suggesting during the partial government shutdown that furloughed federal workers could bridge missed paychecks by taking out short-term loans.
The billionaire Ross seemed oblivious to the reality of many Americans, according to critics, who noted that just four in 10 adults could cover an emergency expense of $400 and nearly one-third of full-time workers have a second job to help make ends meet.
In recent years, the precariousness that faces such workers, coupled with the growth of the gig economy, has produced a series of fintech startups with names like DailyPay, PayActive and Even that give people the ability to receive wages they have earned without waiting for payday. Employers in industries such as retail, ride-hailing and home health care use these services to help their workers pocket wages on demand.
Banks are taking notice of the trend.
They have been spending billions on technology to deliver faster payments, and this type of service — basically faster delivery of wages — is a use case. Some business customers already have shown how the move to faster payments could prompt changes in both payroll and credit.
On-demand access to pay "is permeating a lot of the industries that we traditionally service and gaining steam in the marketplace," says Matt Miller, head of product and innovation at KeyBank.
Last year, the Cleveland-based bank teamed with Ingo Money to enable businesses to disburse payments directly to debit cards in real time. The bank built the capability for insurance carriers, lenders and businesses looking to deliver payments to their final destination quickly.
Employers can use the service to offer their workers access to earned but unpaid wages, provided the employer adjusts its payroll processing to accommodate the shift.
Depending on the employer's goal, either real-time payments or same-day payments via the automated clearing house (ACH) may help to accomplish it, according to Miller, who notes that many of Key's business customers currently use same-day ACH for payroll processing. "The technology needs to be considered against the use case, because it's not always one size fits all," he said.
U.S. Bank is looking to new payment capabilities and technology to address the needs of some businesses that are exploring how to pay workers more flexibly, as well as changing preferences among workers on how and when they want to get paid, as well as the desire of some businesses to pay workers more flexibly. One such example includes distributing wages in real time using Disbursements via Zelle.
There's a lot more familiarity with Zelle as a network for person-to-person payments, but it's also a way for our larger corporate and middle-market customers to make disbursements to individuals," said Sayantan Chakraborty, head of product for U.S. Bank's global treasury management business.
Chakraborty notes that for an employer that wants to pay workers at the end of each shift, the network exists to enable it. "The possibility is here and now," he said. "Theoretically speaking, pay can be distributed in a matter of seconds, if not milliseconds."
Both Miller and Chakraborty declined to discuss specific customers and noted that the shrinking of the pay cycle itself has yet to enter the mainstream. "The market is still in the first inning of figuring out how to price this, but there are a good number of markers out there," Miller said.
One may be the fintech providers themselves. For example, DailyPay, which moves wages to a user's bank account through their linked debit card via the Mastercard and Visa networks, charges $2.99 for instant access and $1.25 for access the next business day.
DailyPay and other services like it partner with employers, rather than market to individuals directly. But DailyPay's chief executive, Jason Lee, understands who the end users are. He said they primarily belong to one of two groups: those who need the funds right away, such as to get their car out of the shop, and the millennial and Generation Z workers who expect to be able to access everything from music to money on demand.
"DailyPay is an ATM for your earnings," Lee said. "You only use it when you need it."
Lee said that the payout turns on the ability of DailyPay, which sources its capital from nonbank lenders in the specialty finance market, to assess with precision the risk presented by each worker and their employer. To do so, the company relies on a machine learning algorithm that it developed to determine the amount a user can request each day.
DailyPay is talking to some banks about partnering to offer its service.
It is a specialty that would be tricky for banks to develop on their own, according to Lee. The shift to real time from batch payments that instant pay demands, and the treatment of such credit by capital rules, "make it very difficult for banks to fund these types of payments," he said. "Banks need to tread very carefully in this space, because it is a deceptively complex business."
As conversations between banks and their business customers suggest, the capability holds value for employers. A study last year by Todd Baker and Snigdha Kumar at Harvard University's Kennedy School found that among six employers that offered instant access to wages via PayActiv, workers who used the service at least twice were 19% more likely to remain in their jobs than those had used the service less frequently.
For a retailer the size of Target, that could translate to a savings of roughly $108 million annually, the researchers found. (Target itself does not currently offer instant pay. Walmart offers on-demand access to wages through Even and PayActiv.)
The apps also can ease stress and lower costs for workers who live paycheck to paycheck. Aaron Klein, an economist who directs the Center on Regulation and Markets at the Brookings Institution, estimates the delay in receiving wages costs Americans at least $10 billion a year in the form of overdrafts, late fees and payday loans.
"There's a mistake that often direct deposit means instant. It doesn't," said Klein.
He pointed out that at a Senate Banking Committee hearing in February, members asked the Federal Reserve chairman more questions about payments than about the rate of inflation. "That ought to be some indicator of the problems facing Americans," Klein said.
The advent of instant pay presents opportunities and challenges for banks that go beyond payroll. Rick Burke, head of corporate products and services at TD Bank, says developments such as on-demand access to wages could change people's relationship to credit.
"Everybody knows that if you want to reduce your mortgage interest, pay twice a month," Burke said. "What would happen if you paid it every day? Or if I could get paid every day and pay my mortgage and car loan and utilities daily? Any place that I accumulate interest, I could either borrow more or reduce my debt burden very rapidly."
If more frequent pay cycles become the norm, the cost of instant pay "would move closer to zero," Burke said. "The concept of faster payments helps to drive risk out of the system."
The move toward real time also runs in more than one direction. John Thompson, chief program officer at the Center for Financial Services Innovation, points to apps like Digit that monitor users' financial habits automatically with the aim of perfecting the amount the person can set aside for savings each day.
As with demand for faster payments generally, the changing assumptions around pay promise "to pull on the rest of the system to catch up," said Thompson. "It will create pressures on banks and legacy providers because it's hard to have part of the system be in real time and part of it not.”
]The shifts underway are an inevitability, said DailyPay's Lee. "Self-driving payroll is already here," he said. "Like self-driving cars, this will not stop at cruise control. This is a dynamic that folks will have to contend with."
