Why faster payments could be a boon for hourly workers

July 11, 2019 9:44 AM

Often overlooked as prospects by financial services institutions who have increasingly focused on the wealthy, hourly workers represent a massive pool of underserved consumers with distinct financial needs.

Early access to earned wages is just one financial product that has recently come to the market and seen dramatic success, as it is a significantly less expensive alternative to payday loans for consumers struggling to make ends meet.

According to the Bureau of Labor Statistics, there are 80.4 million hourly workers over the age of 16, representing 58.3% of all hourly and salary workers (excluding small business owners). While the average hourly worker is often thought of being a young, single person, the reality is far from the truth. There were only 4.67 million teenage (16-19) workers and just 11.31 million young adults (20-25) workers with the rest being over 25.

The ability to gain early access to wages has become an important service for hourly workers who live paycheck-to-paycheck. According to a report from Branch, a mobile financial wellness app for hourly workers that also provides early wage access, 57% of hourly employees would find gaining early access to earned wages to be very helpful. Another 22.6% would find the service somewhat helpful, and almost 80% of hourly workers surveyed said it would help.

“Early wage access before the payday, for wages earned but not paid, helps them to manage their cash flow better between pay periods. Adding to the problem is that these workers often face volatility in their paychecks because the hours worked can vary from pay period to pay period,” said Atif Siddiqi, CEO of Branch.

In the Branch report, over 40% of hourly workers stated that they would be willing to work more hours, ostensibly as a way to help meet their financial obligations. Nearly 80% of workers surveyed experienced some pay variance from week to week.

Based on data from the Branch Report, almost three-quarters of hourly workers report that their preferred method of payment for purchases and bills is the debit card. Cash payments come in second place for preference, just beating out credit cards. Checks garnered fourth place with a 3.9% share ahead of mobile payments at 3.5%

Data from the Federal Reserve’s Payments Study last issued in 2017 shows that card payments overall grew by 7.4% in transactions and 5.8% in value from 2015 to 2016. However in this time period it was credit cards that grew the fastest, at 10.2%, compared to debit card transactions, which grew by 6%. The number of bank checks written during this time period declined by 3.7% in transactions and fell by 3.6%.

When it comes to emergency savings to pay for an unexpected bill such as a car repair or medical bill, over 40% of hourly workers have no savings to fall back on. According to a report from Branch, another 18.1% of hourly employees have only between $1 and $150 in emergency savings.

“Their [hourly workers] cost of living has outpaced their wage growth. They don’t have savings to tap into for medical bills or unexpected expenses,” added Siddiqi.

The early wage access market is growing. Earlier this year a fintech startup specializing in early wage access, PayActiv, announced it had cumulatively processed over $1 billion in early wage access funds to underserved and underbanked workers. PayActiv reported that it had helped over 650,000 employees with its service.

The company also shared the findings of a survey it had conducted among its active users asking them what action would they have taken if they didn’t have timely access to their earned, yet unpaid wages. Over 90% of those surveyed would have taken an action that would have cost them money including 31% would have paid an overdraft and 22% would have taken out a payday.

Unfortunately, 38% of PayActiv users stated that they would have deferred a bill and paid a late fee — actions that not only cost short-term fines, but also have a long-term negative impact on a consumer’s credit score.

The people who can least afford overdraft and non-sufficient funds (NSF) fees are the ones who pay most of them. According to a 2017 Consumer Financial Protection Bureau report on overdraft and NSF fees, just under 5% of bank account holders (frequent overdraft users) paid over 63% of those fees. Adding in the second category of moderate overdraft users (overdraft between 11 and 20 times annually), these two groups comprised just 9.1% of all bank account holders yet paid 78.7% of all fees.