Why should you wait two weeks for a paycheck in a computerized world where money transfers only take a fraction of a second?
Soon you may not have to.
Fintech companies are set to disrupt Canada’s traditional bi-weekly payroll system, with a new service that offers workers on-demand pay for work completed.
Early Access to Wages – also known as Pay-As-You-Go and Early Access Pay – is a third-party service offered by employers that allows workers to access some or all of the money they’ve already earned without the two-week pay arrears. The concept is in its infancy in Canada.
It’s being touted as an alternative to payday loans, which carry exorbitant interest rates, and a solution for people living paycheck to paycheck who need immediate access to their paycheck.
“We’re really empowering people to access their income,” said Seth Ross, who leads Dayforce Wallet at Ceridian, a US-headquartered human resources and payroll software company operating in the United States. Canada, Europe and Australia.
“If someone doesn’t have access to their funds when they need them, where will they go? They will incur debt from credit cards or payday lenders who charge 300% interest,” he said.
Dayforce Wallet started in 2001 in the United States and became available in Canada in July 2021. It works with over 100 companies. Industries that traditionally hire hourly, part-time, or casual workers find the system most appealing. Dayforce Wallet customers include La Vie en Rose and hire-purchase retailer Aaron’s.
Dayforce Wallet allows workers to access their payroll through an app, with money deposited directly to their Dayforce Wallet card. There are no fees to transfer funds to other accounts and there are no interest charges. However, standard ATM fees apply.
“It’s the right thing to do, it’s about helping people take control of their financial lives,” Ross said.
Canadian pay-per-view company ZayZoon was founded in 2014 with the goal of ending predatory lending. To date, he has worked with over 2,500 companies in the United States, including Domino’s, Wendy’s and 7-Eleven.
Although it is headquartered in Calgary, it does not yet work with Canadian employers.
“Canada wasn’t ready for a service like this when we started the company,” said CEO and Founder Tate Hackert. “The population size is just smaller and there are also more conglomerates that have a stronghold in Canada.”
But that could change.
Many Canadians have faced layoffs or unreliable work hours during the pandemic and are struggling to pay their bills on time. And with more job openings across the country, companies need to offer more attractive benefits to their workers, Hackert said.
The goal is to help people who have a cash flow problem by allowing them to pay their bills when they need to, Hackert said. Instead of paying high interest on payday loans, they can access their own paycheck when they need it and pay zero interest.
Toronto-based startup KOHO also got into pay-as-you-go in 2014 to offer a healthier alternative to payday loans.
“You just have to look around and see that lenders are around every corner. It’s super corrosive to financial stability, so that’s the problem we’re trying to help solve,” CEO Dan Eberhard said.
KOHO has partnered with Canadian companies that use the Automatic Data Processing (ADP) online payroll system to offer employees Instant Pay, which allows them to cash out up to 50% of wages earned each working day.
“Employers are looking for stability in the marketplace,” Eberhard said. “It costs employers nothing. This gives them a compelling edge to show they care about employees.
Early access to wages helps with worker retention and during this “great quit” it’s imperative for businesses to be competitive, Ross said.
According to Dilip Soman, professor of behavioral science and economics at the University of Toronto, the two-week pay cycle came about after payroll taxes (in which money is deducted at source) began. Because payroll systems were complicated and expensive, doing it every two weeks was more efficient and less expensive, he said.
Today, the bi-weekly pay system doesn’t make as much sense, Soman said.
“If your credit card statement comes in on the 27th of the month, but your paycheck doesn’t come until a few days later and you can’t pay it off, then this (early pay) service is a plus, because it’s It’s an alternative to payday loans,” he said.
Nevertheless, there are caveats. Giving early access to salaries could be extremely risky for those struggling to budget, he said, and there must be absolute transparency on costs and fees.
In addition, there is a segment of the population that does not need faster access to income; having two paychecks a month can help them budget better, Soman said.
“Any technology that makes it easier to spend can backfire. We have seen this with credit cards; it’s great for some and causes debt for others. This is something we need to point out.
Financial literacy and credit counselor Pamela George agrees.
“If you don’t know how to budget, you end up spending money and there’s not enough for rent,” George said. “Pay-as-you-go could be dangerous for those who can’t save.”
It is up to employers to responsibly prepare their employees for financial success, she added.
“What are employers doing to make sure their employees are saving? Do they help them achieve their goals? If a company wants to implement this system, financial literacy and planning training should be provided to employees,” she said.
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