Since the invention of the home computer, technology has impacted every aspect of our lives. From how we connect to friends and loved ones through social media, to computerized business operations. technology is constantly shaping how we interact with the world and the workplace. It has given us greater freedom with our time and where we place our efforts, creating a world in which flexibility is not only possible, but often the best solution.
Flexibility in the workplace is a main benefit all four generations agree on. That flexibility can come in the form of time spent in the office, how meetings are conducted through video technology, and now a new form of flexibility is entering the system – pay flexibility. More than payday advance loans, fintech startups offering early wage access, or EWA’s, provide flexible pay options for employees.
History of Modern Pay
With the start of the industrial revolution came the concept of wages. Not to say people didn’t make money before that, but from the Industrial Revolution came higher productivity, a shift from an agrarian economy, and the ability for workers to keep and save their wages. Wage labor was inevitably exploited and led to strikes starting in 1824. It would be another hundred years before the modern system of pay would begin.
First, Taxes
FDR and the onset of WWII brought us what we know today as income taxes. Before the war, taxes were collected in quarterly sums for the previous year. Americans filed their taxes and were responsible for making large lump sum payments every quarter. Once we entered WWII, the government found itself needing capital much faster, so FDR instituted the current system of employer deducted taxes from paid wages.
Checks Get Their Heyday
It wasn’t until 1959 that a standardized automation for checks, known as MICR, became available. The MICR opened the door for automated readers and sorting machines to clear checks. It is assumed that after this point, employers increasingly used paper checks to pay employees. During this time the use of personal checking accounts also rose dramatically, perhaps because of increased use of paychecks.
Birth of Modern but Slow Processing
Then, in the late 1970’s, the Automated Clearing House (ACH) was created to reduce the use of paper checks for routine payments. The thought was that the amount of paper checks used by businesses and consumers would eventually exceed the ability of the existing computer systems to process and sort the checks effectively. The ACH has, to this day, timelines of when checks will process, such as if a check deposits after 2PM it won’t process until the following business day. This system gave rise in part, to the biweekly or bimonthly paychecks we all know today.
As you can imagine, businesses relying on the ACH to process payroll, bills, and consumer payments can be a huge headache, especially to small businesses. With the speed with which the world moves these days, it just isn’t feasible to expect businesses or employees to wait for funds to process over the weekend or over a holiday. Even overnight may be too long.
Direct Deposit
The internet, personal computers, and online banking all made direct deposit a feasible replacement for paper checks. From the mid-90’s, direct deposit started making its way into businesses as an alternative to paper paychecks, however paper hasn’t completely phased out. Employers and employees alike typically prefer direct deposit because it is easier for payroll and bookkeeping, more convenient than receiving a physical check and going to the bank to cash, and it also reduces security risks. A paper check can be lost, stolen, or forged.
Today and Beyond
The way we get paid hasn’t changed too much since the 1970’s, other than the adoption of direct deposit and online banking. But many Americans are left out of these technology driven advancements. According to a recent study by the FDIC, over 20% of Americans are “underbanked, they either do not own or actively use a checking or savings account.” This number has remained steady for the last decade. Some attribute the statistic to bank distrust caused by the 2008 financial crisis, high startup costs, and overdraft fees. But the FDIC found that most households just don’t have enough money on hand to avoid regularly incurring low balance penalties. Most paper check recipients are literally living paycheck to paycheck – or worse.
It isn’t only those on the lower end of the income scale. Even families making around 100k are susceptible to paycheck to paycheck living. The “volatility on the income and expense side is more dramatic than we realized,” stated Timothy Flacke, executive director of Commonwealth. People in various income brackets could benefit from a short-term cash flow solution that doesn’t include racking up huge debts from high interest payday advance loans or credit cards.
Fintech Mixes it Up
If we’ve learned anything from the Technology Revolution, it is that tech will find a way to fill gaps in productivity. And that’s just what is happening now. Over the last few years several fintech startups are focused on solving the payday issue, and thus intend to break the mold of how Americans get paid.
Early Wage Access
A big push in pay flexibility from fintech companies is in Early Wage Access. The EWA system is breaking how employers approach payroll and how employees budget their cash. These systems allow employees to access what they’ve already earned before the end of the payroll cycle. Different than a payday advance loan, these platforms account for the schedule the employee has, adds up their earnings minus taxes, and gives immediate access to funds. Consider an employee who needs to pay their car payment two days before payday. They can withdraw the needed funds through the app and make their payment on time, without having to incur late fees or wait for the bank to process their paycheck before their funds are available.
Employers hope this helps their employees avoid late fees, overdraft fees, or high interest payday loans. According to PayActiv, one of the major EWA providers, 70% of workers say they’re in financial stress and more than 50% say it affects their work.” It also helps mitigate the time needed to process paychecks through ACH, by giving immediate access to funds. If an employee is going on vacation, or the banks are closed for a holiday weekend, they can access their pay when needed without waiting for the next business day to come around.
Companies such as Walmart are providing this fintech to their employees. They have partnered with PayActiv to offer early wage access. Last October there were 500,000 employees using the service. Kum & Go, a chain of convenience stores in the Midwest are also using an early wage access service. Since the implementation, they’ve seen a drop in turnover and training costs. It’s given their stores the flexibility to move employees to different locations when call-offs happen, without it affecting their bookkeeping.
Technology shapes the way we do most things, constantly seeks to increase productivity, and provide flexibility in otherwise rigid environments. Online banking and direct deposit options have provided some flexibility to a wide swath of the country, but it isn’t all encompassing and the need for paper checks still exists. The slow processing time of ACH, banks closed weekends and holidays, low wages, and growing flexibility in all other aspects of work all contribute to the need for a new system. Fintech startups in Early Wage Access may be the answer, but for now at least, it’s just a new techy fad.
——-
This article is part of a Throwback Thursday series on technology in the workplace. Critical Research is excited to share lessons learned from the past to make a better future for tomorrow. We strive to make background screening a simple and transparent process for our clients and their prospective hires, bridging the gap between interview and orientation.