Every organisation is responding to the cost of living crisis in its own way. In addition to significant pay increases, we have seen cost-of-living bonuses, hardship funds and free breakfasts. The focus of this article, however, is a development that would have happened independent of the current inflation-related issues that we face, and instead owes more to the explosion of Fintech – banking and finance technology.

There has been a revolution in personal finance management over the past few years. Think of the ubiquity of Klarna, and similar services, that offer payment in instalments for even small purchases; or the use of AI to switch money into savings accounts, as provided by Chip and other online savings companies.  

Many of these developments are being driven by the greater ability of financial services providers to be able to streamline and automate processes in a way that the larger, less fleet-footed financial institutions cannot. They are also driven by an increasing acceptance by many of us to enable providers to access our bank accounts, whether to share our transaction information (as Experian does, for example), or to automate payments and receipts. 

This has led to the development in particular of salary advance providers, such as CloudPay and FlexEarn. These organisations work with employers. The employee can – usually for a small fee – access a proportion of their earnings before payday, with the employer then automatically paying the amount advanced to the provider when the employee receives their pay. 

Do these kind of schemes make sense?

Conceptually such schemes make perfect sense: we pay employees in arrears, and therefore all that they are doing is accessing money that they have already earned, just a little bit earlier than would otherwise be the case. The schemes also make practical sense, particularly where the alternative is for the employee to resort to expensive payday loans, or where other forms of credit are not open to them.

The schemes also make sense to many employers: they can be used to sell the employer’s flexible benefits/well-being credentials, and (except for a small amount of administration) require little resource from the employer. Cash flow is not affected, as it would be if more traditional advances were available to employees, or if the frequency of paydays was increased.

Schemes have been particularly popular with healthcare, retail and hospitality companies, where the shifts tend to be flexible; there is some evidence that it is these sectors where employees most commonly work more than one job, and that early access to funds fits best with employees’ work patterns. Think, for example, of the restaurant waiter who decides to work two extra shifts in a week, so that they can go clubbing on Saturday night. They can use the advance to fund their night out, for a very small fee. These are, of course, sectors where pay can be low and if employees cannot get from one payday to the next without drawing down what is owed to them, one could argue the problem is more to do with what they earn rather than the frequency with which they are paid.

There are also rumblings that these schemes are problematic in and of themselves. The fees charged per transaction (typically under £2) can mount up, and compare unfavourably to the costs of other borrowings, even some pay-day loans. It is also evident that the employee’s pay packet will be light when they are eventually paid and the advance is repaid to the payroll advance company. If the advance has been taken by someone already struggling to make ends meet, rather than for a one-off unexpected event, then the chances are that more advances will be taken, and the pattern will continue and worsen.

The Financial Conduct Authority is also starting to take an interest in this form of borrowing, even though such advances are currently not regulated. The FCA has concerns about the ease at which funds are advanced, and the consequences for employees already struggling to make ends meet. The advances do not show up on credit searches, and so can sit side-by-side with other borrowings, making the overall debt burden on a particular employee unexpectedly high. 

So, should you introduce a scheme? 

They clearly have a place, mainly when times are tight, and in an environment where the traditional wage cycle is breaking down. Perhaps the trick is not to oversell them: they can be a real benefit to those employees who, on an infrequent basis, need an advance to repair a broken down car, or replace a boiler. However, to promote such schemes when wages are simply inadequate seems dishonest. Most experts believe that they are best used in conjunction with other initiatives aimed at improving employees’ financial knowledge and well-being.

As a business owner or HR professional tasked with the potential implementation of a scheme, how would you go about it? One suggestion might be to canvass staff and see how they feel about it. Perhaps you’re confident that any employee faced with a financial problem would feel comfortable asking for help without the need for such a scheme. As the cost of living crisis takes hold what considerations are HR professionals and business owners giving to the financial well-being of employees and in particular are they asking “are we doing enough?”