The wait for payday can be a long and painful one. Life is unpredictable and an unexpected cost is inconvenient at best and completely destabilising at worst. On-demand pay, or flexible earned wage access, offers one solution, allowing workers to access their money as soon as they’ve earned it, often down to the hour.
Once primarily associated with the gig economy, on-demand pay is now spreading into the wider business world as employers seek ways to attract talent and boost the financial wellbeing of their staff amid the cost-of-living crisis. Tesco and McDonalds already offer it and The Perfume Shop is the latest in a growing list of high street retailers, including Superdrug and Savers, to introduce the perk, allowing its employees to be able to draw out up to 50% of their salary at any time of the month.
Giving employees more control over their financial lives is good for morale, engagement and productivity. Given its potential to boost the bottom line, it’s a model that more finance chiefs might want to consider.
Can on-demand pay attract top talent?
For CFOs, on-demand pay serves as a cost-effective tool at a time when the retention of employees has been front-of-mind for businesses. That’s according to Simon Khalaf, chief executive of card payments company Marqeta. “Retaining talent is becoming trickier and more expensive, meaning that CFOs need to pay a lot more attention to issues which were previously solely in HR’s remit,” he says.
Reducing people’s money worries can bolster your bottom line. It’s just good business
In his view, on-demand pay can lead to a more satisfied and engaged workforce by improving the financial security of staff. Khalaf explains: “We are now seeing its adoption across various industries including healthcare, retail and non-profits. The technology can easily be applied to any sector and, as paycheque flexibility becomes a common employee expectation, companies that offer it will benefit from improved employee retention and satisfaction.”
Giving workers early access to earned wages significantly lowered the probability of them leaving their employer, according to a 2022 Harvard Kennedy School research paper.
Another survey by Instant Financial, a player in the earned wage access field, found that businesses were able to reduce employee turnover by as much as 27% by offering them access to same-day pay. It also found that staff were staying at their employer at least twice as long as those not using it.
Boosting productivity
Financial stress is also a major roadblock to employee productivity. Employees spend roughly eight hours a week worrying about money and one-third said it inhibits their ability to focus on their job, according to a survey by fintech firm SoFi.
There’s less absence and greater engagement. It’s just good business
In light of recent economic pressures, more finance chiefs are considering the role that they can play in supporting the financial wellbeing of their employees, says Becca Baker, CFO of PR firm Milk and Honey. “It hasn’t always been on the CFO’s radar but it absolutely needs to be,” she says.
An employee’s personal financial problem can quickly become an organisation’s productivity problems if financial wellness isn’t proactively addressed, Baker says. “At the end of the day, reducing people’s money worries can bolster your bottom line. There’s less absence and greater engagement. It’s just good business.”
Be aware of the risks
There is, however, potential for things to go wrong. There is a “complex web” of financial regulations and compliance requirements that govern how companies manage payroll, says Yiannis Zourmpanos, a financial consultant and founder of investment platform Yiazou Capital Research.
These rules can be intricate and confusing, and often vary depending on where a company operates and in which industry.
“Depending on how the on-demand pay system is structured, it could even be subject to banking or lending regulations, adding another layer of complexity,” Zourmpanos explains. And with sensitive financial information being processed more frequently, companies need to be vigilant in complying with data protection laws, he adds.
Finance leaders will also need to navigate tax withholding requirements, ensuring they’re correctly calculating and withholding taxes even with more frequent pay distributions. New labour laws, including regulations on minimum wage, overtime, and pay frequency, could also affect the implementation of on-demand pay.
An on-demand pay system can increase the complexity of payroll process, leading to potential errors in wage calculations. It also makes it harder to track variable amounts, like overtime, bonuses, deductions and commissions.
Another, more practical challenge is integrating the on-demand pay system into the company’s existing payroll systems. “This can be difficult and expensive,” Zourmpanos explains. “There might be problems with making everything work together and keeping the information safe. It takes careful planning and investment to get it right.”
CFOs looking to implement such a scheme must be aware that, while the aim is to reduce money worries, there is a risk that employees may spend their earnings prematurely, leading to financial instability.
How to maximise the benefits
However, there are measures that finance chiefs can take to ensure any salary advance scheme is safe and effective. This could include offering financial advice and guidance alongside the roll-out of an on-demand pay scheme.
Khalaf says individual employee patterns of usage can be monitored so that when there is repeated use, which may be a sign of financial difficulties, an alert can be triggered and employees can access free guidance about how to stay out of debt. Clear rules about who can use it, how much they can take and what fees apply can also help manage the risks.
“Advanced planning is a must so regular paydays are never missed. Cash-flow issues might arise if a lot of employees all need money at once before the normal pay cycle ends,” Zourmpanos says. “Regular checks can make sure everything is working correctly and fix any problems early on.”
Ultimately, implementing on-demand pay also requires greater collaboration between finance and HR, Khalaf adds. “By working with HR, finance leaders can take multiple considerations into account at the same time, from company outgoings to employee intake and payments,” he explains. This will allow the company to make informed decisions about who is likely to want to take advantage of the scheme and when.
As with many financial wellbeing benefits, on-demand pay needs to be flexible. “In a multi-generational workforce, people will have different needs,” explains Baker. “What works for one won’t work for everybody. CFOs need to listen to their employees and collaborate with other operational leaders to understand what works best.”
There’s plenty to be gained by offering staff more flexibility over pay, including bolstering an organisation’s bottom line. Provided, of course, that finance chiefs remain alert to the associated risks.
