The completion of the intercontinental railroad in 1869 was a watershed moment in American history. It opened a new chapter in the country’s economic growth as the connection of the two coasts by rail made the transfer of resources in the West to markets in the East easier, faster and safer. This technological marvel transformed the country.
Fast forward about 150 years to today. Technology is doing it again.
Instead of tracks and a train, the latest transformative advancement is allowing Americans to access their wages easier and faster. While early access to direct deposit payroll has been available through some banks and credit unions for several years, new earned wage access platforms and powerful payment rails are creating new options for employees by enabling money to be moved instantly from one bank account to another.
For millions of working Americans, the challenge of paying bills often comes down to the timing of when they receive their pay. The traditional one-week or two-week payroll cycle can present challenges to people with tight budgets. In our immediate digital age, some employees may view these payroll cycles as slow and inefficient — similar to traversing the country pre-1869. For many workers, there can be great benefit to immediately accessing a portion of their earned pay. The world doesn’t stop between paychecks. Bills need to be paid on time.
Earned wage access can empower employees to access a portion of their earned pay when they need to make purchases or pay bills. It may also help them avoid using high-cost, short-term credit to meet immediate cash flow needs.
The Consumer Federation of America, an association of non-profit consumer organizations, reported that one in five borrowers of a payday loan end up defaulting on their balance. This often results in a damaging cycle where individuals are unable to repay their loans and are forced to continue borrowing. The Consumer Financial Protection Bureau (CFPB) reported 12 million Americans take a payday loan each year and the loans often carry high interest rates. This showcases the value of earned wage access as a means of improving cash flow and potentially decreasing the need to use expensive forms of short-term credit.
This can be a game-changer because, according to the CFPB, pay period fees associated with payday loans are typically $15 per $100 borrowed, equivalent to an annual percentage rate of 400% — with some as high as 600%. With difficulty paying the payday loans back, employees become engulfed in the vicious cycle of debt.
Earned wage access providers sometimes charge fees for services, which are often paid by the employee, as well. Consumer financial education is important for all consumers and those who use an earned wage access tool need to be aware that even small service fees can add up over time.
The benefits of earned wage access may extend beyond workers. Financial institutions and billers may also reap the rewards of the influx of cash into the hands of employees before payday. For billers, it may decrease the number of late payments because fewer of their customers need to wait for a scheduled payday to make a payment. For financial institutions, employees may choose to redirect the money that previously went to paying late fees, overdraft fees or short-term forms of credit to make ends meet by opening a savings account. While Americans want to save more according to a recent Pew Research study, the stark reality is that nearly 3 in 10 (27%) Americans don’t even have a savings account.
The marriage between the innovation in payments rails and earned wage access can have some of the same positive effect on local communities and workers as did those railroad tracks in 1869. Instead of moving lumber from the forests of Oregon to the factories in New York, money moving into workers’ hands at the press of a button can keep millions of workers on the right track to financial wellness.
Elena Whisler is the SVP of sales and relationship management at The Clearing House, a U.S.-based payments system operator that clears and settles more than $2 trillion each day through wire, ACH, check image and real-time payments through the RTP® network. Elena is responsible for overseeing the customer relationship, sales and marketing teams to manage and expand its client base across
Veteran bank executive Rob Nardelli serves as Director of Commercial Banking for DailyPay, a leading financial technology company creating groundbreaking payments innovation. In his role, Nardelli serves as a sales lead for channel top partnerships.