Providing employees with benefits that actually serve their interests is an essential part of supporting the workforce, and on-demand pay or earned wage access is one way to help workers significantly with their savings. This might sound like an obvious connection when penned on paper, but in many cases, for low-income workers in particular, saving money for future investments is rarely an option when combating immediate and delayed expenses. A new study from researchers at the Korea Advanced Institute of Science and Technology and George Washington University recently explored the effects of on-demand wage access on the financial engagement of low-wage workers, and they found that investing in such on-demand wage access (OWA) systems instills greater autonomy among workers over income use.
A new study shows that earned wage access could help low-wage workers improve their savings habits and secure their financial futures. (Image: Pexels)
What is Earned Wage Access, and How Can It Support Low-Income Earners with Their Savings
Earned wage access (EWA) or On-Demand Wage Access (OWA) is a fintech offering that allows workers to access and use a portion of their paychecks before their scheduled payday. These instant paychecks come at a fee, but they grant employees access to wages that they have already earned for the period, which are then deducted from their regular paychecks. The research, published in the INFORMS journal Information Systems, found that having access to on-demand pay boosted both savings behavior and savings potential for workers, allowing them to find stability with greater ease and also plan for the long term.
The study found that earned wage access or on-demand wage access helped boost monthly savings frequency by 3.7%, allowing financial monitoring to go up by 12%, and encouraging the tendency to set financial goals by 1.3%. These benefits, however, hinged on a measured and modest use of this service, as repeatedly turning to these earned wages limited their ability to set financial goals. Exploring this relationship between instant pay and savings habits, the study rightfully identified “self-empowerment as a key drive of behavioral change.”
How Can We Link Instant Pay with Improved Employee Savings?
Earned wage access has an exceeding number of benefits to offer and has been utilized by employers like Walmart and Uber. Recent movies like Good Fortune have made references to the struggles of gig workers who do not have access to their earned pay immediately as evidence of a current gap in modern-day operations. More importantly, the regular complaints and struggles of workers caught in tough spots should suffice in convincing us that there is a need for better pay structures. Better pay scales may be the ultimate goal, however, in the present, instant pay can be the solution to altering financial behavior.
Services for earned wage access eliminate the need for offering differential pay schedules. They also restore some degree of independence to earners who can determine when they access their pay and how they put it to use. Autonomy allows for greater planning, and employees who have access to instant pay can determine their own savings habits more freely. This prevents immediate expenses from building up, like a medical fee or another expense that is better served by immediate payments. However, this instant withdrawal comes with risks, which some believe outweigh its benefits.
Why Is On-Demand Wage Access a Controversial Concept?
Frequently turning to the OWA system to withdraw pay can cause employees to spend more impulsively rather than saving and planning ahead for their expenses. This can result in a dependence on a system that hurts workers in the long run, leaving them with limited funds for major payments like rent and electricity bills.
Additionally, to access these instant paychecks, employees also have to pay a fee to withdraw in advance. Many organizations see these Earned Wage Access systems as a way for financial institutions to add up the fees for unsuspecting users, many of whom do not realize how much they might end up spending on the process of frequent withdrawals. The more employees become dependent on these systems, the more they stand to lose in the long run.
While these disadvantages are certainly worrying, this desire to decide for workers on their behalf can be problematic as a practice.
Should Earned Wage Access Systems Be Used by Employers?
Self-empowerment and independent planning are a big part of navigating the realm of financial security, and instant pay for low-wage workers returns this independence to them. For employers who are concerned about EWA systems and the detrimental effects they can have on savings, offering financial education and financial planning tools can serve as support systems to uplift the workforce.
Employees prefer to be trusted with their own financial futures, and most are inclined to ensure a stable future for themselves and their families. Workers living from paycheck to paycheck are rarely afforded the luxury of choice and thus find it harder to break out of the cycle when all their bills and expenses pile up until payday. Even a brief stint with falling short on payments or being hit with late fees can cascade into greater incidents, but occasionally accessing earned wages can help prevent such incidents from occurring and escalating into bigger issues.
While EWA systems have a role in improving their offerings to ensure they aren’t taking advantage of their users, employers can also take their time to teach workers about the downsides of frequent withdrawals to keep them alert to the risks that await.
What do you think about Earned wage access and the link between better savings prospects? Share your opinions in the comments with us. Subscribe to The HR Digest for more insights on workplace trends, layoffs, and what to expect with the advent of AI.
