It was a find—a better apartment, with a lower rent. Amber Thompson jumped on it and gave her landlord 30 days' notice.
Shortly before the 28-year-old Gonzales, La., hospital recruiter was scheduled to move, she found out that her landlord required 60 days' notice. She would have to pay an extra month of rent for her old place on the same day she’d be paying the first month’s rent on her new place, on top of her other bills. Her paycheck wouldn’t arrive in time to cover it all.
Cash crunches such as Thompson's lead many people to pile up credit-card debt, bounce checks, or turn to payday lenders, which charge high interest rates and fees for making loans against your paycheck. The result can be additional fees for late payments and overdrafts in a financial spiral.
Thompson had a further option. Her employer, Baton Rouge General Medical Center, had signed on with a service called PayActiv that lets employees withdraw a portion of the money they earn, as they earn it, without waiting for a paycheck. The transaction fee is $5. Thompson, one of 400 or so employees who enrolled to use the service, walked to the PayActiv ATM in her building and took out $400.PayActiv just won a Best of Show award at FinovateSpring 2016 for its use of technology to ease the "cash flow struggles of working families."
It is one of a raft of young financial technology companies with such names as FlexWage, Activehours, Clearbanc, and Even that were launched to fill a financial gap. Weekly and biweekly paychecks don't fit the way many people work any more. In a sign of the times, ride services such as Lyft and Uber have rolled out Instant Pay and Express Pay services for their drivers.
“Everyone has this mindset that waiting to get paid is somehow good," said PayActiv's chief executive officer, Safwan Shah. "Is waiting to get paid something that can create forced savings, or does it cause problems for low-income people? We’ve done studies to prove that what we are doing is actually helping people save more.”
That doesn't mean having constant access to your earnings is risk-free. Activehours, which lets consumers choose what to pay for transactions through what it calls "tips," helps employees with budgeting, said Ram Palaniappan, CEO. “If you need to spend, you check if there are earnings in the app, and if there aren’t, you need to work more before you spend,” he said. “It’s very much like business, trying to make revenue meet expenses.”
Moreover, the percentage of earnings that employees can take, and how often they can take it, may be limited by employers. For now, Baton Rouge General caps withdrawals at 50 percent of wages earned and a maximum of $500. An employee can’t take out another loan until the first one is repaid out of his or her paycheck.
Other companies may set the limit at 75 percent to 80 percent of earnings and limit the service's use to once per pay cycle, said FlexWage CEO Frank Dombroski. He founded the company after six years at JPMorgan, where he managed the firm's commercial payments solutions business.
The pitch to employers is less financial stress on employees and improved productivity. The service is often positioned as a financial wellness benefit that can increase retention. PayActiv's Shah said being able to tap earnings this way can lead to better financial behavior. He compared it to grazing on food, rather than bingeing.