Advances in technology can very often meet social needs in such an astounding way that we wonder how we ever coped without it.
There are probably hundreds of practical ways that modern medical, communications and banking technologies – to use just three examples – have improved our standard of living in the last two decades. Now, we are entering the age of Earned Wage Access(EWA) that promises to break debt cycles for millions of employees around the world.
To focus on advancements in banking technology, the evolution of digital payments not only eliminated the need to carry, protect and store physical cash, but allowed for people to safely, securely and instantly pay or transact with anyone, anywhere through platforms such as PayPal.
Digital payments technology has become so ingrained in the fabric of our modern economies that, even in developing countries with little to no physical presence of financial institutions, individuals can transact with each other using nothing more than mobile phone numbers. Global acceptance and comfort related to digital transactions has accelerated around the world over the last two years as Covid-19 lockdown restrictions forced people to stay in their homes. There is now literally no question about the digital future and the shape of the financial services industry to come.
At the same time, one of the world’s longest-standing banking norms is being revolutionised by the adaptation of technology to meet social needs. As much as transactions have been made seamless and instantaneous by technology, monthly payment cycles have entrenched destructive debt cycles that force employees to pay back high-interest loans when they are caught short of cash before month-end.
“In a country like South Africa, without a significant savings culture and where the majority of those employed in the formal economy are under persistent financial pressure, the unsecured lending industry has flourished on the back of unsecured loans that are typically taken out to cover living expenses. The reality of many workers turning to loan sharks just to be able to afford groceries is something our policymakers have been wrestling with for years,” says Deon Nobrega, Co-founder and Managing Director of earned wage access organisation Paymenow.
Financial emergencies are the most common reason for entering these debt traps. Even in developed economies such as the United States many employees are living from pay cheque to pay cheque. A BankRate study revealed that just 37% of Americans would be able to cover an unplanned $500 expense.
“Costly loans for workers already on the edge become spiralling burdens of repayments that inevitably result in an inability to save, further predatory lending and employee bankruptcy,” says Nobrega.
Earned wage access works to solve the problem by allowing employees to access a portion of their earned wages at any time during the month. Rather than borrowing from the employer, it means a flexible payment schedule that allows employees to cover financial emergencies or shortfalls and retain financial control while avoiding exorbitant fees.
Not only do employees benefit from the arrangement. Employers typically observe lower rates of absenteeism and turnover, since a reduction in financial distress allows employees to afford to commute to work and build a more sustainable financial position.
“Given South Africa’s problems with getting a savings culture to take root, earned wage access presents a great opportunity to reduce employees’ need to borrow. Paymenow also educates employees in financial wellness and provides rewards for managing their money well, allowing them to take greater control of their finances and reach financial goals, which no amount of regulation of the unsecured loan sector can do,” says Nobrega.
Bryan Habana, Paymenow’s head of business development, says Paymenow’s statistics in South Africa bear out the organisation’s claims that earned wage access promotes financial inclusion – an important social need in South Africa. “An impact report conducted in the second quarter of 2021 showed that users of the app no longer needed to turn to friends, family or loan sharks to make it to payday. Four out of five reported improvements in the quality of their lives and more than two out of three reported significantly reduced levels of stress as a direct result of using Paymenow.”
“Because the solution is not a loan but a responsible alternative credit, and can work with any payroll software application, employers have everything to gain by helping their employees gain financial dignity through earned wage access. Paymenow features bank-grade security and will seamlessly facilitate payments anywhere in Southern Africa without disrupting a business’s cash flow,” Habana concludes.