How does early pay work?
Early pay or daily pay is usually provided by third-party companies like DailyPay and Instant Financial that partner with employers to allow workers access to earned wages.
This isn’t considered a payday loan, according to a 2020 advisory opinion from the Consumer Financial Protection Bureau (CFPB), as long as the worker isn’t accessing more funds than they have earned and they aren’t paying any fees to access these funds.
Instant is designed as a fee-free service and allows workers to access up to 50% of their pay after a shift.
You can make purchases using your Instant card. It functions like a prepaid debit card, so you only have a limited balance at a time and you can’t overdraft. Alternatively, you can transfer your pay over to an external bank account once a week.
Instant Financial CEO Tal Clark says that 50% cutoff encourages financial wellness. “We found that's the right amount to make sure they get to the end of the pay cycle and still have some of their pay left,” he says.
Keep in mind, these companies can still impose fees in some situations, like when transferring money to an external bank account too quickly or too often. With Instant, you'll pay a standard convenience fee of $2.50 per transfer after the first each week. DailyPay charges $2.99 for an instant transfer and $1.99 for a next-day transfer, while Branch charges $0 for a transfer after three days but up to $4.99 for an instant transfer.
Some employers already experimenting with early pay include franchises like Walmart, Kroger, McDonald’s and Wendy’s — as well as companies such as HCA Healthcare, Westgate Resorts and nursing agency IntelyCare.
Walden notes that the retail and restaurant industries are sectors that have struggled to attract workers in the current labor market, so offering same-day pay could be a way of attracting new hires.
There are also other ways for employees to get access to their pay before traditional payday, says Rachel Gittleman, financial services outreach manager for the Consumer Federation of America (CFA).
Some employers make the funds available a day or two early, and some banks allow access to funds sooner than the official pay date via direct deposit.
“I think there's a growing trend of early pay; I wouldn't say that I have seen a growing trend of same-day pay,” notes Gittleman.
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Make Money NowSome experts warn that early access to pay can deplete savings
Early wage access may have some drawbacks if not used responsibly.
“Hourly wage workers tend to have income volatility, and so [early wage access] can serve as an income smoothing tool,” says Gittleman.
However, she thinks there’s serious concern for whether workers who spend their pay today will end up with a hole in next week’s budget. Biweekly pay can force consumers to budget, while early access to pay could entice them to increase their spending.
This concern is backed up by a 2021 study published in the Journal of Consumer Research that found a relationship between increased payment frequency and greater spending, due to the consumer’s subjective perception of wealth.
“If we take somebody who gets paid once a month and give them their pay every weekday, our data would suggest that they would end up spending over $250 more throughout the year, which is more than double what the average American spends on books, newspapers and magazines combined,” Wendy De La Rosa — Wharton marketing professor and co-author of the study — told University of Pennsylvania newspaper Penn Today.
“This has real dollars behind it, and it may have real consequences for consumers’ financial well-being.”
What you need to know before accessing early pay
Gittleman says that every consumer’s financial situation is different, but it’s important to highlight that there are some early wage access products that can be more harmful than others.
Always look for the free option first, she advises. Be cautious of hidden fees, or voluntary tips — which some platforms may encourage instead of imposing a flat fee.
Fees can be difficult to compare across products, but if you look at the interest you’d pay on running a credit card balance or taking out a cash advance, early-pay fees can still be high.
“If you're accessing $50 two days before payday for a $2 fee, that's an exorbitant APR,” says Gittleman.
And don’t forget to save and build up an emergency fund to boost your financial stability.
Clark says that employees should access pay responsibly, but should also have the option for early access available to them if they need it.
“We think we can provide that opportunity for access to your wages, while also putting in guardrails that help build financial responsibility,” he notes.
Gittleman also suggests that employers that offer early access to wages should provide their workers with the financial tools to manage their money.
“I think, really, consumers and employers should view this as like a lifeline — one option when facing economic distress or struggling to make ends meet,” she says.
“But for employers offering this as a benefit, it should be offered within a suite of savings tools and other financial wellness options. So that it's not the only option for consumers.”
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