How to Choose the Best On-Demand Pay Solution for Your Business

For better or for worse, on-demand pay solutions are rapidly gaining popularity across multiple industries.

man with phone and credit card
What is an on-demand pay solution?

On-demand pay solutions are any electronic method or financial payment platform that allow employees to access earned funds from their employers “at will” rather than exclusively during designated pay periods (usually bi-weekly or monthly). Many of these solutions are available as third-party apps or software. However, some employers are starting to develop their own internal payroll solutions to facilitate the delivery of these “instant-funds” to the people they employ.

According to Brendan Miller, Head of Product Marketing at the global FinTech Rapid, “Whether it’s a direct bank transfer or a payout to a debit card, on-demand, and real-time payments are now the norm across much of the globe. On-demand payments have a direct impact on user retention and go a long way in creating trust and preference with your customers and partners.”

What are the pros of an on-demand pay solution?

As the name would suggest, on-demand pay solutions can have multiple benefits for both employers and employees alike. One one hand, employees get more agency over their hard-earned dollars and can access emergency funds in the event of an unexpected expense or a medical emergency. This is specially important to people in the workforce working paycheck to paycheck, which is nearly 50% of all American workers according to Forbes.

Shockingly still, 53% of those Americans in the quoted research study claimed that they didn’t have an emergency fund to help keep them afloat during hard times. The average United States worker is likely to fall victim to predatory payday lenders or high credit card interest rates if other short-term payment options — like on-demand pay solutions — aren’t available.

Given the job market volatility of 2020 caused by the current global pandemic, it’s more important than ever for employers across the board to offer solutions that address the cash-flow needs and concerns of their employees — particularly in industries that rely heavily on entry-level, freelance, or low-wage workers. By reducing the financial stress they feel in between pay periods, employers can increase retention, boost loyalty, improve employees’ health, and enhance overall productivity. According to EY’s 2020 Employee Financial Wellbeing research study in the U.S. and United Kingdom, the estimated annual cost to employers in lost productivity as a result of financial stress (which impacted 72% of workers at least once a year) is over $300 billion.

Data from EY’s “On-Demand Pay: payroll that works for all.”

Given the job market volatility of 2020 caused by the current global pandemic, it’s more important than ever for employers across the board to offer solutions that address the cash-flow needs and concerns of their employees.

What are the cons of an on-demand pay solution?

While many HR professionals and financial institutions champion the implementation of on-demand pay solutions, others are more skeptical due to the potentially detrimental and long-lasting effects on a growing number of people trapped in a cycle of poverty. Instant-gratification solutions are becoming the norm in our tech-driven world, but they can have serious ramifications come payday for employees who struggle with addiction, impulse-control, or who are not very good at managing their personal finances.

On-demand solutions also represent a significant cost (upfront and per transaction) for the employers interested in implementing them, with the highest coming from custom internal solutions and the lowest from contract-based software integrations with third-party providers. Additional upgrades to payroll and real-time hours tracking solutions will be necessary for the success of these programs since the system needs to be able to quickly calculate how many funds an employee has available to them in real-time, making the technology impractical for smaller or medium-sized companies.

It’s also worth mentioning that employers can mitigate or downright eliminate these cons by implementing strategic rules that help more than they hinder, such as by limiting withdrawal amounts to less than 50% of a period’s pay or by covering the transaction fees for a fixed number of transactions per year before passing on the responsibility to employees. As in most things, research is key to determine the best solution for any company or industry.

What industries or what type of employees like on-demand pay solutions?

The gig economy is booming and the platforms that support it provide workers flexible alternatives to rapidly disappearing full-time positions as well as a greater diversity of payout options.

Gig economy workers, freelancers, low-wage, and/or hourly workers in high-turnover industries (such as the restaurant and service sectors) are the groups most likely to use and benefit from on-demand pay solutions. The gig economy is booming and the platforms that support it provide workers flexible alternatives to rapidly disappearing full-time positions as well as a greater diversity of payout options.

But they’re far from the only ones with potential interest in these solutions. The EY study findings compare workers’ likeliness to withdraw money early in different income brackets:

Data from EY’s “On-Demand Pay: payroll that works for all.”

And the demand for on-demand payments will likely grow from both sides. Approximately 30% of individuals from the EY study would be “likely or very likely” to use some form of on-demand pay if it was offered by their employer, and about “25% of payroll professionals state that on-demand pay is a must-have solution for improving the employee experience” according to another Bloomberg cited survey.

So be sure to look into this trend and consider the tremendous value it could bring to your organization in the short and long term.

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