Concerns Emerge of Unregulated Early Pay Plans Offering Financial Wellbeing

Despite optimistic employment stats, the data beneath the headlines paint an entirely different narrative.

According to the Office for National Statistics, around 9 million people had to borrow more money than usual due to the pandemic.

Unemployment rates are projected to rise due to the termination of the government’s furlough program, which has preserved about 11 million jobs.

You can use an Employer Salary Advance Scheme (ESAS) to get more cash if your financial status has gone down.

Employees who can’t wait until the end of the month to get paid are turning to Earned Wage Access (EWA) schemes, most commonly known as wellbeing plans—enabling employees to receive their pay earlier. Not all of the money can be taken out; however, most organisations will let you take out 50% of your income early for a modest charge.

Workers can receive up to 50% of their salaries in advance by paying a £1.75 fee to Wagestream, a well-known company in this market.

A new salary advance scheme has also been launched by the financial app Revolut. According to the website, you can use it as an alternative to high-cost payday lenders, and problematic Buy Now Pay Later services.

Businesses are being approached to join the system. For just £1.50 per transaction, the scheme will allow employees to withdraw up to half of their salary earlier.

However, even though these schemes are less expensive than other short-term lending choices, they are full of critics.

In the first place, there are charges for early access to the money, which is usually a transaction fee instead of interest. In addition, most employers don’t run a credit check on their applicants.

The Financial Management Issue 

There is also a broader question of money management. If you need a little more cash and don’t want to use a costly short-term lender and can’t wait until your next paycheck arrives, payday loans could be a lifeline.

Nevertheless, are they only the lesser of two evils? If that same person is already strapped for cash, it will be difficult to budget when they receive their wage on payday, and it’s 50% less. Consequently, they may be forced to withdraw their paychecks early regularly or choose more expensive choices to tide them over until their next paycheck.

According to Rachel Harte, Head of Financial Planning at Claro, this type of facility encourages terrible financial habits by making it too easy to acquire rapid unsecured credit.

She also adds that there are salary advance plans designed to provide employees greater control over their compensation and cash flow, and in some cases, this can be helpful for employees. But, if used as a permanent unprotected credit facility, it may lead to poor financial health and wellness.

Additionally, the schemes are not governed by the Financial Conduct Authority (FCA) or covered by the Financial Services Compensation Scheme (FSCS), which protects up to £85,000 of your money if a business goes bankrupt.

Offering Low-Cost Borrowing 

It was found that unsecured credit schemes can be an affordable option to expensive short-term loans but that they should be used in conjunction with measures that promote sound financial management and budgeting skills.

According to the CIPD, employees can use these programs to deal with unanticipated financial situations and refrain from taking out expensive loans.

But they must be supplied with other measures such as a living wage, an assurance of adequate hours to get a living income, fair compensation, the ability to save money for the future, and emergency assistance, professional advancement, and financial education.

Alternative solutions to salary advance programs are determined by your total financial status and your personal preferences.

There is no better method to cover an unexpected expense than using your own money and existing reserves. Unfortunately, this is not an option for many due to the recent economic climate.

For the most part, credit cards with zero-per cent-interest periods are the most cost-effective. The only way to benefit from them is to pay off your credit card debt before paying interest. It’s also true that the best products are only available to those who have excellent credit scores.

Overdrafts and payday loans are the most expensive options, and they can lead to serious debt problems for those who use them.

Denzil Otieno

Denzil is an experienced writer and a procurement graduate on a mission to eliminate poor regurgitated content while advocating for top-notch digital content. When he’s not writing, Denzil joins the rest of the world watching the English Premier League games.