How can on-demand pay benefit your employees’ financial wellness?

Today, 4.4 million households in the UK are experiencing serious financial difficulties, and nearly half of all UK adults worry about money every day. Learn more about how on-demand pay benefits your employees’ financial wellness in multiple ways and represents an important employee benefit.

Most people in the UK are now feeling the squeeze of the cost-of-living crisis. This is likely to worsen when we turn on our heating when autumn arrives. 

In the UK, 60% of people say they run out of money before payday. This is a clear indication that employees are struggling with low levels of financial wellness. 

In response to the growing need to support employee financial wellbeing, more employers are deciding to include on-demand pay as part of a holistic wellbeing strategy.

What financial struggles do employees face?

The benefits of on-demand pay can help employees overcome financial struggles, such as:

1. Bill payments don’t fall right after payday – they’re scattered throughout the month.
2. Employees have to foot the bill for business expenses until they’re reimbursed (weeks later).
3. Loans for short-term cash shortfalls are expensive and trap people in debt cycles.
4. Unplanned expenses happen to everyone, even the most financially capable.
5. Many people lack comprehensive financial management skills.

Let’s explore each of these financial struggles and delve into how on-demand pay can help and boost their financial wellness.

Bills are scattered throughout the month 

Bills usually arrive at different dates throughout the month, often long after payday has been and gone. This means that employees have to ensure there are sufficient funds in their accounts at precisely the right time.

Some people plan ahead for bills by transferring money into a separate account to make sure they don’t spend it. However, many people don’t organise their finances in this way for a variety of reasons. 

People can be too busy juggling day-to-day matters to sit down and plan their outgoings. Or they may be too scared to take note of their outgoings because they’re afraid of what they’ll discover.

For those who do budget and set aside money for bills, there are still challenges. With the current energy crisis, we don’t know exactly how much our bills will be each month. This makes this expense in particular increasingly harder to plan. 

Employees can align their income to their expenses using on-demand pay 

With on-demand pay, employees have more flexible access to their earnings and can align it to their expense dates (i.e. the dates they need to pay for bills and other expenses). 

On-demand pay allows employees to access their salary immediately without waiting for the next payday. This means they can simply transfer funds for bills as and when they need them. 

Employees can typically access up to 50% of their gross earned salary and will get paid the remaining portion on their usual payday. So employees won’t be left with nothing come payday. 

Employees wait weeks for business expense reimbursements

Lots of employees are expected to fork out for business expenses during the course of the month. The issue comes when those employees have to wait weeks to be reimbursed by their company payroll, putting an added strain on their finances.

Examples of business expenses include paying for fuel, train tickets, food when on a business trip, tickets for events, work-related subscriptions and more.

These expenses can place employees under insignificant financial stress. Especially when expenses are unplanned (for example, a last-minute business meeting in another town). 

Employees can use on-demand pay instead of savings to cover business expenses

Instead of using their savings to pay for a business expense, employees can transfer the amount they need using on-demand pay. They can pay for the expense without dipping into their savings and having to save money from their last pay cheque. 

This gives employees the peace of mind that they can access funds for a company expenses when they need it, easing financial stress associated with depleting their savings. 

Loans are expensive and can be debt traps

With almost two-thirds of people running out of money before payday, demand for short-term loans and other means to access extra funds is high.

However, once people start taking out expensive loans to see them through, they can become trapped in a cycle of long-term debt. They borrow to pay for something, then find they need to borrow again to pay back the original loan. 

Options to access extra funds include overdrafts, credit cards, and payday loans. However, the options for borrowing money to cover shortfalls are expensive:

• Overdraft interest rates can be around 40%. 
• Interest rates on a typical credit card are around 22.8% APR (APR stands for annual percentage interest rate). 
• Payday loan interest rates can be up to 1,500% APR. 

Another avenue that many people resort to is borrowing from family or friends. Understandably, most people are reluctant to do this. That’s probably because 55% of people don’t want to share their money worries with others.

Employees are not borrowing money when they use on-demand pay

Unlike loans, on-demand pay isn’t a form of borrowing. On-demand pay is a more cost-effective and safer alternative to overdrafts, credit cards, and payday loans because:

• On-demand pay is not a loan so there is no interest to pay.
• There’s no impact on someone’s credit report or credit score when they use on-demand pay (unlike credit cards and payday loans). 
• There is a low-cost, transparent fee of 1% (min. fee of £1 applies) of the amount of on-demand pay transferred.

Unlike confusing APR rates that credit products charge, on-demand pay is transparent about how much users pay. In the app, Openwage users can see what the fee will be to transfer their salary before they transfer it. Plus they can see the total fees for that month (where the user has taken multiple transfers). 

There’s also a cap on how much salary a user can transfer when using Openwage. Typically, this is up to 50% of their gross earned income, but it can be lower. 

Unplanned expenses happen to everyone at some point

No matter how good at budgeting and financial management you are, unexpected things can happen that result in unplanned expenses. For instance, you may need emergency dental work, your car might need repairs, or you might have a parking fine to pay. The list goes on. 

A quarter of all households in the UK don’t have savings to fall back on, and 11.5 million people have less than £100 in savings. Those who do have savings may be reluctant to use them because they worry that if they start down this road, they’ll have nothing left. 

Employees can handle unexpected expenses more easily with on-demand pay

It’s near impossible to eradicate the possibility of unplanned expenses. But on-demand pay means employees can cope with such expenses without dipping into their savings or resorting to high-cost loans.

So if a financial hurdle comes along like an urgent repair to their car, they can pay for their car to be fixed immediately and carry on enjoying life, instead of having to wait until payday.  

The benefit of this is that employees with access to on-demand pay can stick to their savings habit and therefore feel more in control of their money. Having a sense of control over money is an important factor in achieving financial wellness. 

A lack of financial management skills leads to financial stress

Just 52% of people aged 7-17 say they’ve received some form of financial education. This means that a significant proportion of the population is growing up with no idea how to manage their money correctly. 

Low levels of financial capability can translate to:

• Difficulties with budgeting – some people don’t know how to plan their expenses so their money stretches for a whole month.
• A ‘live for today’ mindset – this often applies to younger people earning their own money for the first time. In a report by KPMG, 23% of UK people spend half their salary on payday.
• Dependency on payday loans – borrowers can quickly find themselves trapped in a debt cycle they can’t easily escape.
• Spending money fast – it’s so easy to spend money quickly and with little thought. Online stores target us while we’re online (including social media), causing many of us to spend more than we’d like. 
• Not checking bank balances – only 21% of people check their bank account every month. If someone doesn’t know how much money is in their account, they’re more likely to accidentally go overdrawn or have their card declined while shopping. 

On-demand pay is a useful financial management tool

On-demand pay gives employees greater control over their earnings. They can choose their pay frequency according to their needs. 

For example, if an employee has all their bills coming out of their account in the third week of the month, they can transfer what they need right before the bills are due. That means they don’t have to worry about making their monthly pay cheque stretch for four whole weeks.  

In addition, on-demand pay can help prevent the ‘payday millionaire’ mindset. Since people have access to up to 50% of their salary when they need it, they’re less likely to go on a once-a-month spending spree. 

Discuss the benefits of on-demand pay with us

Increasing numbers of companies are bringing flexibility to the way they pay their employees by offering on-demand pay. But it’s not just employees that benefit. 

On-demand pay is completely free for employers and can even reduce business costs associated with financially stressed employees. 

Openwage is quick and easy to set up and we’ll guide you through every step. Request a demo or get in touch with us to discuss how on-demand pay could become your newest employee benefit.

The information in this article is for general information only. It does not constitute professional advice from Openwage. Openwage is not a financial adviser. You should consider seeking independent legal, financial, taxation or other advice to check how the information in this document relates to your unique circumstances.