Make money and get it faster: Instant pay apps give you quick access to wages — but there’s a catch

Sure, birthdays and holidays are great, but if you are living paycheck to paycheck, paydays are some of the happiest days of the year. While many employees wait anywhere from a week to a month to get the money their company owes them, new apps from financial technology startups like DailyPay, FlexWage and PayActiv are giving workers at places like Goodwill, McDonald’s and Uber faster access to wages — sometimes even on the same day they clocked their hours.

With traditional pay cycles, “people put in the hours, but the money is not accessible to them,” Safwan Shah, CEO of payment app PayActiv, said in a phone interview. “Having small amounts of money helps them manage their day-to-day life better. It reduces their stress and they make better decisions.”

Sounds great, right? Proponents like Shah say faster access to wages can motivate hourly workers to put in longer hours (since they’ll reap the rewards more quickly) and can reduce their reliance on abusive payday loans with sky-high interest rates that can leave borrowers in an unending debt cycle. Indeed, taking out a single $100 payday loan for two weeks could eat up more than $130 out of your next paycheck, once you factor in interest and fees. Repeat that every two weeks and you are down hundreds of dollars for the year — equivalent to a full month’s rent for many.

Yet even as same-day pay apps take off — Instant Financial says over 175,000 workers at more than 60 companies currently utilize their Instant service — there are also concerns that the apps encourage people to overspend, leaving them with insufficient funds for basics like rent and car payments.

“To think that they are some kind of magic solution is a mistake. Or to think that they won’t create their own new problems is also a mistake,” John Thompson, a senior vice president at the nonprofit Center for Financial Services Innovation, said in a phone interview.

Here’s what to know about this new class of pay apps — and the major pros and cons of using them.

How instant pay apps work

It can be an awfully long wait until payday if you only get paid a couple times a month — especially if you’re among the three out of four Americans who said they were living paycheck to paycheck in 2016.

And while higher earners are more likely to have ways to make ends meet until their next direct deposit — such as by using credit cards or even borrowing from friends or family — when you’re a minimum-wage worker, your only option to get cash fast might be payday loans with high interest rates. Part-time workers may face similar hurdles paying bills if their hours vary so much that they get an unexpectedly light paycheck right before rent is due, for example.

The new breed of instant pay apps aim to give you access to your wages as close to when you earn them as possible. “For the employee, it is about helping them manage their cashflow gracefully and cost-effectively,” Frank Dombroski, CEO of FlexWage, said in a phone interview.

Each service works a little differently. With DailyPay — which is used by hourly workers at DoorDash delivery service, the Maids residential cleaning service and Kellermeyer Bergensons Services facilities management firm — employees can access 100% of their accrued and unpaid net wages for a fee of $1 to $3 per transaction. The money can be deposited directly into their bank account or put on a prepaid card or payroll card on the same day. “You can get it instantly, every day,” DailyPay CEO Jason Lee said in a phone interview.

At the Maids, which has some 150 locations across the country, about 250 workers use the service, employee experience manager Zara Black said. The average withdrawal is $65, which workers often use for bills and unexpected emergencies like a flat tire or repairing their roof. Workers typically withdraw funds one to two times a week.

“The employees love it. It is a really good recruiting tool,” said Black, who added that most team workers are full time employees working 35 hours a week and received one week of paid time off after their first year. (Any additional time off is unpaid.)

Another app called Earnin lets workers withdraw up to $100 a day and $500 per pay period in advance of receiving their regular paycheck. While it charges no fees, it does give workers the option of “tipping.” The service then withdraws funds directly from your checking account after you’ve been paid.

Other instant pay apps give workers more limited access to their funds or charge higher fees. FlexWage, for example, only lets workers tap up to 70% of their unpaid wages between regular paychecks (for a $3 to $5 fee per transaction). PayActiv gives them access to 50% of their net pay for every 30 hours worked for a $5 fee.

And Instant Financial lets employees withdraw half their daily net pay every day at no cost at all: Instead they charge employers $1 per month per employee enrolled in the program.

What are the pros of instant pay apps?

Employers like instant pay apps because they say it helps to reduce absenteeism. Rebecca Kyeretwie, a manager at a McDonald’s in Tampa, told the Wall Street Journal that she used to have to find replacements to cover about 10 hours a week when others did not come to work, but now that employees can get paid right away, “people are begging to come into work now.” (Hourly workers typically receive little to no sick or vacation pay, with a few exceptions, so if they miss a work because of the flu, they don’t get paid.)

Likewise, DailyPay reports that 73% of its users say they are more motivated to come into work because of the app, Lee said. The company also surveyed its users about what they use the funds for and found that 94% use it to pay rent, cell phone or utility bills.

Getting early access to your pay can save you money when the alternative is paying a $33 overdraft fee because you’re $10 short to cover your gas bill, or worse, taking out a payday loan, which often has an annual average interest rate of over 300%. Since you have already earned the money, it’s not a loan and you never have to pay any interest — although some instant pay services charge a small, one-time fee for sending you the funds before payday.

There is also some academic research supporting the apps. A 2017 working paper by Todd Baker, a senior fellow at the Mossavar-Rahmani Center for Business & Government at Harvard Kennedy School, found that financial technology products, including FlexWage and Pay Activ, “provide financial benefits to employers through reduced employee financial stress, improved employee engagement and satisfaction, lower turnover and lower absenteeism.”

Another paper by the American Institute for Economic Research reached similar conclusions, noting that instant pay apps like PayActiv serve as “a benefit that makes working at their company more attractive.”

What are the cons of instant pay apps?

Receiving your pay immediately after you earn it may seem perfectly fair and reasonable, but it could also get you into financial hot water if you don’t plan out your expenses for the month.

Specifically, getting access to your pay early could lead you to spend more than you had intended, leaving you short at the end of the month for essential bills like rent, student loans or utilities.

Hardee’s shift manager Barbie Roland told the Wall Street Journal, for example, that her biweekly paycheck shrunk from $900 to $500 when she first started using the Instant Financial app. “I thought, did I really press accept that many times?”

That kind of mindless spending is what worries consumer advocates. “It’s cheaper than a payday loan, but I fear that people get into the habit of spending their wages early and end up paying to access their wages on a regular basis,” Lauren Saunders, associate director at the National Consumer Law Center, told NerdWallet.

And while it’s logical to get your pay as soon as you’ve earned it, “in some ways, employers are actually helping you save money by not paying you until the end of the month,” New York University economics professor Jonathan Morduch told the Journal.

Much like credit cards can tempt you to spend money you don’t have, seeing a high balance on your debit card or in your checking account can tempt you to use money that you’d be better off putting in an emergency fund, savings account or retirement plan.

The genius of many 401(k)s, for example, is that they invest a small portion of your earnings before you ever see it. Research indicates that when contributions to such plans are automated, workers save more than three times as much as when they’re not. (Even better, the money you invest lowers your taxable income, which can also bump you to a lower tax bracket.) And considering that most Americans aren’t saving enough for retirement, any behavioral nudges to get us to do so can only help.

Saving for your golden years may feel like a luxury when you barely make enough to cover basic necessities, as is the case for many of the low-paid, hourly workers who use instant pay apps. But even setting aside $100 a month at a 5% annual interest rate will get you to about $15,000 in 10 years — or more than $150,000 in 40.

At the very least, workers receiving pay before their regular pay cycle should consider creating a monthly budget that helps them figure out how cashing out pay early to cover one bill will affect their ability to pay others down the line — as should anyone who wants to stay on top of their finances.

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