How Earned Wage Access Can Usher In The End of Predatory Lending

Can you handle an unplanned expense with your salary? 

According to a recent study by E&Y, only 29 per cent of urban Indians have reported the ability to meet unplanned expenditures with their salary, while the majority still live paycheque to paycheque.

This essentially points towards gaps in financial resilience in the backdrop of the pandemic, more significant in emerging economies when compared to developed nations.
 
To make ends meet between paycheques, many are looking for alternative finance options, turning to loans from friends and family and high-interest payday loans. A more cost-effective alternative of liquidity reserve has since emerged in the form of Earned Wage Access (EWA). 

Let’s take a look at how the solution can enable comprehensive financial wellbeing. 

Do We Really Understand Payday Loans?

Globally, payday loans have become synonymous with predatory and high-risk lending. 

These are short-term unsecured loans of about 2-4 weeks—just long enough to cover expenses until the next payday; the catch being astronomically high interest rates that average well over 400 per cent APR (Annual Percentage Rate).

In India, the interest rates for payday loans can be as high as 2 per cent per day. The number by itself may not seem so big, but the APR can range from 36-730 per cent, depending on the loan tenure. On the other hand, APRs for regulated credit systems like loans and credit cards are usually between 12 and 30 per cent.

To put this in perspective, if you borrow Rs. 10,000 at 2 per cent interest per day, you end up paying Rs. 2,000 in interest over 10 days, along with the principal amount. For people who are already struggling to make ends meet, predatory lending pushes them into a vicious, inescapable debt cycle. 

The E&Y study, cited earlier, also notes people earning less than Rs. 15,000 are six times more likely to fall into severe debt.

Regulators worldwide are stepping up measures to limit the impact of high-risk lending. The Reserve Bank of India (RBI), for instance, is working on framing an anti-predatory lending policy.

Despite these measures, the unsecured loan industry is booming, intensifying financial distress for common Indians. 

Earned Wage Access - Affordable Alternative

Freeing up employees and employers from the traditional pay cycle, earned wage access helps disrupt predatory lending models. Earned Wage Access (EWA) or On-Demand Pay empowers individuals by giving them access to a portion of their earned, but unpaid salary any time before their payday.
 
The same allows employees to draw their earned pay instead of relying on short-term loans to comfortably cover mid-month unplanned expenses. It makes earned salary available to employees in real-time, and on demand, giving them instant access to ready liquidity any time of the month. Paying only a nominal transaction fee (that is a fraction of the interest on payday loans), earned wage access can provide a pathway to financial stability.

Small Steps, Big Gains

When implemented correctly, the benefits of earned wage access are readily apparent. Research indicates nearly 43 per cent of earned wage access users are able to cover all their expenses with their monthly salary, and one in every two users feel optimistic about their financial situation. 

Furthermore, EWA is an employer-backed initiative – the solution is typically free for employers and has no impact on their cash flow. The unique feature not only allows organisations to contribute towards the larger workforce’s financial wellness, but by breaking the pay cycle, employers are ensuring employees can build their financial resilience.

Greater Financial Freedom

As companies globally pay closer attention to their employees’ needs and resort to technology for solutions, ‘earned wage access’ is poised to emerge as a popular and valuable product to modernise employee financial wellbeing. Adding the on-demand feature to one’s daily lives, earned wage access can radically transform the landscape of financial freedom for Indians.

The author is CEO and co-founder, Refyne

(Disclaimer: Views expressed are the authors’ own, and Outlook Money does not necessarily subscribe to them. Outlook Money shall not be responsible for any damage caused to any person/organisation directly or indirectly.)