The recent publication of the Woolard Review marks a turning point for Employer Salary Advance Schemes (ESAS), the payment innovation sometimes known as ‘On-Demand Pay’.
The Woolard Review is the latest report by the Financial Conduct Authority (FCA) into ‘change and innovation in the unsecured credit market’ and focusses exclusively on Buy Now Pay Later (BNPL) and ESAS services.
In the report, the FCA states that Salary Advance schemes “…have benefits for users. Employees can use them to ‘smooth’ their income throughout the month to better manage regular monthly spending or deal with unexpected or emergency expenditure. Depending on how they are used, they can be a low-cost, easy-to-access alternative for people who may not be able to access mainstream credit. There is no need to actively repay anything at the end of
the month as withdrawals are automatically deducted as part of the payroll process.”
As the maturity of providers increases, this endorsement by the FCA moves Salary Advance Schemes from the periphery to the mainstream of technical innovation in payments. This means that, for employers, it is a case of ‘when’ not ‘if’ to consider introducing ESAS to staff and the debate now centres around the most responsible way to deploy it to the workforce.
New ethical challenges always accompany technological innovation. In assessing the benefits outlined above, the Woolard Review concluded that it had seen no evidence of crystallisation or widespread consumer detriment from ESAS.
It did, however, identify a number of risks associated with its use.
These included the risk of persistent use compounding the problem of short-fall at month end, fees making the service more expensive than alternatives and the ongoing question of who should bear the responsibility for individuals who find themselves in financial difficulty.
There is clear guidance that employers should follow when looking to launch such a benefit:
#1 – ESAS should always be offered as part of a holistic programme of financial health.
Like other forms of health, financial health is a long-term habit, not a destination. Its attainment requires individuals to develop the correct skills, knowledge and attitudes whilst being able to access relevant digital financial products and services.
ESAS can be a valuable stop-gap to short term financial needs but is not a solution to long-term health.
Employers should look to offer a holistic suite of services that include budgeting tools, financial education and, above all, savings and be wary of the hype about establishing new habits while solving the symptom, not the cause. There are no shortcuts to long-term health.
#2 – ESAS providers should not be solely reliant on income from advances
An important corollary to number one is to ensure that the commercial interests of the ESAS provider and the financial health of the end user are aligned. Perhaps surprisingly, this isn’t always the case.
If the ESAS provider’s sole source of income is fees associated with use of the service, it is inevitable they will come under pressure from shareholders to optimise usage. This drive is at odds with a responsible approach to implementation and will ultimately make ESAS part of the problem rather than part of the solution.
Employers should look for providers whose commercial model generates sustainable income from overall engagement with a suite of services that improve a users’ long-term financial health, not just fees from advances.
#3 – Beware of free
The FCA explicitly criticised ESAS providers willing to offer salary advances services at no charge as long as the employer also takes certain other commercial services with the operator, for example, factoring invoices, that have little to no impact on the overall goal.
This brazen attempt to lock in employers will be at odds with their mission to improve the financial health and wellbeing of their staff and should be a cause for concern.
#4 – ESAS providers should adhere to a Safe Use Policy that is shared with employers
The FCA encourages ESAS providers and major employers to draw up a code of best practice for salary advances and, where firms are regulated for part of their activity by the FCA, the FCA should look to formally recognise the code.
With no extant industry code as yet, employers should look for partners with clearly defined policies for both the ‘Safe Use’ of ESAS and mission statements that go beyond commercial gain and shareholder value.
#5 – ESAS providers should work with employers to establish appropriate safeguards
Employers should look for service controls (or ‘safeguards’) that can be configured by the employer and adjusted over time.
Safeguards should be set for frequency of use, percentage of salary that can be advanced and an upper cap for total monthly amount.
#6 ESAS providers should balance end-user confidentiality with a responsible approach to the vulnerable
Any assessment of ESAS must take into account the shortcomings of the status quo.
The continuing success of PayDay Loan providers indicates persistent demand for low value borrowing to offset short-term expenses. Research indicates that part of the appeal of PayDay Loans is their confidentiality and the fact that transactions are conducted in a non-judgemental context.
To this end, it is crucial to respect the dignity of end users and recognise the importance of maintaining confidentiality to alleviate recourse to PayDay Loans.
At the same time, providers should use automated monitoring tools to identify early signals of financial difficulty and proactively reach out to individuals of concern.
In certain circumstances they may choose to limit access to the service but, in the interests of user confidentiality, only share this information with employers in exceptional circumstances.
Conclusion
Pay is foundational to the relationship between employers and employees. It is unsurprising, therefore, that any change to its delivery is viewed with caution. Excessive hubris by some providers of Salary Advance Schemes has undermined the pace of its adoption in the UK.
Despite the recognised benefits, providers must be sensitive to the concerns of employers in respect to the introduction of this service to their staff.
The far-reaching effects of Covid-19 have strengthened the case for greater pay flexibility and most employers now acknowledge the benefits of making changes.
The Woolard Review should give reassurance to employers that ESAS is a beneficial innovation in payments, as long as it is implemented responsibly.
As the cofounder of financial health platform Level Financial Technology, Paul Jackson leads the product, design and engineering teams. Paul is a software product manager with over ten years' experience managing both remote and in-house engineering teams. Most recently, he has worked with seed stage startups, overseeing the design and development of their initial product. Before joining Level, he was Chief Product and Technology Officer for StructureFlow, a legal-tech start-up in London and Head of Product for The Times and The Sunday Times.
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