The payday debt cycle: what every employer needs to know

Stop Loan Sharks

by Deon Nobrega

Paymenow CEO

Loan sharks have earned their name. For many years, unscrupulous lenders charging high-interest rates have circled employees struggling to reach month-end. The cycle of running out of cash and approaching a lender to make it to the next paycheque has been deepened by Covid-19, which has caused incomes and savings of all South Africans to be stretched.

The result is more than strictly financial – as household debts grow and unsecured loans eat up any available cash, workers find themselves in a debt spiral from which they cannot escape. The psychological effects of sustained elevated stress levels, relationship strain and feelings of losing control over personal finances can be severe.

For workers who are already under pressure, something has to give when an emergency happens. Being unable to afford transport to continue coming to work or to put food on the table introduces a domino effect of consequences that frequently lead to debt traps and poverty.

Intervening to break the cycle of withholding wages until month-end, savings destruction and forced employee exposure to unsecured loans are earned wage access providers, such as Paymenow. While earned wage access is a relatively new concept, these services are growing quickly as employers of all kinds recognise the mutual benefits of changing their patterns of payment.

Here’s how it works

Paymenow, via the mobile app or its website, provides employees with real-time access to wages they have already earned but have not yet been paid. The solution integrates seamlessly with organisational payroll systems and allows employees to withdraw a percentage of their earnings – which is determined by the employer – to be deducted from the salary they will be paid at the end of the earning period.

It’s that simple, and it’s absolutely free for employers. The solution has been purpose-built to allow employees to make ends meet while also providing rewards, reduced fees and benefits for improving financial literacy and managing their wages more effectively.

It does work

Paymenow currently serves more than 40 organisations and 150 000 workers, many of whom used to run out of money for basic expenses before month-end. An impact report conducted in the second quarter of 2021 showed that Paymenow users no longer need to turn to friends, family or loan sharks to get through to payday. From a sample set of more than 3000 employees, the following key statistics showed the impact that earned wage access can have for employees:

  • 81% reported improvements in quality of life thanks to the app
  • 67% experienced reduced levels of stress
  • 40% said they were better able to handle financial emergencies
  • 34% no longer needed to rely on their families for support
  • 27% were finally able to afford to pay household bills without help

There is no catch

The solution seems simple, and it is. Employers are able to set a maximum early withdrawal threshold in any earning period – for example, 25% of salary – to avoid any disruptions to cash flow. Paymenow’s clients have noted that most employees gaining early access to wages use the cash for transport, groceries and medical expenses. These are not expenses that should be attracting loan shark interest rates.

At the same time, Paymenow’s built-in financial education modules help users improve their financial literacy. Customer organisations report significantly reduced requests for short-term loans, absenteeism and staff turnover. These are benefits for both organisation and worker and lay the foundation for more employees to be in a position to save, preserve dignity and reach their financial goals.

Paymenow’s solution is not a loan, but a responsible alternative to credit. It can work with any payroll software application, features bank-grade security and is fully plug-and-play in South Africa, Namibia, Lesotho and Swaziland.

 

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