Revolut has recently launched a new product called Payday, which is an “Earned Salary Access Scheme” that allows customers to access up to a maximum of 50% of their monthly wages as they are earned (also known ESAS).
It’s free for employers to join the scheme (and it doesn’t affect payroll runs); customers are charged £1.50 per transaction and Revolut covers the amount of the salary accessed until the customer is paid on their usual salary date.
Wagestream also offers a similar product which is already being used by Bupa, Halfords, Coop and others.
What is ESAS for?
The scheme is designed to help customers in times of short-term cashflow problems.
For example, if your car broke down a week before payday and you couldn’t cover the repair costs from existing funds, you could access up to 50% of the salary you’ve already earned, but not yet been paid, to pay for the repairs.
Is ESAS regulated?
No.
The Woolard Review (which sets out how regulation can better support a healthier unsecured lending market) stated that “a sustainable credit market needs more alternatives to high-cost credit.” ESAS would certainly seem a much more affordable and viable option.
However, ESAS is not a form of loan or credit so it is not subject to credit regulation. There is no registration on a person’s credit record nor are there, currently, any affordability checks. This raises a cause for concern if an organisation advances up to 50% of the salary, but the remaining 50% is not sufficient to cover routine direct debits and standing orders, which are probably timed to coincide with the monthly salary date. Creditors should beware, as they will be impacted if there are insufficient funds to cover their direct debit or standing order as a consequence of the earned salary advance.
On the other hand, Wagestream says that the monthly pay cycle “exposes 3.1 million people in the UK to payday lenders every year” however the ESAS provides customers with the liquidity to access their own funds, and therefore removes the reliance on costly payday lending.
So, is ESAS a good or bad move?
As you’d expect, there are differing views on this type of product:
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Pros
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Cons
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Why shouldn’t consumers have flexible access to money they have already earned?
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Consumers could become trapped in a cycle of early access to their salaries and therefore be no better off and will still have reliance on payday lenders.
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Consumers are generally responsible and would be much more careful using their actual salaries, compared to how they would use credit.
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Lack of regulation could encourage firms providing this service to charge high transactional costs.
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Wagestream reports that the hospitality industry is recruiting 27% faster because of the ESAS service.
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Lack of affordability checks could result in customers falling behind on priority (and other) debts.
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ESAS apps allow customers to track their earnings throughout the month and provide financial tools available to help save and build confidence.
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This type of instant, short-term borrowing could mask more serious underlying circumstances.
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Wagestream stated that ESAS has meant 42% of users avoid turning to a payday lender, 37% avoid going into their overdraft and 65% of users cover an unexpected bill with their own wages.
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Undoubtedly, there will be many more companies offering this service and product providers should have a duty of care to their customers. We would expect that as the product matures, so will the safeguards that will need to be put in place to protect customers. Customer vulnerability is high on the FCA’s agenda and given there are no affordability checks and that access to the cash is instant, there should be controls in place to track a person’s indebtedness (are they still using payday lending as well as ESAS, for example?), as well as controls to protect customers who are subject to domestic abuse and forms of financial crime.
On the plus side, providing consumers with the flexibility to be in control of the money they earn and not have to wait a month to access it is a big benefit. Why should people wait for it? Why should people be constricted by “old fashioned” pay cycles?
It will be interesting to see how this product develops, as well as the regulatory landscape around it.
Nick Walsh
Principal Consultant
Arum