In case you’re out of the loop, payday advance schemes are a way for employees to access some of the cash that they’ve earned before payday. In most cases they’re not run directly by the employer, but by third party organisations that work with the employer to give people a way to withdraw a proportion of their salary throughout the month.
It’s a simple idea that requires businesses to opt in so that their staff can benefit. You usually get access to an online app that will show you how much you’ve earned and make it easy to draw some of that money into your bank account.
What’s the issue?
The financial conduct authority (FCA) has not condemned the idea, but they have raised several key concerns. Currently they believe that there is a lack of regulation and a lack of transparency about costs, which could mean these schemes are riskier than they seem.
They’ve also questioned whether payday advance schemes can really help people manage their finances in the way that they’re intended to. They’re often positioned as a safer alternative to payday loans, which is true in so far as they lack the extortionate interest rates that make payday lending a particularly dangerous form of credit.
However, the FCA have warned that they could still cause similar financial issues long term, by locking people into a cycle where they are forced to withdraw money early each month, becoming dependent on the early access system. Although the fees are lower than payday loans, using the facility too regularly could cause the charges to mount up.
Should they be avoided?
Not necessarily. The FCA are urging caution, but they’re not suggesting that these schemes don’t work for some people. If you are having a financial emergency and your employer offers this facility then it could be considerably less expensive than some of the other options out there. However that’s only true if you’re having a short term, one off problem – not if you need to plug a recurring hole in your income.
For instance, if your payday changes each month then you may occasionally find that it falls after your rent is due. Talking out a salary advance may be less expensive than a costly unarranged overdraft. However, if you need to pay rent before you get paid every month then it would make more sense to speak to your landlord about moving the payment date. That’s the difference between a one-off emergency cost and a long-term issue.
What comes next?
Now that these schemes are on the FCA’s radar, there’s likely to be some kind of follow up, and potentially regulation, which would help customers get a fair deal. Demands from the FCA may include affordability checks, credit reporting and better user interfaces – they’ve already suggested that the tools could introduce notification systems to warn customers if they’re drawing down too often and risking high fees.
This will be no bad thing. We’re always in favour of more financial tools giving people flexibility around their money, however they need to be managed properly and without hidden costs.