Workers may be too scared to tap early-paycheck cashouts if they think their employer is watching. Here’s how players like DailyPay and ADP are making privacy a priority.

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Financial wellness is a sensitive subject for many, and employees are unlikely to use an on-demand pay product if they feel their employer is able to see their activity.

  • Earned wage access — the ability to draw on earned wages between paychecks — is quickly becoming a table stakes employee benefit. 
  • Both point-solution startups and payroll providers are offering employees the ability to draw on wages between paychecks, helping users avoid late payments and overdraft fees.
  • But personal finances are a sensitive subject for many, and employees are unlikely to tap on-demand pay if they feel their employer is able to see their activity. 
  • Startups and payroll companies alike have weighed these concerns, and designed their apps and platforms so employees feel comfortable using their products.
  • Visit Business Insider’s homepage for more stories.

Earned wage access — giving employees access to their wages between paychecks —  has become a growing trend in recent years.

After the initial success of startups like Earnin and PayActiv, more established payroll providers like ADP and Gusto have begun to dip their toes in the EWA waters.

The idea is that by drawing on a portion of wages before payday to cover an expense, employees avoids costly fees. 

Nearly 70% of Americans said that a one-week delay in their next paycheck would make it “very” or “somewhat” difficult for them to meet their current financial obligations, according to a survey published in September from the American Payroll Association. 

And for those who do live paycheck-to-paycheck, bank fees add up quick. 

US banks collected over $11 billion in overdraft fees in 2019, according to the Center for Responsible Lending. And the vast majority (84%) of all overdraft fees were paid by just 9% of account holders. On average, that group carries a balance of less than $350. 

However, for all the benefits EWA can offer employees, some are still hesitant due to concerns around privacy and sharing information about their financial wellness with their employer. 

Jeanniey Walden, chief innovation and marketing officer of DailyPay, which partners with employers to offer EWA to employees, said potential customers have previously voiced privacy concerns to her.  

“One person said, ‘I don’t use DailyPay because my HR manager told me about it, and I’m afraid if I use it, she’s going to know the financial troubles that I’m in. I don’t want anyone to know about that,'” Walden told Business Insider. 

Third-parties and payroll companies are designing around perceived privacy concerns

The EWA space has evolved in recent years, with a variety of startups and payroll providers offering slightly different versions of on-demand pay.

Some startups, like DailyPay and PayActiv, partner with employers to offer the product, integrating with payroll systems. Others, like Dave and Earnin, market directly to consumers, using timesheets and location data to verify how much employees have earned. 

And now, payroll companies themselves, like ADP, Gusto, and Square, are getting in the mix as earned wage access becomes more of a table stakes employee benefit.

Read more: Gusto, a $3.8 billion small-business payroll startup, is muscling in on fintechs like Earnin by adding a feature to let workers get paid early 

Behind the scenes, providers of EWA services said access to employee data to draw on earned wages is secure and private. But that doesn’t mean there isn’t room for mis-perceived privacy concerns on the part of employees. As a result, insiders said it’s key for any EWA provider to design a products that ease those concerns.

Leveraging a third-party brand is one way to increase employee comfort that their employers aren’t monitoring their behavior. 

While DailyPay is integrated with an employer, the approvals and cash flow needed to offer the service are managed outside the employer’s view. 

“If it’s being managed through DailyPay, it’s a third party. Nobody knows what you’re doing inside your company,” DailyPay’s Walden said.

Offering a separate app helps, Walden added. Similar to a bank app a customer might use, DailyPay users perceive it as separate, not an extension of their employers’ systems.

Read more: Payroll giant ADP is piloting an earned wage access tool as it looks to get in on the paycheck-on-demand frenzy

Payroll providers who offer EWA are particularly sensitive to customers’ concerns around sharing information on their personal finances. ADP, for one, is piloting its own version of on-demand pay. The payroll giant already offers an employee-facing HR app.

When it was building out financial wellness tools, ADP decided to build an app separate to the benefits-related interface to help curb perceived privacy concerns.

“People tell us that they don’t want employers to know what they’re doing with their money or how they spend their money. That’s personal,” Belinda Reany, Division VP of employee financial services venture at ADP, previously told Business Insider

Gusto, the $3.8 billion payroll and benefits startup, is also entering in the space, including an on-demand pay feature in its new digital wallet. When an employee uses the cash out or savings features in the Gusto Wallet, there aren’t any approvals or notifications sent to employers. And an employee’s Gusto account doesn’t ever expire, meaning they can keep using it even if they work for an employer that doesn’t use Gusto.

Gusto also does not share data with third parties for marketing purposes, according to its privacy policy. Other providers reserve the right to share or sell anonymized data with partners in their terms of service. And third-party providers often need to collect more data than a payroll company would, given they’re not always integrated with employers.

“We only use basic employment data to provide financial benefits instead of the approach that has been adopted by other services that track bank account and transaction information, geolocation and device identifiers, contact and internet activity information, and then use for their own business purposes or share said data with affiliates and partners,” Joshua Reeves, Gusto’s CEO told Business Insider via email.

Third-party apps fees tend to be higher

The perceived sense of security a customer might get from using a third-party app outside of their company could come at a cost, though. While some earned wage access products are free, others either charge or suggest a fee for their services.

DailyPay charges a percentage of the amount drawn, which can be covered by employers or employees, depending on how the employer sets up the service. 

Dave and Earnin, which operate independent of employers, have voluntary fees in the form of ‘tips.’ Tipping has come under some regulatory scrutiny. The New York Department of Financial Services is conducting an ongoing investigation of the payroll-advance industry related to tips and other fee structures.

Some in the industry liken tips to interest rates. Depending on the tip amount versus the amount of wages drawn, users could be paying a higher percentage via tips than they would on a short-term loan. 

“If you’re paying anything, whether it’s a fee or a tip, and you do the math, in many cases it doesn’t look a whole lot different to a payday loan,” said Jared Kaplan, CEO of OppLoans, a small-dollar lender focused on consumers with no or low credit.

Some of the latest entrants, including payroll companies like Gusto and Square, are offering their product for free. In part, that’s because on-demand pay is a small piece of the payroll and benefits platforms these companies offer. They’re already being paid by employers, so they’re not reliant on transaction fees on earned wages for revenue.

Some third-party apps are starting to roll out free earned wage access. One such example is Clair, which gives users a debit card to spend earned wages. Clair then makes money on the interchange fees associated with the card, as opposed to charging the employee.

“This must become the standard — every company that provides payroll services should be offering savings and early access to earned wages for free,” Reeves said. “And any other business that uses hidden fees or predatory banking practices when providing early access to earned wages should cease to exist.”

https://markets.businessinsider.com/news/stocks/earned-wage-access-on-demand-pay-privacy-gusto-adp-payroll-2020-11-1029822778

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