4 startups that have collectively raised $300 million explain how the coronavirus is a 'watershed moment' for instant paycheck cashouts
- Demand for same-day pay has gone up amid the coronavirus pandemic, which has led to record jobless claims in the US.
- In recent years, startups like DailyPay and Earnin have cropped up offering earned wage access, which is the ability for workers to draw on their earned pay between paychecks.
- While these startups are seeing a decline in the number of hours worked across their user bases, they're seeing a surge in demand for their product.
- The startups expect that the financial stress caused by the coronavirus pandemic will change the way workers and employers think about how they pay their employees and could boost demand going forward.
- "This is a moment in time when the entire industry should look at the cost of waiting to get paid," said Safwan Shah, CEO and founder of Softbank-backed PayActiv.
- Click here for more BI Prime stories.
The coronavirus pandemic has rattled the American workforce. And startups that offer on-demand pay have seen a spike in use as Americans face the financial uncertainties caused by the pandemic.
Workers in several industries including airlines, hotels, restaurants, and retailers, have been furloughed or laid off. Jobless claims in the US hit a record 3.3 million in March.
Well before the coronavirus pandemic, many Americans were living paycheck to paycheck, so fewer hours worked or job loss leaves them in more precarious financial situations.
But for those still working, having same-day access to their earned wages has been in high demand.
Startups like DailyPay and Earnin, often cited as an alternative to payday lending, give workers access to their earned wages between paychecks based on the number of hours worked. Some of the players in the space market directly to the consumer, while others partner with employers and offer the product as an employee benefit.
DailyPay doesn't require that users input a reason for accessing earned wages but 43% of those who did provide a reason the week of March 17 said that they were accessing their wages to stock up in light of the coronavirus pandemic, Jeanniey Mullen, CMO of DailyPay told Business Insider.
Higher demand for the product with lower supply of hours
Earnin, a direct-to-consumer earned wage access startup, has seen a 20% spike in the number of people searching for and downloading its app.
However, it's also seen the number of hours its used have worked drop.
"There's increased demand, but there are reduced accrued earnings," said Ram Palaniappan, founder and CEO of Earnin. "So I think people are coming to the app because they want money, but unless you're working, you can't actually cash out."
70% of Earnin's users are hourly employees. Early on during the pandemic, user data showed that hourly employees, who often work in jobs that can't be done from home, were more likely to be going in to work.
"If you're living paycheck to paycheck, you're going to go into work because you need the money," said Palaniappan.
Then, as state and local governments started closing non-essential businesses like retail stores and restaurants, Earnin saw a dramatic reduction in hours worked.
"We're seeing huge drop-offs in the number of people going to work, and it's accelerating," Palaniappan said.
DailyPay, which is available to over 2 million US employees at companies including Berkshire Hathaway, DialAmerica, and Six Flags, has seen a surge in use for certain industries and a drop in others.
This week, the startup released a workforce index that tracked the average number of hours worked at its employer partners including supermarkets, call centers, hospitals, and quick service restaurants (QSR).
The index shows the daily volatility of working hours in these industries which don't typically have the flexibility of remote work, and are in high demand during the pandemic. While call centers have seen an increase in hours worked during the latter half of this week, QSRs have been steadily declining, and hospitals have remained relatively flat.
A 'watershed' moment
Earnin CEO Palaniappan expects that as workplaces start to reopen, those who downloaded the app and realized they wouldn't be able to access funds without accrued earnings will be eager to use the product.
"I think what that tells us is that once people start the work again, the demand for cashing out your earned wages will shoot up," Palaniappan said.
"It's a watershed moment," said Safwan Shah, CEO and founder of Softbank-backed PayActiv.
As employers, employees, and regulators come to better understand the difference between earned wage access and payday loans, adoption will continue, Shah said.
PayActiv partners with employers like Walmart and Wendy's to offer earned wage access. During the coronavirus pandemic, PayActiv is also waiving fees for its product.
"This is a moment in time when the entire industry should look at the cost of waiting to get paid," said Shah. The cost, Shah said, can be found in things like bank overdraft fees.
DailyPay's Mullen also expects a rise in demand for earned wage access.
"We're thinking that immediate access to your earned income will get accelerated because people will need it," said Mullen.
"We're seeing a lot of employees almost demanding that this be the continued wave of the future and expecting that anywhere they go will offer this," said Mullen.
Investors, too, are bullish on earned wage access
DailyPay, Earnin, Even, and PayActiv have, together, raised nearly $300 million in VC funding from big-name investors including Andreessen Horowitz (Airbnb, Instacart, Lyft), Khosla Ventures (Affirm, DoorDash, Impossible Foods), and SoftBank (Alibaba, Slack, Uber).
Nigel Morris, cofounder and managing partner of QED Investors, is also bullish on the earned wage access industry. Morris thinks offering this as an employee benefit could help employees rehire as the coronavirus pandemic wanes.
And while large employers like Walmart have already embraced earned wage access, Morris expects that small businesses will start offering daily access to wages as well.
"We're going to see small and medium-sized companies start to embrace this," said Morris. "As we come out of COVID, they are going to want to rehire rapidly. I think this will be an important differentiator when they offer packages of benefits to prospective employees."
Morris has invested in several earned wage access startups, including Rain in the US and the UK's Wagestream.
Financial wellness requires more than daily access to wages
While on-demand pay can help people avoid overdraft and late fees, many caution that having daily access to wages could lead to bad habits and limit spending.
"On-demand paid by itself doesn't actually solve people's problems," said Jon Schlossberg, CEO of Even Responsible Finance.
"The only reason anyone ever needs to take their pay early is because they don't have money in their bank account, so let's solve that problem," Schlossberg said.
In addition to offering its users access to up to 50% of their earned wages, Even's app offers projected earnings for a pay period, a budgeting tool, and a savings feature. Instead of charging fees for earned wage access, the startup operates on a subscription model.
"Having money in your pocket so you don't have cash flow problems is a good first step," Schlossberg said. "But if that's the only thing employers do, it actually will create more consequences than it will solve."
Equipping employees with more transparency around how much they'll make in a given pay period is key. 30% of Americans' income varies from month to month, according to the Federal Reserve. And the lack of stability between paychecks can cause financial stress.
"For most hourly workers, it's very difficult to know how much money you're going to have when you get paid," Schlossberg said.
Schlossberg says that the earnings tracking feature is the most used product in the Even app.
Savings, too, are vital for people looking to break out of the paycheck-to-paycheck cycle. Like Even, DailyPay also offers a savings product, which the startup launched in February.