Having an accessible savings buffer can protect people from problem debt and anxiety, and there is evidence that this also boosts productivity at work. But what about people who don’t have savings? What options are there for those who need affordable access to money to bridge a gap, manage an unexpected expense, access opportunities or reach life milestones?
A growing number of employers are considering the role that they might play in supporting the financial wellbeing of their employees. Workplaces can be a powerful channel for reaching people where they are, and employers can be trusted intermediaries for those who otherwise might not seek out solutions from the market directly. Payroll also provides an opportunity for setting up and automatically making payments, whether for saving or borrowing.
Among employers’ options for supporting their employees are offering earned wage access (EWA) solutions and various kinds of loans that can be made available in the workplace. EWA allows employees to access some of the pay they have already earned before payday.
Evidence of the relevance and effectiveness of these employer-driven solutions is evolving and remains patchy. As a result it can be difficult for employers to weigh up the different options available when making decisions about their financial wellbeing benefits offer.
Our exploratory research
Our report, Bridging financial gaps for workers (PDF), shares new exploratory research that brings together existing evidence around EWA and workplace loans and reflects the viewpoints of different stakeholders – those of low- and moderate-income workers themselves, employer decision-makers, EWA and workplace loan providers and industry and consumer experts. With support from JPMorgan Chase, we’ve been able to look at and build an in-depth understanding of:
- how earned wage access and workplace loans are used
- what the benefits and risks are
- how they compare to other financial wellbeing interventions offered through the workplace
- whether these two options are likely to be scalable across a significant proportion of the UK labour force.
Our research involved a literature review, 20 expert interviews and a series of interviews and discussion groups with 33 employees. Data collection was carried out in late 2022 and early 2023, a period during which inflation in the UK hovered around 9%.
The need for affordable access to money
Many low- and moderate-income earners face challenges that are less likely to be faced by higher earners:
- Variable pay: Unlike most salaried workers, many lower earners have pay that varies, often significantly and unpredictably. It can be difficult in this context to manage expenditure month-to-month and to plan ahead.
- Exclusion from other options: Many low- and moderate-income workers are excluded from bridging solutions like credit cards, overdrafts and high-street loans because of poor or damaged credit history. They may be less able to turn to friends or family for financial support if their social network also lacks financial security.
What is earned wage access?
Earned wage access (EWA) enables employees to access some of the pay they’ve already earned before their usual pay day. They’re able to access small amounts of money quickly, usually through a third-party app. There’s often a small fee of £1 to £2 to use the service, although sometimes this fee is subsidised by the employer. The amount of pay that can be accessed is usually limited, for example to 25% to 50% of earned wages.
Viewpoints on earned wage access
Around 1 in 10 employers currently offer EWA to all their employees. It’s more likely to be made available to employees working for larger employers.
Views on EWA are mixed, to some extent reflecting an evolving understanding of this relatively new proposition which doesn’t fit easily into any existing category of financial product.
|A lifeline in moments of extreme financial stress or a potentially vital safety net that’s good to have in the background should an emergency arise.||The risk of habitual or cyclical EWA use, or its use to fund gambling or other addictions. Some controls are already put in place by providers and employers to protect vulnerable customers, such as limiting the amount of pay that can be accessed, setting limits on when money can be accessed and intervening in cases of very frequent usage.|
Workers told us that EWA is not used impulsively or without thought of the effects. Rather, usage is a component of strategic money management when resources are constrained and options are limited.
Yet more could be done to understand whether high-frequency usage by a minority of customers does indeed risk harm, and if so, what measures should be taken to address this. It’s also hoped that these issues will be addressed in the forthcoming industry code of conduct.
|A better way to manage income and expenditure, which can be particularly useful when costs are incurred at times that don’t line up to the timing of wage payments or variable.|
|A path for taking advantage of opportunities, for example, when an employee knows they have more pay on the horizon to cover the cost of something they need or want to do today.|
|A way of mentally accounting and managing different sources of income, either where an employee has basic pay and additional pay, or where they have multiple jobs.||The risk of being seen as an alternative to providing workers with a liveable wage. Some employees felt strongly that EWA could not, on its own, resolve bigger issues in the way that more predictable pay, more visibility and control over shifts or more regular pay would.|
While there are some valid concerns, the potential benefits of EWA to short-term resilience for the majority of users are clear. EWA answers needs that other financial wellbeing offers don’t address, in particular giving people more choice and control over how and when they use their money.
However, not enough is known about how workers actually use the money they access through EWA, how EWA usage interacts with other financial behaviours, what incentives and disincentives are created by having the option of EWA or how fees influence the use and impact of this option. We recommend that these evidence gaps should be addressed through future research.
What types of workplace loans are there?
There are different types of loan schemes that workplaces can deliver directly to employees or through a third-party provider, including:
- hardship loans
- deposit loans to help with large, upfront costs
- consolidation loans
- personal loans.
Loan repayments may be linked to payroll or made outside payroll, and interest rates can vary from 0% on loans made directly by some employers, upwards to low or market rates.
Viewpoints on workplace loans
Around 1 in 8 employers offer hardship or payroll loans to their employees. Workplace loans are also more likely to be available to those working for a larger employer.
|A payroll link is welcome, as it means the employee doesn’t have to worry or think about making repayments and cannot default. They also appreciate the fact repayments come out of pay automatically before the money is ‘felt’ in their pocket.||There is often stigma around taking a loan. Whether loans are provided by a third party or directly by the employer, it’s important to assure employees of the confidentiality of their financial need. Employees were very concerned about their manager or co-workers knowing they needed a loan or were in debt. Loans offered by a third-party provider rather than directly by the employer are more likely to be trusted as be confidential. Where providers offer other products, such as payroll-linked savings, in addition to loans, employers will only know that a deduction is going to that provider, not that it’s for a loan.|
|No or low interest loans. Some loans made directly by employers accrue no interest on the loan amount. Where loans are made through a third-party provider, interest rates may sometimes be lower than available elsewhere because of the payroll link and, for the same reason, loan acceptance rates may be higher.|
|Hardship loans provide support for workers’ immediate, most urgent needs. Where these are offered directly by an employer at low or no interest, they can help employees get back on track and provide a beneficial alternative to more costly credit options.||There were some concerns around what would happen if an employee took out a loan and then left the employment or were unable to work. Again, reassurance and clear information is needed here.|
|Deposit loan schemes are especially useful when they focus on large, upfront costs that can hold people back – for example, costs associated with travel to work, housing and childcare. However, most traditional deposit loan schemes aren’t consistently aligned with the real-world needs of low- and moderate-income employees. For example, schemes to provide upfront funding for childcare may be limited types of childcare that aren’t accessible to those working irregular shifts.|
In isolation, neither EWA nor workplace loans can address all of the financial needs that low- and moderate-income workers need to find financial stability and plan for their future. However, early indications from this exploratory research are that, when offered together, these solutions can support employees to make the most of their income, manage uncertainty and gain access to more opportunities.
Ideally both solutions work best as part of a holistic financial wellbeing offer designed to meet the needs of the employee population in question. This holistic offer would likely include workplace savings and financial education as well as tools to maximise income such as shopping discount schemes, benefits entitlement checkers and skills and career development pathways.
Good practice is likely to include:
- Understanding employees’ needs before designing and implementing solutions.
- Offering comprehensive financial wellbeing support that employees can use to support short-, medium- and long-term financial goals and challenges.
- Choosing an EWA provider that is signed up to the forthcoming code of conduct and ensuring there are relevant controls in place for vulnerable customers.
- Focusing loans on supporting workers to gain stability and increase their long-term earning potential.
- Providing pathways into saving.
- Taking an integrated approach across the organisation, including better integration of mental health and financial wellbeing support.
While there are indications that these solutions work well in general, evidence of their effectiveness and impact is evolving and remains patchy.
Our exploratory review suggests that objective research and trialling activity would help to identify ways that EWA and workplace loan solutions could be designed to both better meet workers’ needs and prioritise investment.
If your organisation would be interested in working with Nest Insight to explore further research, please get in touch at email@example.com
Read our report
If you’d like to find out more about our exploratory research, read our report: Bridging financial gaps for workers (PDF)