What are Salary Advances?
Salary Advances are also called an Employee Salary Advance Scheme (ESAS).
They are more often than not, contained within a “Wellbeing” package provided by an Employer, that allow people / employees to take part of their earnings before payday.
There are a fair few companies offering this now – but you don't get to choose which you go for, as you can only use companies your employer has partnered with (if, indeed, it's partnered with any)
They were introduced to reduce the use / need for Payday Lenders.
A host of companies are now offering to let you access part of your salary in advance – though for a fee. Examples of Companies providing these services include Hastee, Wagestream and Salary Finance.
Salary advances – sometimes known as payroll borrowing – are a relatively new form of borrowing, where the Salary / Wage advance companies work with your employer to let you access part of your salary as you earn it, rather than having to wait until your payday.
Your employer needs to be signed up with a company which offers this for you to be able to access it, but once it is, you can access your salary in advance whether you're paid weekly, fortnightly, four-weekly or monthly.
It's billed as an alternative to payday loans, though the difference is that it's your own money you're 'borrowing'.
As these are salary advances rather than loans, it's not counted as credit, so you're not credit checked, and you don't pay interest. Instead, you pay a fee each time you access your salary early.
How they work
ESAS schemes allow employers to provide these services to their employees.
Each employee is restricted to the wages already earned based upon the hours / shifts worked to that day's date.
The schemes can ONLY allow for up to a maximum of 50% of wages to be drawn down ahead of payday and then that amount is deducted when the full end of period pay is due. In addition the Employer might only agree a lower maximum than 50%, as seen in the example, below.
The Salary / Wage Advance Company provides the individual with an App that then provides each person with the up to date information as time progresses.
There's no chance for you not to repay, as the salary advance company sits on the payroll between you and your employer.
So when you get paid, the payroll lender gets its money back – and the amount in your pay packet will be lower, as you took some early.
Here's an example of how it could work
It's a new work week, and Walter Waiter earns £9 an hour working at a restaurant and is paid weekly.
He does a 10-hour shift on Friday, then looks at his salary advance app a few hours later.
He can see he's earned £90 for the shift, and that £36 of it is available for him to access (his employer limits him and his colleagues to 40% of their salary as an advance).
Walter takes £30 of that £36 available as he needs to top up his electricity meter that day.
However, he's OK for the rest of the week and doesn't take any further advances.
On his weekly payday next Thursday, he's paid his full salary, less taxes and other deductions, and also minus the £30 he took as an advance, and the £1-£2 fee he paid to access the advance.
Should you use these companies?
Martin Lewis of Money Saving Expert on the 13th August 2020, highlighted the following comments -
If you do use the services, only do it in a real emergency.
Salary advances, though they're a very good alternative to payday loans, are not without their own issues.
There's a moral hazard which means the easy accessibility of the cash could lead to people letting go of their budgeting and using this too often.
Be warned against doing that – it's far better to be in control of your finances than to need a system like this and pay for it.
That's in spite of it being far cheaper than other alternative forms of quick finance (although not cheaper than a 0% credit card facility).
It's very important to make a pact with yourself that if you're going to do this you'll only ever do it for real emergencies – a smashed window in your house that needs fixing, a locksmith to get in.
Not new shoes, not a party you want to go to. And generally not for paying your bills, because bills are something you should be budgeting and planning for anyway.
If you were having to use a salary advance more than a couple of times a year there's an issue going on.
Don't fall into the psychology of 'easy access means I have more money'.
Ultimately, it doesn't give you more money.
In fact, each time you use it, you pay a fee, so you actually get less money and at payday you will receive less than the full amount and with costs deducted.
There are critics that say these services can push consumers into cycles of debt.
This type of product is not currently regulated.
In July 2020 the FCA announced they had concerns over the perceived lack of transparency around costs and repeated borrowing
Constant withdrawals and Fees - add up
Could have potential to trap people!
Cause / Effect
Money Management / Debt Advice
If employees do not have major debt problems, then it may be the case that an ESAS would be really beneficial for them.
Some scheme operators are also developing models where the employee pays no fees but the burden falls on the employer, who bears the full cost.
Employees who have limited options are more at risk.
The FCA has provided a number of recommendations for employers and scheme operators which could reduce those risks, including:
Scheme operators could consider advising employees about the best places to seek financial help from on the employee section of their website, or within the app, if they provide one
When introducing employees to ESAS, employers could ensure that they highlight the limitations of salary advances and potentially signpost them to the Money Advice Service website, if employees require debt advice.
They may also inform employees about debt charities, including Citizens Advice and Stepchange – this may be particularly relevant where those who are using the scheme frequently are identified
Periodic notifications could be provided to employees where transaction charges are building
Scheme providers could develop systems that monitor the pattern of usage of employees, and where the usage is substantial, alerts could be triggered providing guidance and directing employees to organisations providing free debt advice
Bloom’s comments on Salary Advances and the FCA’s concerns
Bloom has always considered that Salary Advance should be a part of an inclusive package that could help provide an invaluable alternative to Payday lending.
However the FCA’s report was in line with our concerns and that Money Management must be the key function, even more so since Covid 19.
However one of the real problems is the lack of coverage available of alternative fair finance lenders in the UK.
Please note the following facts about existing Credit Unions and Responsible Finance Organisations (RFO's) in the UK
Bank of England statistics issued on 28th August 2020, shows there are now just 277 remaining Credit Unions in England, Scotland and Wales with 145 in Northern Ireland.
The Community Investment Steering Group Report Nov 2019 - Scaling up Community Investment in the UK states that there are only 23 active RFO's in the UK.
From these statistics it estimated that no more than 5 - 10% of the UK has any coverage available from a Credit Union or a RFO. There are 69 cities and over 48,000 towns in the UK. In the last 10 years many Credit Unions have been closed and NO services replace those lost to the massive detriment of the Community in which they were based.
