If you earn more money than you spend, paying bills isn't a big deal. It's annoying when your car breaks down or your sore throat needs antibiotics, but you don't lose sleep over it.
If you're living paycheck to paycheck, on the other hand, even small unexpected expenses can put you in the red. The two weeks between paychecks is an eternity for an hourly worker whose credit card is already maxed out, or who doesn't have one to begin with. Every parking ticket and hospital co-pay is a potential crisis. By the time payday comes, it's too late -- the next crisis has already arrived.
Financial technology startup DailyPay thinks giving people in this situation more frequent access to wages would go a long way toward solving this problem and putting them on the path to financial security.
DailyPay's solution works like this:
1) The startup integrates with a company's established payroll and time-tracking systems. Instead of going directly to an employee's bank account, paycheck deposits are set up to go through DailyPay first.
2) An employee can withdraw wages he or she has earned but not yet received throughout the two weeks or month before formally getting the paycheck. DailyPay fronts the money for a small fee, and keeps the expense on its balance sheet.
3) Come payday, DailyPay deducts whatever money the employee has already withdrawn, and sends the rest of the paycheck through to the employee's bank account.
"It's just like an ATM," said CEO Jason Lee. "We charge a small transfer fee that depends on when you actually want your money. If you want it the next day, it costs $1.25. If you want it instantly, we charge you a little bit more -- we charge you $2.99, just like an ATM would."
Perhaps Lee likens his service to an ATM because the more obvious comparison -- a payday loan provider -- is often considered predatory. It can't be ignored that the payday loan industry makes some of the same claims as DailyPay, namely helping people avoid problems from not being able to pay their bills. A testimonial on the DailyPay homepage reads, "I had a light bill that needed to be paid on Monday, but payday wasn't until Wednesday and then I remembered I had DailyPay. I had money in my bank account when I needed it and was able to pay my bill without the lights turning off."
One key difference is that DailyPay interfaces directly with employers, positioning itself as an HR benefit. DailyPay's pitch to other companies is that flexible payroll reduces turnover, which is good for the bottom line, and the service is free to implement. One internal study of 20 DailyPay clients found that turnover shrank by 40 percent on average after they adopted it. The service has found an eager market with gig economy companies like Uber, DoorDash, and Shiftgig.
"That pain point for the individual is now also creating enormous collateral damage for companies," Lee explained. "This is obviously because when someone can't pay a bill on time, even though they may have a job -- even though they may have a good job -- when they can't pay a bill on time that actually becomes the moment where they say, 'Guess what? I need to find a new job.'"
In some ways, the need for DailyPay's product is a reflection of how bad things are in the labor economy. Wage growth is stagnant despite low unemployment (although not, crucially, a high labor-force participation rate). A Federal Reserve report based on data from 2015 found, "Forty-six percent of adults say they either could not cover an emergency expense costing $400, or would cover it by selling something or borrowing money."
On top of that, "31 percent, or approximately 76 million adults, are either 'struggling to get by' or are 'just getting by.'" Among the third of adults with fluctuating monthly income or expenses, 42 percent "have struggled to pay their bills at times because of this volatility."
"This is not flat-screen TVs. No one's going to Best Buy," Lee said. "This is real life -- this is real-life America." He added, "We see the transfers, and they always spike at the end of the month," which is when rent is due, as well as in the middle of the month for the power bill. "We agree, companies should pay more," Lee said. Until that happens, not sitting on workers' money will have to do.