The myths and realities of banking’s early wage access trend

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It’s the time of the season when almost every financial service pundit, armchair economist, and legit prognosticator is rolling out a look back at 2022 or looking ahead to 2023. Almost to a level of unanimity one of the things banks need to look out for is competition from fintechs. Jaime Dimon knows it, and you should too.

Why? Fintechs have lower overhead, more features and cleaner interfaces. They have been disrupting and are continuing to disrupt the world of traditional banking and if there’s one thing that will ruin a banking executive’s day it’s an unruly competitor. As Toptal, a network of global on-demand talent put it recently, “In the aftermath of the Financial Crisis of 2008 and various other scandals, customers are demanding more from their banking services. Technology now empowers consumers to scrutinize their providers more heavily and upstarts are harnessing it to provide cleaner and more effective customer service, free from the shackles of legacy technology.”

Shackles? No word will scare banking executives more than shackles.

So fintechs want to chip away at banks and banks want to co-opt the strengths of fintechs. And apparently, one of the ways they’re going to do that is from a watered-down version of early access to paychecks.

You’ve probably seen the ads. Capital One, for example, has been all over some high-profile TV placements hawking the fact that customers can access their paycheck two days early. JP Morgan Chase has also offered a similar service, seemingly without the ad budget. Other banks have followed suit and it’s very evident that early wage access is becoming an important tool in the fintech competition kit. However, in the process of positioning early wage access which is really only 2 days early, banks are missing the whole point of the feature. Two days might be nice for some customers, but the aim of this feature shouldn’t be early access. It needs to be earned wage access, also known as on-demand pay. So let’s dispel some myths about the banking version of early wage access and the pure, practical and positive approach to on-demand pay.

Myth #1: Two days ahead of payday can make or break a consumer’s bill-paying needs. Reality: Sure – there is some value in having access to your pay two days early – if the timing lines up just right in that short window. However, consumers are using on-demand pay to pay bills that might otherwise be late or to pay an emergency or unexpected bill at any time during the pay cycle. What if a member of the household has an uncovered health expense? Or has a high-deductible health plan. Two days does nothing here. On-demand pay, on the other hand, can literally impact the health and well-being of a household and its members.

Myth #2: Said early wage access is free. It’s actually not in many cases. It’s part of a checking account package. JP Morgan’s early access is part of its Secure Banking for $4.95 a month. The package also kills overdraft fees, which banks have been looking to justify for quite some time. Capital One’s version is cleaner in terms of fees but limits day one withdrawals to $225. Here banks have found an outstanding customer retention and customer value tool. If you’re running a bank as big as Capital One, every move you make with customers moves the needle. You don’t make small adjustments. You make moves that will affect a group of customers. Example: If you’re trying to increase the value of high-net-worth individuals (HNWIs) you will introduce a platinum credit card with no limits. Or you’ll make cross-border payments free. If you’re looking to attract and retain lower-income consumers, or even those on a paycheck-to-paycheck schedule, you’ll design something like Secure Payment. But again, placing limitations or exacting fees for early wage access misses the point. If banks want to be truly valuable and drive customer value they will recognize the plight of the $50,000 to $80,000 salary cohort and design a suite of products that allows them to be prepared for the unexpected. The American consumer has already absorbed a spike in the cost of living, due to inflation. Earned wage access, in its purest form, is designed to give consumers an option outside of more debt.

Myth #3: Banks are making sacrifices of their own to extend early wage access to consumers. They’re not. In fact, it’s not even an innovative use of payment technology. As Michael Herd, SVP of NACHA told NPRs Marketplace earlier this year, “Every direct deposit payment has an official payment date. So that’s the date on which the employer intends payment to be made. An employer typically will send a payroll file of direct deposits one or two days before payday to the employer’s bank.” So banks have the money. They will make a few bucks less interest on the deposit. But although their positioning makes it look like they’re putting out for the consumer, it’s an easy get.

So what banks have discovered, thanks to their fintech colleagues, is a very effective marketing tool and a way to make lower-income accounts more valuable. They’ve discovered an easy page to tear from the fintech playbook. But this 2-day early access model is like comparing a mountain to a mole hill when it comes to on-demand pay, and will not give consumers the options or peace of mind that true on-demand pay can afford.

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