Earned wage access technology can help change payday debt cycles

14th September 2021 By: Schalk Burger - Creamer Media Senior Contributing Editor

An earned wage access (EWA) solution allows employees to access a portion of their earned wages at any time during the month, rather than borrowing from their employer or taking out unsecured loans to cover living expenses, says EWA financial technology organisation Paymenow co-founder and MD Deon Nobrega.

An EWA solution means a flexible payment schedule that allows employees to cover financial emergencies or shortfalls and retain financial control while avoiding exorbitant fees.

“In countries such as South Africa without a significant savings culture and where the majority of those employed in the formal economy are under persistent financial pressure, the unsecured lending industry has flourished on the back of unsecured loans that are typically taken out to cover living expenses.

“The reality is that many workers turn to loan sharks to afford groceries and [this is] something policymakers have been wrestling with for years. Costly loans for workers already on the edge become spiralling burdens of repayments that result in an inability to save, further predatory lending and employee bankruptcy,” says Nobrega.

Financial emergencies are the most common reason for entering into these debt traps. Even in developed economies, such as the US, many employees are living from paycheque to paycheque.

“As much as transactions have been made seamless and instantaneous by technology, monthly payment cycles have entrenched destructive debt cycles that force employees to pay back high-interest loans when they are caught short of cash before month-end,” he says.

This long-standing banking norm is being revolutionised by the adaptation of technology to meet social needs. Not only do employees benefit from the arrangement, but employers typically observe lower rates of absenteeism and turnover, as a reduction in financial distress allows employees to afford to commute to work and build a more sustainable financial position.

“Given South Africa’s problems with getting a savings culture to take root, EWA presents a great opportunity to reduce employees’ need to borrow.

"Paymenow also educates employees in financial wellness and provides rewards for managing their money well, allowing them to take greater control of their finances and reach financial goals, which no amount of regulation of the unsecured loan sector can do,” says Nobrega.