Did you know that you are a human credit facility?

Why the bi-weekly pay cycle is becoming outdated (and why it’s there in the first place).

There is a cost to living “paycheck to paycheck.” Each year banks in the US make $15 billion on overdraft and NSF fees, and payday loans can have interest rates that run above 600% APR. This cost has been exacerbated due to the current high inflationary environment, which led to real wages falling in 2022.

The paycheck-to-paycheck lifestyle, and its associated costs, are a derivative of the fact that employers pay their employees on lagging and retroactive pay cycles, usually every two weeks.

For most workers, wages are not paid as they are earned; instead, the company you work for essentially owes you money for time worked until they pay you. 

But, why? 

The reason for this is largely based on historic precedent: in the early 1940’s, the United States implemented a mass payroll tax for employers, which resulted in a lot of “back office” work when there wasn’t widespread electronic transfers or advanced computers yet. In order to balance paying their workers regularly with efficiently handling their payroll taxes, companies adopted a two-week or monthly pay cycle. With the huge advancements in financial technology, most companies should have the ability to pay more frequently, but it’s not always in their best interest. 

Let’s play this out: a worker is loaning his or her time to an employer at no additional cost to the employer, however if they run out of money before they receive their next paycheck and need to secure a payday loan, that lender can charge them up to 600% APR on a payment advance. So, the employer gets a free advance on labor while lenders receive a 600% interest on a payment advance for that same labor. To make things worse, it’s likely that a significant portion of that high interest advance will be used to pay NSF and late payment fees. Clearly there is a problem here. 

Thankfully, the cost of the paycheck-to-paycheck lifestyle is starting to get more attention and solutions are emerging. Earned wage access (EWA) refers to financial services or products that allow workers to access their wages before their employer pays them. EWA enables individuals to receive liquidity before their paycheck is deposited and avoid incurring overdraft fees or resorting to payday loans. 

Access to earned wages is a growing trend in corporate America, with Walmart and McDonald's offering it to their employees, but it is still only a small fraction of how employees are paid in the US. While there are private companies that provide earned wage access, such as Earnin, they charge for that service. Is it fair that people should pay to access the money that they have already earned to avoid predatory financial fees? Society, especially those in the lowest income bracket, is begging for a solution that allows people to access their money as they earn it without paying for the "privilege." At RTV, we are excited by the idea of supporting companies in offering EWA to their employees, and terminating the vicious cycle of living paycheck to paycheck.

Johnny Meagher