Attempts by upstarts to provide more affordable alternatives to payday loans are tweaking the traditional pay cycle. As an employee benefit under the new format, consumers can access portions of their paychecks that they have already earned, regardless of the day of the week. Contrary to payday loan models, the amount advanced is tied closely to the wages owed.
New Jersey-based FlexWage, for example, was established in 2009 and recently raised $3.5 million to fund an expansion under which it will work to forge partnerships with financial institutions and bring in larger employers. It currently works with 150 employers, whose workers typically request loans of about $220. FlexWage does not lend but instead crunches data on employees' pay rates and hours worked, accessing the information by interfacing with employers' payroll and time systems. It then accesses the payroll accrual funds to provide the early disbursement money. The offering, called WageBank, works in conjunction with a payroll card. FlexWage charges employers a fee for each active user and charges a $3 to $5 flat rate for the employees.
Activehours, a California-based rival, does not partner with employers but goes to consumers directly. Hourly wage earners request portions of their paycheck, which they receive the next day. On the actual payday, Activehours automatically withdraws the funds owed. Rather than charging a fee, it asks users for tips -- which essentially lets customers name their price. It remains to be seen whether this model is viable over the long term.
Whether the FlexWage and Activehours models are the right solution may depend on individual consumers. Jeanne Hogarth, vice president of policy at the Center for Financial Services Innovation, notes that there is no "one-size-fits-all" solution in a marketplace this large, and that some individuals will always spend more than they make.