This piece appears in the Wall Street Journal and simply summarizes the state of payroll processing. In the U.S., payroll processing continues to have a substantial check-based component, which by definition includes substantial waiting time.
That can be good for processors (float) and not so good for employees (overdrafts, etc). So the point is that in the age of advancing technology, with faster and more flexible payout capabilities already in existence, there are better ways of doing things:
“A clutch of tech startups, with more than $300 million in venture funding, have come up with ways to front workers their wages early and collect later on, when payday arrives. To do it, they are experimenting with charging some form of fee, or selling companies’ future payroll obligations to investors. Some startup banks also advertise faster paycheck access.’
The article goes on to discuss the variations in payment timing and methods, and the fact that payday lending adds up to about $30 billion each year. As a result, various politicians have been calling for faster payments by banks and the Fed.
For its part, the Fed announced last week that it is creating a real-time payments system called FedNow, which many in the industry had been expecting. However, it will not be available for at least four years. Since there are already real-time payments systems in existence, there is no need to wait.
The key is to intertwine the faster capabilities into the payroll cycle. One example is how Uber allows drivers to retrieve payments daily, or even several times per day. This is accomplished through the Mastercard Send platform, which places the payment onto the payee’s debit card. Frankly, much of the topic comes down to frequency of payment, which for many businesses is a cash flow issue. This will evolve fairly quickly during the next five years, in our view.
“About 60% of U.S. private businesses pay employees roughly every two weeks for work they might do every day, according to the Bureau of Labor Statistics. Another 5% of the businesses pay monthly. In the early days of the modern labor market, regular pay cycles were an innovation to attract workers. Biweekly paydays became the norm over the course of the 20th century, especially for office workers. Some manual-labor industries, like construction, often pay workers weekly. But both the frequency of paychecks, and the way they move, are hard to change….’You’ve got an enormous embedded infrastructure of payroll tied into doing things, and the cost of replacing it is pretty significant,’ said Todd Baker, a senior fellow at Columbia University’s Richman Center for Business, Law and Public Policy.”
Overview by Steve Murphy, Director, Commercial and Enterprise Payments Advisory Service at Mercator Advisory Group
