Employee and Employee Benefits

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Level believes that recent advances in ‘fintech’ (financial technology) not only broaden the options for employee and employee benefits but will also establish new financial behaviours.

These advances present new opportunities for employers to improve the adoption and efficacy of their employee benefit programs.

The role of mobile devices, in particular, cannot be overstated. As a channel, they offer levels of privacy and immediacy that have previously constrained uptake of employee benefits.

With on-demand payments and person-to-person transfers readily available in everyday life, people are beginning to expect those same ‘instant’ pay capabilities from their employers.

By providing payment options that reflect the needs of their employees, employers now have a unique opportunity to become a leader in the future of pay.

The role of the ‘salary-link’

Fintechs that take advantage of the ‘salary-link’ offer services that support automatic repayments through salary deduction.

Research from the US indicates that salary-linked products can be more efficient, inclusive, and cheaper. For instance, the salary-link allows employers to offer loans at a lower cost than market alternatives, repaid directly from a monthly salary payment.

The ‘Earned Advance’

The salary-link also supports the introduction of software that facilitates small value advances to employees of income they have already earned but have not yet received due to monthly pay cycles.

The principal characteristics of earned advances are:

• They are not loans, so do not require users to undergo credit checks

• They do not accrue interest, so do not compound debt-cycles

• They are automatically repaid each month

• Advances are made on a salary that is earned, so there is no default risk

• They are digital services, so accessible to anyone with a mobile phone or computer

Research indicates a high adoption rate of earned advance services when introduced.

The most extensive analysis, conducted by The Harvard Kennedy School in the US, found evidence of improved employee productivity and retention.

It concluded that employer provisions of earned advance services, “are associated with materially lower employee turnover rates, which could potentially save them tens to hundreds of millions annually.” 

The affordability of short-term credit will diminish as a result of Covid-19 which strengthens the importance of the role earned advances play.

Open Banking and the importance of budgeting

Open Banking is the UK’s implementation of a broad European legislative program known as the Second Payment Service Directive, or PSD2. Open Banking obliges all UK-regulated banks to let people share their financial data - for example, spending habits, regular payments, and the merchants they transact with - with other banks and authorised 3rd parties.

Open Banking’s standardised approach to data-sharing has catalysed a ‘fintech’ revolution in the UK. A wide range of startups have made personalised financial dashboards, mobile account creation, and automatic utility switching a reality.

But the impact of furloughing, payment holidays and the variable income streams that have arisen in response to Covid-19 has undermined the efficacy of ‘generic’ budgeting and financial advice.

Millions of people have needed to budget with less household income whilst one unexpected outcome (for some) has been the accumulation of ‘forced savings’ due to constraints on spending during lockdown.

What is clear is that individual financial circumstances are now uniquely complex and only bespoke budgeting solutions, underpinned by accurate, dynamic transactional data, will be effective.

A holistic solution to employee benefits

Given the range of fintech services now available, it is possible for employers to offer a genuinely holistic program of employee benefits to their employees. By implementing such tools, it puts financial wellbeing at the forefront of the employer's agenda.

Using Level’s definition as a schema, this program could offer the following:

Fixing problems of debt:

Earned advances instead of payday loans

• Salary-linked debt consolidation loans

Changing financial behaviour:

• Budgeting tools powered by Open Banking, enabling better financial decisions

• Automatic switching services (eg. for gas, electricity or broadband) to cut monthly outgoings

• Education and advice content from a recognised authority such as MAPS

Building savings:

• Salary-linked savings deposits

• Prize-linked savings schemes, sponsored by employers

• Automated ‘sweeps’ that round up payments into savings

The importance of safeguards

It is incumbent on all fintech startups to provide appropriate safeguards for the small minority who misuse their services. These include automatic service limiting and the provision of tailored educational content in the event of sustained use.

Pay is foundational to the relationship between employers and employees. It is unsurprising, therefore, that any change to its delivery is viewed with some caution.

But the far-reaching effects of Covid-19 have strengthened the case for greater pay flexibility and most employers now acknowledge the benefits of making changes.

They recognise that, when offered as part of a holistic employee benefits package, the earned advance is the most risk-reduced solution to low-value, short-term financial needs.

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