Reasons for Advance

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We all need a salary advance from time to time; we can’t control events and financial needs can be unpredictable.

As the late Donald Rumsfeld was fond of saying, there are ‘unknown unknowns’.

The most commonly cited reasons for an advance would be an unexpected emergency, such as a boiler breaking or a flat tire, that requires urgent repairs. 

Or it could be something more rewarding, such as a deposit for a holiday or a great discount on an outfit in an online flash sale that lasts for only two hours.

But the underlying reason for an advance on your salary is that pay cycles (especially those that are monthly) rarely align with our personal financial needs.

In the past, the gap between work and pay was much shorter. Workers could expect to be paid at the end of each day for the work they had completed, or at the end of the working week.

But the historical trend has been toward less frequent pay cycles rather than more.

The reasons for infrequent pay cycles serve the operational interests of employers, as opposed to the financial needs and preferences of workers.

At Level, we like to describe monthly pay as ‘an accident of history.’ Payroll is a resource-intensive, expensive process for employers. As a result, it is uncommon for firms, especially large ones, to run payroll more than once a month.

But monthly pay cycles have consistently been proven to be harmful to the financial wellbeing of working people.

As payroll is resource-intensive, it is an expensive process for employers. As a result, it is uncommon for large employers, in particular, to run payroll more than once a month.

Evidence from both the US and the UK supports the thesis that a high percentage of working people struggle to manage their monthly cash flow. 

This disproportionately affects those aged between 18 and 25 as well as those in rental accommodation but the impact is not restricted to those demographics. One-third of middle-class workers report struggling to cover a £500 unexpected expenditure.

This struggle, alongside an absence of savings, renders working people vulnerable to ‘financial shocks’ (ie. unexpected expenses) on a regular basis.

The final days before payday, in particular, are a ‘debt-danger zone’. 

This is primarily because:

Monthly pay is an accident of history that creates cash flow problems for employees. Most unexpected expenses are small in value (<£300) yet there are few options to borrow small value amounts on a short-term basis. It is uneconomical for established lenders (e.g. retail banks) to offer small value loans.

In the absence of adequate solutions from retail banks, demand has been met by a variety of short-term, high-interest providers who offer what is conventionally known as ‘PayDay Loans’. 

PayDay Loans are forms of credit that incur high levels of interest for the borrower and can serve to exacerbate existing problems of debt. 

Furthermore, there is a ‘poverty premium’ inherent in the mechanics of credit assessment. This means those most in need, and with the least resources, are subject to the very highest levels of interest.

As a consequence, PayDay Loans have been the subject of considerable debate in the UK, raising persistent concerns about the ethics of short-term lending. 

Despite increasing legislation and some well-publicised bankruptcies, the market for these services remains strong. Research indicates this is because they remain the most accessible and most discreet options for low-value, short-term borrowing.

All this has occurred because employers are unwilling to acknowledge the axiomatic relationship between frequency of pay and financial health and adapt their operational processes in response.

To compound the irony, it is often those who have the greatest ability to rectify the situation who are most opposed to the solution despite demonstrable demand from their employees.

Buyers of earned wage access services frequently stand in the way of the introduction of earned wage access services, which give staff greater flexibility over their pay, claiming they see or no clear need for the service or (worse) take a stance that implies that workers can’t be trusted with increased access to the income they have earned.

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