Salary Advance and Salary Finance

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“As we move forward, employers will soon become true partners with their workers, and employees and employers alike will find themselves on more stable ground.” - Harvard Business Review, 01.06.2020

At the beginning of 2021, in the middle of the COVID pandemic and subsequent lockdown, Level Financial Technology started the National Wellness Conversation.

The National Wellness Conversation is a campaign aimed at raising the profile of salary advance and salary finance as key benefits that all employers should offer their staff.

Beneath this mission sits two objectives:

The first is to draw attention to salary advance and salary finance as critical components of the overall health and wellbeing agenda and to highlight the impact it has on mental health in particular.

The second is to emphasise the role employers can play as custodians of their employees’ financial health and why this is an important element of any responsible business agenda.

Level believes that the ‘salary-link’, the transactional relationship between employers and their staff, is what empowers them to provide salary advance and salary finance services.

In fact, we regard the salary-link as a ‘super-power’- one that puts employers at the leading edge of solutions to individual financial health; even more so than banks or established financial service providers. 

But it is clear that this is a super-power that is often overlooked and its benefits under realised. Raising awareness of this and reversing its neglect is at the core of what the National Wellness Conversation is about.

Why is the salary-link a superpower?

The salary-link means employers can offer the best technical solutions to their employees short-term and long-term financial needs, all via a single holistic service such as an app, website or even via SMS.

These solutions can be better in terms of speed and usability (such as earned wage access for taking advances on salary) or in terms of the interest rates they can offer for a payroll savings account. 

Research shows that the salary-link is the most effective tool for enabling a regular savings habit and avoiding short-term debt.

Combining this with analysis of the transactional data that Open Banking provides gives employers unprecedented capabilities to finally measure the improvement we believe they can make to employees’ financial health.

The importance of a holistic approach to salary-link services

In terms of action, the objective of the National Wellness Conversation is to establish an honest and open dialogue within firms around the issue of financial health.

For employers, this also means acknowledging the historic lack of employee engagement with previous financial wellness programmes and an honest assessment of why they fell short.

Often this was as much about the channels in which these programmes were delivered and the nature of the onboarding experience as it was about the value of the underlying programme. 

Making a service available only on a company intranet, accessible only via desktop, behind SSO gateways that required passwords that were rarely to hand all represented points of friction that undermined engagement and usage.

These constraints are easily resolved via a single mobile native solution that leverages biometric security in place of oblique corporate credentials.

But there was also a problem of attitude and approach. 

Advice and guidance have historically overlooked the reality (and extent) of people’s short-term cash flow needs and advocated long-term solutions (such as cost-cutting and saving) as a catch-all response to all circumstances.

As a result, working people have disengaged from orthodox advice resources and (as has been well-documented over the last few years) serviced their short-term cash flow needs via high-cost, short-term credit providers aka ‘payday loans.’ 

Far too often, they found themselves in cycles of debt and compounding interest as a result.

At Level, we believe strongly in the importance of acknowledging that short-term cash flow needs affect all income brackets. However, a lack of adequate solutions from employers has fuelled the popularity of payday loans which are outside of an employer’s control and damaging to employees’ financial health.

By introducing a salary-linked alternative that incurs no interest and can be settled in full at the end of each pay-cycle, employers can stop ignoring the problem and become part of the solution.

It is also important to recognise that short-term and long-term cash flow needs co-exist. 

Therefore, offering ‘point’ solutions that only address one or the other will never be sufficient. Salary advances should only be offered alongside an interest-bearing, salary-linked savings product, accessible from a single interface.

Level’s most established and engaged customers are enthusiastic users of both services. They adeptly analyse their financial needs and plan accordingly.

Behavioural Science and the salary-link

Behavioural science has garnered much interest of late. This is mainly due to its perceived potential to influence human behaviour at scale via interventions commonly known as ‘nudges’. 

Predictably these have yielded both positive and negative responses. Some interpret nudges as a paternalistic toolset that can engender beneficial habit changes in society, reducing litter for example or increasing organ donation.

Some interpret nudges as covert means of exerting influence through psychological trickery. 

Level embrace the principles of behavioural science but think it’s important to demystify the concept and clarify its practical application inside a fintech startup.

Earlier this year, we were proud to welcome Dr Jim Coke as Chief Behavioural Officer to the senior leadership team. Dr Coke’s initial focus was the definition of Level’s ‘Nudge Strategy’ and associated ‘Nudge Register’ which defined how behavioural science tactics could and should be deployed operationally.

What we learn from Level’s Nudge Strategy is that human beings naturally develop a range of cognitive biases (or ‘rules of thumb’) in order to process information and make decisions when time is limited. 

Foremost amongst these is what is known as ‘present bias’ - the tendency to prioritise short-term needs over those further away in time. This inevitably leads to what is known as ‘hyperbolic discounting’ which is choosing to reward oneself now rather than delay gratification.

The effects of this bias are obvious in terms of one’s inclination towards spending rather than saving. But with a salary-linked solution that solves both short-term and long-term needs, carefully chosen ‘nudges’ can be introduced to help one gradually invest in the latter so that the need for the former naturally attenuates over time.

By offering a holistic salary-linked solution to your employees, you can benefit from a better range of outcomes from behavioural science. 

Conclusion

In June of 2020, Doug Politi, writing in the Harvard Business Review, concluded that.

“Today’s global events are forcing employers to rethink their role in supporting their workers, especially in terms of pay.” 

The protracted nature of these events, exactly one year later, have only served to exacerbate this trend. 

Level’s experience introducing salary-linked services (such as earned wage access and payroll savings) to distributed workforces across the UK clearly indicates the extent of the value they deliver to financially fragile workers to solve a hybrid of short-term and long-term financial needs.

Only employers can deliver this value as only employers possess the super-power of the salary-link. We hope this unique capability will be increasingly acknowledged and utilised by more and more employers over time.

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