Is the way you’re paying your employees fair for everyone? Are the financial benefits you offer ones that all employees can take advantage of? These are the kinds of questions employers need to ask around financial inclusion, and they’ve never been more important to address than right now.
The truth is, traditional payroll methods and employer-offered financial benefits exclude more people than you might think. While the payroll methods you use might seem equitable, 25% of Americans are unbanked or underbanked, meaning they actually have no direct deposit abilities or access to a traditional bank account, credit or debit cards.
What’s more, 78% of hourly workers were living paycheck to paycheck pre-COVID, and the number has likely climbed. For these employees, the traditional two-week pay cycle can prove a challenging wait. These workers typically have few options for financial services that fit their needs because traditional banking services often have minimum balance requirements or hefty overdraft fees that are out of reach for them.
It’s crucial that the payment methods and benefits you provide your employees are actually accessible and convenient for all—which means considering financial inclusion.
Financial inclusion meets fintech
Financial inclusion means that people should have fair and equal access to financial services. The emergence of fintech (financial technology) companies aims to promote financial inclusion by addressing the problems of underbanked or unbanked individuals listed above, like excessive fees and minimum balance requirements, as well as methods to address the downfalls of the traditional two-week pay cycle.
If you’re curious about using fintech to pay your employees or offer them more useful financial benefits, here are just a few ways fintech fosters financial inclusion.
1. Lowers transaction and service costs
First and foremost, fintech aims to lower transaction and service costs for people who would otherwise be unable to benefit from standard financial services. Minimum balance requirements, for example, create a barrier between many working Americans and the ability to open a bank account. And overdraft fees or account maintenance fees are another story altogether. (Last year, big banks charged more than $11 billion in fees alone!)
For people living paycheck to paycheck, overdrafting can send them into a serious cycle of debt. They can’t afford something, so they overdraft. Then, they can’t afford to pay the overdraft fee so they’re charged more and more money the longer it takes to pay it. It’s a vicious cycle that leads many people to take out high-interest payday loans which are even more predatory and can have long-lasting ramifications.
Fintech companies are seeking to change that. They typically don’t charge the unnecessary fees of big banks or have minimum balance requirements. Many (including Branch!) won’t let a customer overdraft, so there’s never the concern that overdraft fees and late fees will pile up and cause additional financial strife.
2. Provides them options outside of the traditional payroll cycle
The traditional two-week pay cycle is not currently working for every American. Hourly workers (especially those who rely on tips) can deal with a huge amount of pay variance on a day to day basis. If you have a busy week as a server, for instance, but the following week is extremely slow, that pay variance affects your life—and can be hard to budget for. Even harder is trying to account for life’s unpredictable expenses, which happen to all of us. What happens if that server has to deal with an unexpected car repair during a week when his paycheck is lighter than normal?
Many fintech companies offer earned wage access (EWA) to combat this. Earned wage access allows people to access a portion of their earned wages ahead of payday when needed. By helping people access their earned money when they need it, fintech companies can help prevent the overdraft fees or loans many people fall victim to when dealing with unexpected bills or financial hardship.
3. Limits intimidation
Many people are simply intimidated by traditional banks, especially if they’re not in the financial situation they want to be in. When you have a face-to-face interaction with someone about the amount of money in your bank account, it can be intimidating. When you may not know the answers to all the questions you’re being asked, it can be intimidating. Plus, with many banks, the KYC (Know Your Customer) process can be drawn out and lengthy. This is a traditional verification process used to set someone up with a bank account. But, if people don’t have the necessary documentation like a utility bill in their name, for example, they can be disqualified.
With fintech, banking is put in the hands of the consumer. The KYC process is often more streamlined and fair, without creating barriers between a person who is financially struggling and the financial services they’re hoping to use. Some fintech companies (including Branch, not to toot our own horn!) even include financial tools that can help people learn to make a budget or get a better, more holistic view of their spending habits. For example, our Auto-Budget feature alerts someone when they have an upcoming bill due and provides an at-a-glance view of their expenses and payments.
Fintech helps people better understand their financial situation and use beneficial financial services without having to jump through a bunch of hoops or explain their individual circumstances. It can provide them meaningful tools to improve their financial situation, from earned wage access to budgeting help and more. At the end of the day, it opens the door to financial services that they might not have had access to otherwise.
Ready to learn more about financial tools that can help both you and your employees?