• Zaneb Iqbal

Predatory Payday Schemes Vs. On-Demand Pay: What’s the Difference?

You’re responsible with your money. Bills are paid on time. Maybe you’ve even started small savings or retirement fund. But financial emergencies come when you least expect them, and many Americans live paycheck to paycheck with inadequate savings to absorb such a financial shock. Everyday expenses and savings efforts are interrupted or depleted to mitigate the emergency, leaving you drained and desperate.


You look for a solution to bridge the financial gap, incur emergency expenses, and recover quickly from the interruption, but what can you do with little savings and patchy credit?


What if you could get the money you’ve earned from working before your payday. You may have heard of a payday loan or on-demand pay as a way to get money quickly. They sound similar but they’re worlds apart. One is a predatory lending scheme that exploits workers, and one is an earned wage access solution that empowers workers.


Let’s look at the differences between payday loans and on-demand pay so you will be ready to act with smart judgment when a financial emergency strikes.


What are Predatory Payday Schemes?

Payday lending schemes are often considered a solution when an individual faces a sudden emergency expense. These expenses are usually caused by losing a job, experiencing a medical emergency, an expensive car repair, or a death in the family.


When resolve to these setbacks isn’t found in the checking or savings accounts, and credit is not an option, hard-up individuals search for an advance on work pay. Hence, the search immediately leads to a payday loan, also known as a salary advance, payroll loan, or cash advance loan.

Sounds great, right?

Wrong. Don’t be fooled!


Payday loans target vulnerable people who feel they have no other option or don’t know what to watch out for. Most of these lenders are predatory and the benefit is one-sided.


Four in five times, the side benefiting is not the borrower; it’s the lender.


“Cash now” sounds perfect, but predatory payday lenders charge ultra-high interest rates, hidden fees, and penalties. Some won’t even provide a proper contract, further protecting the lending agency but taking advantage of the borrower. Before you know it, you’re even deeper in a financial ruin than before, with an impossibly expensive additional bill.


When it looks grim for a consumer in financial struggle, that’s when predators snap to action, appearing as a last resort. Borrowers who cannot get conventional support, or don’t know a better way, often feel they have no other option but to surrender to these payday schemes for help.


However, the evolving financial technology and changing employee needs have introduced multiple alternatives to predatory payday schemes that offer safe and cost-effective solutions to workers.


Defining On-Demand Pay

On-Demand Pay, also known as earned wage access (EWA), wages on-demand, accrued wage access or instant access to earnings is a safe, smart, and fast method for handling unforeseen expenses.


Rather than waiting for a traditional payday, on-demand pay allows employees to access their earnings as soon as they earn them. It works like this: wage balances accrue for the daily hours worked. Employees access a portion of those wages, most often via an app, and transfer this money to an account for instant use.


Employers are not inconvenienced because they’re not providing that money and payroll runs as usual without interruption.


Learn more about the revolution at orbispay.me


The concept of on-demand pay began to rise around 2010 as recession pressures settled in. Many American workers clamored for solutions to deal with rising costs and falling credit. Recognizing the extreme benefits this offered to workers, other progressive businesses, like ADP, Sage Group, and Lyft, adopted similar on-demand blueprints.



EY, one of the largest and most prestigious global accounting and financial services firm, estimates that about $1T across the nation is tied up in employer payroll on any given day.


What would it do for employee financial wellness to have direct and instant access to that capital? On-demand pay shifts funds fast so day-to-day life can keep going without a detrimental financial burden.


Let’s Compare

Predatory payday schemes are expensive and often set the borrower up for failure.


“The average APR on a credit card today is around 15%, but the average APR for a payday loan is a massive 400% and can even be found at over 900%, making it impossible to pay it down. “

CFPB


The borrower ends up paying back nearly 10x of what was borrowed. It can be argued that this interest rate is misleading because if the full amount is paid back to the lender in the next paycheck, no interest will be applied.

However, most payday loans are not paid back in full by the next payday. In fact, according to the Consumer Financial Protection Bureau (CFPB), 80% of these loans are renewed multiple times. It’s difficult to pay this loan in full by the next payday because it means the worker still must incur a significant length of time without a check and the expense of daily living will not pause.


Even if you dodge the absurd APR, these predators still get more of your money for the borrowing. On your next payday, you’ll expect a loan repayment transaction for $X, but when you check your balance, “Oh my goodness, where’s all my money?!”.


Unbeknownst to you, the payday advance lender has taken the repayment but that’s not all. These agreements always contain hidden fees and surcharges. Since the clientele is desperate, vulnerable, and unaware, these scavenger lenders swoop in to feed off the disaster in the form of charges you won’t be expecting and can’t dispute.


Two major recent statistics really open our eyes when considering what to do amid the financial crisis:

  • 61% of Americans cannot bear an unexpected expense of $1000 or more

  • 64% of Americans are living paycheck-to-paycheck

With so many of us unable to balance an unexpected cost of $1000+ without disruption to our budget, a more ethical, economically viable option must be brought to light and made the norm.

On-demand pay delivers this solution with no interest rates, no hidden charges, and only one small fee, comparable to that of an ATM withdrawal.

Employees never have to strike risky deals with shady operators to get the money they need for financial wellness. Employees have better control over finances in general and in an emergency.

For employers, on-demand pay is a win-win. Workers are no longer distracted by emergency financial worries and therefore focus better on their tasks. Access to earned wages doesn’t disrupt the HR process or payroll and employers are not responsible for fronting the money to workers who request it. Even better, adding this financial perk to a holistic employee benefits package will cost nothing. The service is free to employers; there’s no reason not to add this feature to employee benefits to attract and retain talented workers.


Final Verdict

The world and its expenses are changing. Our environment and obligations are instant and on-demand, so it makes sense that our resources should be, too. Payday once or twice a month may have made more sense in the 1940s and 50s, but it looks somewhat obsolete in the fast-paced world of technology and science we share today. Our challenges are more elastic, and our finances must be the same.


“It’s time we started looking at wages differently, which is why our wages on-demand platform empowers and protects the most vulnerable.”

Mo Saeed, CEO OrbisPay


If you’re an employee, protect yourself now and ask your leaders to include on-demand pay as a reward for financial wellness in your employee benefits package. If you’re an employer, then don’t wait any further.


Attract and retain talent with access to earned wages at no cost or interruption to your business. You rely on your workers, and they depend on you. Cultivate financial wellness with on-demand pay.

Get OrbisPay for your business