Everything You Need To Know About Wage Advance Services
March 16, 2021
Surfing the buy-now-pay-later wave that swept through Australia over the past year, a new crop of players offering ‘pay on demand’ services have created space for themselves within the market. Just like BNPL, these services focus on their digital offering, utilising bold, colourful graphics designed to appeal to a younger generation. And just like BNPL, they promise users ‘greater control’ over their finances.
So, what sets them apart? As you most likely know, most BNPL platforms act as a tool for consumers to buy what they want, and then spread the cost of paying for it, typically with no interest applied. Pay on demand services – also known as wage advance services – on the other hand, offer users the opportunity to access their paycheque early, again, with no interest applied.
In this way, these wage advance services – led by Beforepay and MyPayNow – straddle the line between BNPL and more traditional forms of credit, such as personal loans and credit cards.
Like BNPL, wage advance services provide access to funds without the burden of interest. But, users don’t have to rely on their preferred BNPL platform to be offered by a particular retailer when they want to buy something. As such, wage advance services are more like personal loans and credit cards, in that they allow the user to use their funds on pretty much anything they want. But again with that kicker: no interest.
Sounds like the best of both worlds, right? While the concept of getting your hands on your own money earlier is certainly appealing, wage advance services aren’t without cost. While there’s no interest to pay, there are fees you will have to cover.
Then there’s your potential for coming to rely on these services. Say you access your paycheque early this month. You’ll then have to work harder to make it stretch until the following paycheque is due, with a chunk of it missing due to fees. If you can’t, you may be forced to apply for another wage advance, paying out more in fees in the process. This could lead to a cycle that that’s hard to get out of.
Other potential issues have been raised regarding the fact that, due to their structure, wage advance providers do not need an Australian Credit Licence. As such, they don’t have to abide by the same standards during their approvals process as licensed credit providers. It also means users enjoy fewer consumer protections.
Add to that the concern that wage advance services may be targeting those who are struggling financially – perhaps as a result of COVID – and you can see why the services offered within this burgeoning industry are becoming a cause for concern for some.
How Does It Work?
Which is why we’re going to delve deeper into the topic in this post. Starting out by finding out how wage advance services work, we’ll look at what they have to offer, and then finish up with the various pros and cons involved.
Launched in January 2020, Aussie fintech Beforepay was one of the first on the wage advance scene here in Australia. While its offering has changed slightly – mostly with regards to how much users can access as an advance – the concept of what Beforepay provides has remained the same, in that it allows you to “get paid before your pay”.
Here’s how it works.
- First, you sync the app to the bank account where your paycheque is deposited. Beforepay uses this banking info to determine how much you get paid, and how you typically spend your money.
- Beforepay will then advise you how much you can cash out – up to a maximum of $1,000 – of which, you can select a portion or the total amount on offer.
- After making your selection, Beforepay deposits the funds into your account within 60 seconds.
- To repay your wage advance, you can pay it all off on ‘payday’, or make use of Beforepay’s flexible repayment options, paying off your advance over a period of up to four weeks.
- Alongside the amount advanced, you will pay a fixed fee set at 5% of the amount advanced.
An example of how this may work? Let’s say you took Beforepay up on an advance of $1,000, you would pay a fee of $50. You could then pay back the advance in one lump sum when your paycheque comes in, or you could opt to pay it off in four weekly instalments of $250 (plus fees).
How does the company see itself then? Speaking to Yahoo Finance in November 2020, Beforepay co-founder and CEO Tarek Ayoub said Beforepay fills a gap in the market that services such as Afterpay and Zip miss (1).
According to Ayoub, 60% of Beforepay customers use BNPL. As such, Beforepay is mostly used where BNPL isn’t offered, on everything from Netflix and Spotify subscriptions, to food and bills. “What we do find is most users are spending it on groceries and transport. So it’s things you can’t really get buy-now-pay-later on,” he said.
With that, Ayoub insisted Beforepay was not really designed to cover big-ticket purchases. “It’s just for regular little items. We don’t want you to get into big debt. We just want you to be able to repay it quickly and efficiently so you’re not in any trouble with your budget.”
Launched in July 2020, competitor MyPayNow works in much the same way as Beforepay.
- When you start using the service, you provide info regarding your employment and finances. MyPayNow’s ‘cutting edge AI’ then uses those details to work out how much of an advance to give you.
- You can then make as many requests as you want each pay cycle, accessing amounts from $50, up to a quarter of your wage. Your requested amount will hit your account within 60 seconds.
- When you receive your next paycheck, MyPayNow will automatically deduct the amount advanced plus a 5% fee via direct debit. The website also advises ‘flexible repayment options’ are now available.
While you may or may not be aware of newcomers Beforepay and MyPayNow, you will have heard of CommBank. At the end of 2020, CommBank dipped its toe in the expanding wage advance pool when it quietly announced the launch of its AdvancePay feature to select customers.
CommBank describes AdvancePay as “a short term facility applied to your everyday account as a temporary limit”. How does it work?
- If you don’t think the funds in your everyday account will stretch until payday, you can ask for an advance up to $750 via NetBank or the CommBank app, to be repaid when your paycheque drops. The application takes a couple of minutes to process, but the decision will take up to one business day to be processed.
- In terms of costs, a fee will be applied depending on the amount you choose to advance. On amounts of $300 to $500, a fee of $5 will be applied. On amounts of $501 to $750, a fee of $10 will be applied.
- When you apply for an advance, you nominate a repayment date. On that date, access to your AdvancePay amount ends, and money paid into your account (in other words, your paycheque), will be used to cover the shortfall in AdvancePay funds.
And if the money isn’t there in your account to repay your AdvancePay? CommBank notes when that is the case: “Your account will be considered overdrawn and you’ll be charged the debit excess interest rate (currently 14.90% p.a.)”.
This is different to Beforepay and MyPayNow, neither of which charge late fees or interest on late payments. Instead, these platforms restrict the use of their service until the amount has been repaid.
As AdvancePay is still currently operating as a pilot, it’s only offered to customers the bank deems eligible. It also comes with a series of ‘guardrails’ to protect customers.
“These guardrails include having regular salary deposited into a CBA account, having access to only a single facility at a time, frequency limits in terms of the number of times the product can be used in a year and a cap on how much of their next pay can be accessed to ensure that customers still have money left on payday,” a CommBank spokesperson said to Business Insider (2).
The bank is expecting to roll out the trial as a permanent feature in the coming months.
Weighing Up the Pros & Cons
So, now we know what each of these providers has to offer and how they operate, let’s get into the pros and cons of using the services.
When you apply for a personal loan or credit card, the credit provider must adhere to a certain set of responsible lending standards to determine whether you can afford to take on the debt, and repay it without suffering financial stress.
Like BNPL platforms, wage advance services don’t fall under this label of ‘credit provider’, and as such, don’t need to adhere to the same standards. Looking in particular at the approval methods of Beforepay and MyPayNow, that means no credit check.
Instead, these providers utilise a technique known as screen scraping, which involves collecting screen display data from each user’s bank account, which they then use to evaluate their financial situation and decide whether to take them on as a customer.
MyPayNow managing director, Bronson Powe, said screen scraping is “the most accurate and secure way to obtain statements, as it is real-time transactional data directly from the consumer’s bank”. In saying this, he pointed to the fact that credit scores can vary between the agencies that compile them, and may contain outdated information. (3)
In scrutinising three months of transaction data, Powe said MyPayNow uses its own “extensive assessment to make sure our product is suited to each customer”. Among other criteria, applicants must be employed and earn at least $450 a week, in order to be accepted.
Powe also pointed out that, “MyPayNow declines 60% of its applicants as we deem them to be unsuitable for our service”.
With that being said, there have been concerns regarding the accuracy of screen scraping. In a 2019 submission to the Senate Select Committee on Financial Technology and Regulatory Technology, examples from clients were given where payday lenders used screen-scraped data that mistook lump sums from Centrelink as regular income, and payments to a cafe as rent, among other errors.
Data Sharing & Privacy
Aside from the potential for incorrect information being gathered, screen scraping has experts also worried about privacy. If, for example, you shared your online banking log-in details to allow a company to screen scrape your info, you may find yourself in breach of the terms and conditions of your bank account.
This would place you at risk of losing your protections under the ePayments Code, meaning you could be liable for any losses incurred through theft or other misuse of your log-in details.
Then there’s the issue of data sharing. Alexandra Kelly, director of casework at the Financial Rights Legal Centre, said she was concerned about other ways companies using these methods might use people’s data. (3)
“Are they sharing it? Are they making money out of it? That’s one aspect of these new services that I find very worrying,” she said, adding that many of the centre’s clients, after having a credit application rejected, get an unprompted text or email from another provider offering them credit.
It’s worth pointing out that both MyPayNow and Beforepay state they don’t sell user information or data they are provided.
Checking out the websites for MyPayNow and Beforepay, you can see from their bold, colourful graphics that they are designed to be both accessible and appealing. Both sites also make plenty of effort to outline just how easy the process of using their service is.
Some have likened these websites to those of payday lenders, in that they appear to target young adults. Positioning itself as a trusted ally, rather than a credit product, MyPayNow states, “Think of us like a supportive Aunt or Uncle – we’ll never judge, and we’ve always got your back if you find yourself in a sticky money situation”.
Coming face-to-face with the “harm and distress” caused by easy credit, Julia Davis, the financial rights policy and communications officer at the Financial Rights Legal Centre said to the Sydney Morning Herald, “Like many other opportunistic products, MyPayNow will be attractive to people who are struggling to make ends meet”. (4)
Davis was also concerned that MyPayNow was using Instagram and Facebook to promote itself with cash giveaways, describing this as “worrying predatory behaviour”.
Meanwhile, Tom Abourizk, a policy officer at the Consumer Action Law Centre, shared similar misgivings over whether wage advance services such as MyPayNow and Beforepay target people who are in financial hardship, effectively digging them into worse situations.
By promoting the fact that they don’t do credit checks before advancing users money, he said these companies are likely to attract customers who “know that credit might not be available to them otherwise… and often they’re people in real desperation”. (3)
MyPayNow chief innovation officer Chris Appleyard disputed this, saying their average user was 34, with a higher salary than the national average. “This is definitely not payday lending – we don’t charge interest,” Appleyard said. “This is real-time wages. We’re doing for the wages and payroll industry what Afterpay did for lay-by.” (4)
Fewer Consumer Protections
As we mentioned previously, wage advance companies are not labelled in the same way as traditional credit providers. Why?
Under the National Consumer Credit Protection Act 2009, this type of ‘short-term credit’ is an exempt product, in that it is provided over a period of less than 62 days, its fees are no more than 5% of the amount loaned, and the annual interest rate is no higher than 24%.
What this means for providers is that aside from not having to carry out credit checks, they also don’t have to be members of the Australian Financial Complaints Authority. So, users cannot access this independent dispute resolution scheme, should things go wrong.
Wage advance companies are also not obliged to offer financial hardship assistance, which again, could cause issues for users who find themselves in financial distress.
Ms Davis of the Financial Rights Legal Centre described this as a “sleeper issue”, with the full extent of harm on individuals not becoming apparent for months or years.
Creating Cycle of Debt
While users may certainly access these wage advances services only once, in dire circumstances, both Beforepay and MyPayNow talk up the way in which their services can be used again and again.
Looking at the MyPayNow site, its site shows off the opportunity to ‘repay and repeat’, encouraging users to continue to use the service as soon as their previous advance has been paid off. The site also mentions the fact that while advances may be limited to a quarter of each user’s wage, regular users may be able to advance more of their wage in the future.
Fiona Guthrie, the chief executive of Financial Counselling Australia, stressed people should be cautious before using features such as wage advances. “The problem will be that if you’re short of money one pay cycle, bringing it forward may just mean you’re caught short next time,” she said. “People may find themselves trapped into an endless cycle.” (4)
It is worth noting that in providing its service, CommBank seems more restrained in its encouragement of repeat use. Limiting the number of times users can access AdvancePay, CommBank states the following on its website:
“CommBank AdvancePay is a short term facility which we offer at our discretion and may not be available every pay cycle. If you need ongoing or longer term credit, other borrowing options may be more suitable (e.g. a personal overdraft, a credit card or accessing available redraw on your home loan).”
CommBank also advises customers who are “facing financial difficulty” to look beyond AdvancePay, and to speak to its Financial Assistance Solutions team for help instead.
With that being said, users will still turn to wage advance services such as these for their promise of fast cash and low fees. Financial commentator Nicole Pedersen-McKinnon said she had two “huge” warnings about pay on demand services such as these. (1)
“The first is that whenever you spend money you haven’t yet received – whether you’ve technically earned it already, or not – you pay a penalty,” she said. “That means your money doesn’t go as far, straight up.”
“But my second big warning is that accessing your money in small chunks like this leaves you in danger of falling short of the big savings that you need, for everything from bills and insurances, to your next holiday.”
“Sitting down with a fortnightly or monthly amount, and slicing and dicing it in the cleverest way, is a far better strategy.”
What’s the Alternative?
And if you haven’t managed to do that? If you don’t have savings set aside, and you haven’t managed to make your budget stretch this month, what are the alternatives to choosing a wage advance service?
If you have control over your finances in general, you could consider an alternative product such as a personal loan or a credit card.
Applying for a small personal loan with minimal interest could help you get back on track, clearing any other debts you’ve got that are causing your budget to stretch, either because they are demanding too much in the short term, or their associated interest costs are too high.
Alternatively, a credit card could work for future shortfalls between paychecks – as long as you manage it correctly. Opt for a no annual fee card and keep it for emergency use only, being sure to only use it on spending you know you can repay at the end of the month.
On the other hand, if you are struggling to keep your finances under control, you may want to talk over your options with an expert. The National Debt Helpline is on hand to offer free, independent and confidential financial advice, and could help you navigate your options more clearly.
Everything You Need To Know About Wage Advance Services
March 16, 2021
So, what sets them apart? As you most likely know, most BNPL platforms act as a tool for consumers to buy what they want, and then spread the cost of paying for it, typically with no interest applied.Read more ›