Salary advance schemes: lockdown lifesavers or a trap into debt?

Lockdown has been a trying time for millions of workers. Suddenly having to work from home, coupled with worries about future security and finances, have weighed heavily for many.

For an increasing number of cash-strapped workers, the solution has been Employer Salary Advance Schemes (ESAS). Through the likes of Hastee and Wagestream, they can access up to 50% of their wages before their regular payday. However, critics say the services can push consumers into cycles of debt and should be regulated like the payday lenders they aim to replace.

Last month, the salary advance industry was dealt a blow after the Financial Conduct Authority raised red flags over its lack of regulation. It warned of a lack of transparency around costs, and the likelihood of workers making repeat withdrawals and becoming dependent on the services to make ends meet.

ESAS providers strike deals with employers, and withdrawals are restricted to wages already “earned” according to the number of shifts or hours worked to date.

They usually sit between the employer’s payroll operations and the employee’s bank account, and track how much they can advance to the customer’s account. The firms deduct the advance and any fees or charges from the wages on payday.

One of the sector’s largest players, Wagestream, calls itself a “financial wellness company” and is backed by charities including the Joseph Rowntree Foundation, Barrow Cadbury Trust and Big Society Capital via the Fair By Design investment fund.

Wagestream, which launched in 2018, says its mission is to prevent employees from falling into cycles of debt, and to “eradicate” payday loans by 2022.

Together with provider Hastee, Wagestream says it offers a low-cost alternative to overdrafts, credit cards and payday lenders, the latter of which can still charge interest rates equal to an annual percentage rate (APR) of over 1,400%.

Salary advance firms charge a flat fee, or percentage, per withdrawal – Wagestream charges £1.75 per transaction while Hastee takes 2.5% after offering the first withdrawal – up to £100 – free.

The FCA says that these schemes can help employees deal with unforeseen expenses and occasional short-term cashflow when used in the right way. But, it warns, while they are often offered as part of a “wellbeing package”, and presented as a safer alternative to payday loans, they can raise similar issues.

As it explains, if employees withdraw a portion of their salaries early, they are more likely to run short before the next payday, potentially leading to a cycle of repeat advances and escalating fees. While the fees might be modest, there is a risk employees might not appreciate the true cost, and find it hard to compare it with the interest rate or APR on a standard loan.

“This can become particularly expensive if an employee uses the product repeatedly,” the FCA says. The charge, it says, can be higher than the price cap for payday loans and other high-cost short-term credit products, depending on the size of the advance and when it is used in the pay cycle.

But their popularity is rising. Hastee, which offers its services through 400 employers including the NHS, restaurant and pub chain Mitchells & Butlers, and London City Airport, boasts around 120,000 users a month. It says thousands signed up in mid-March amid the uncertainty of lockdown, leading to a big spike in withdrawals over March and April. Its users usually take an advance four times a month and are, on average, aged about 27 and earn £28,000 a year.

Wagestream, which has around 220,500 enrolled users employed by the likes of BrewDog, Leon, London’s Hackney Council and Fuller’s, saw active users double before lockdown. Despite a dip when everything was closed, it has recorded rising use among hospitality, retail and restaurant workers since the restrictions started being lifted in May. On average, users take an advance more than twice a month, worth around £68 each time.

Emma Steele, an investment manager at Wagestream backer Fair By Design, says it is “one of the best case studies of a business providing true cashflow-smoothing solutions to those households vulnerable to cashflow shocks. It is designed to bring people out of the cycle of debt by removing the need for debt altogether”.

However, Sara Williams, a debt adviser, campaigner and author of the Debt Camel blog, says the industry needs closer scrutiny. “Salary advance schemes have the potential to trap people into debt, having to borrow early in the next month as their ‘final salary’ has been reduced by repaying the previous loans.”

The schemes, she adds, look “much like payday loans but with a lower rate of interest. I think these should be regulated in the same way that loans are”.

The much-criticised payday loans industry is also crying “foul” over what they claim is preferential treatment for a similar – albeit cheaper – service. Jason Wassell, chief executive of the Consumer Finance Association, which represents short-term lenders, says the reason salary advance schemes cost less is because there is “almost no risk of them not being repaid”. He points out that customers have less protection and carry all the risk. The fact the advance is effectively repaid by the employer before users have the chance to cover key costs, mimics, he says, a controversial practice where payday lenders used to have priority access to borrowers’ bank accounts.

Wassell also echoes the FCA’s concerns over limited, or nonexistent, affordability checks, and the fact that regulated lenders cannot see any evidence of the use of a wage advance when they check credit files

The FCA says salary advance schemes could introduce notifications and alerts when workers start to use the service repeatedly or accumulate transaction charges. Those workers should also be directed towards debt advice charities.

But Hastee says its practices are already in line with many of the FCA recommendations, and any “unusual behaviour” will mean users are directed towards charities like the Money Advice Service. “Safety and governance are baked in with wellbeing algorithms monitoring a user’s shifts, earnings, deduction frequency, deduction amount, and the type of spending,” Hastee’s chief executive James Herbert says.

“Others in the industry may be regulated because they provide some sort of consumer credit, or control payroll, which Hastee does not.”

Wagestream also pushes back against claims that it is in any way a loan product and insists its services already featured alerts for repeat users, as well as user-controlled restrictions on withdrawals.

Its chief executive and co-founder Peter Briffet, says: “Our data clearly shows employees use Wagestream responsibly – with 93% of employees accessing less than 30% of their available wages – as it is their hard-earned money they are spending on emergency expenses, not falling into a cycle of credit and debt.”

How much does it cost?

If someone is running low on cash before payday, what are the options and how much do they cost?

Taking an advance or a “stream” through Wagestream will cost £1.75 each time, no matter the amount.

Payday lenders charge a variety of rates but Martin Lewis’s MoneySavingExpert says the fee is about £25 if you take out a loan of £100 for a month.