How coronavirus changed the way hourly workers manage their money

August 7, 2020 12:01 AM

Now that the U.S. is five months into the COVID crisis a new victim is emerging. Caught between small businesses furloughing their staff landlords needing to collect rent are millions of hourly workers.

Record unemployment levels, reductions in hours available to work and a stimulus package that has seen its funds used up has meant that many hourly workers are struggling to make ends meet at a higher level than before the pandemic. Having to choose which bills to pay and where to obtain funds to buy groceries or pay rent has left this segment of the workforce vulnerable. The recent spate of credit card account closures and credit limit decreases by banks has sapped the very lifelines many of these workers were looking to use in order to survive.

Now caught in a vicious bill pay spiral, it appears that the payday lending industry stands to gain — while also creating bigger debt problems for this audience down the road. But a host of new and existing fintechs, ranging from challenger banks to earned wage access (EWA) providers, are seeking to provide a more consumer-friendly alternative.

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The COVID-19 pandemic has forced many hourly workers to exhaust their savings to pay for what many consider common, everyday bills. As the economic hardship continues to batter the U.S. and global economies, the now common phrase being repeated by politicians — “It will likely get worse before it gets better” — will be particularly painful for hourly and gig workers.

According to a July 2020 study by Branch, a financial wellness mobile app for hourly workers that also provides EWA services, over half (52%) of hourly workers have no emergency savings set aside, up from 40% in its June 2019 pre-pandemic survey. Another third have under $500 saved, broken down as 20% having between $1-$149 and 14% having between $150-$$499. The number of hourly workers who, pre-pandemic, had $1,000 or more has shrunk by more than half, to 7%, from 15.4% in 2019.

“The biggest thing that came out in this year’s study was the big jump in workers that had no savings,” said Atif Siddiqi, founder and CEO of Branch. It went up by 12 percentage points. There are a lot of working people without savings. It also says a lot about the current state of struggle that hourly workers are having when it comes to paying bills. There’s nothing left in the savings account in case of any emergencies. They have nothing to fall back onto.”

One major challenge for most hourly workers, when it comes to paying bills, is their lower levels of participation with traditional banking. Issues such as high minimum costs, lengthy gasoline authorization holds on debit cards and slow paycheck access become magnified for those making less money.

Based on data from the FDIC 2017 National Survey of Unbanked and Underbanked Households, almost half (48%) of Black households are considered disenfranchised from traditional banking (16.9% unbanked and 31.1% underbanked), compared to just 17.1% of white households (3% unbanked and 14% underbanked). One factor for the high levels of Black disenfranchisement is that banks in predominantly Black neighborhoods charge higher upfront and monthly minimum deposits than they do in predominantly white neighborhoods.

Using annual income as a measure for bank disenfranchisement, for those making less than $15,000 it's 50%, and for those making $15,000 to $30,000 it's over one-third (35.9%).

That’s where challenger banks such as Current can make a difference for lower income and minority consumers in terms of making banking more affordable and accessible.

“The average person signing up for Current is a 27-year old working at DoorDash, Amazon, Walmart, in the military or as a nurse,” said Stuart Sopp, founder and CEO of Current. “They don’t go to branches and want a mobile-first experience. They are demanding a new way of interacting with their money. Getting paid on a Wednesday instead of Friday and getting a gas hold removed from a debit card faster can make a big difference to younger consumers and those living paycheck-to-paycheck. It’s been instrumental to us in acquiring new customers.”

As many hourly workers have found themselves working fewer hours and shifts, the need to access earned, but not yet paid wages has grown. Arguably, costs have risen in the pandemic, making things even worse. Based on data from the Bureau of Labor Statistics, the cost of groceries (food at home) rose by 4.1% in April, and then again by 4.8% in May. CNBC called the April increase the largest monthly grocery inflation rate since 1974.

Amid the backdrop of rising costs, hourly workers now want earned wage access at a higher level than they did last year. According to a July 2020 study by Branch, 80% of hourly workers reported that they would find the ability to access their pay before the official payday very helpful, up from 57% in June 2019. The workers who reported that they wouldn’t access their wages early if they could fell from 13.8% in June 2019 to just 3% in July 2020.

“Employers understand the challenges that their employees are going through during this time and there is a social responsibility that they have to help them [hourly and gig workers] as much as possible," said Siddiqi. "In our deal with Domino’s, it was a great use case outside of just accessing earned wages since we are able to also push tips and mileage reimbursements digitally. In many cases the individual Domino’s store didn’t have the cash on hand at the end of the day to pay its drivers. By using Branch’s services, we were able to help them cash out the drivers at the end of each shift electronically.”

One of the biggest hurdles hourly workers face in managing a household budget is what to do with the variability in pay — something almost never experienced by salaried workers, other than those who receive large commissions. By contrast, expenses such as rent, car payments, insurance bills and subscription services typically don’t vary.

Based on data from a July 2020 study by Branch, over two-thirds (69%) of hourly workers experienced some level of variability in their weekly pay. In fact, 43% reported that their weekly pay varied either a lot or some, which can make paying a monthly bill very difficult. Even for the one-quarter (26%) of workers who reported their weekly pay varied a little, the onus to save falls squarely on the worker for the months when their pay may rise slightly to make up for the months when their pay may be somewhat lower than the norm.

“We noticed that there has been a shift in concern among workers to paying for shorter-term needs such as gas and utility bills over paying for rent. It’s a testament to how cash-strapped hourly and gig workers are right now,” noted Siddiqi.

It may come as a surprise to many salaried workers as to how ubiquitous payday lending storefronts are in the U.S.: They are as prolific as McDonald’s and Starbucks, which are as iconic as one can get in the branding world.

According to the Federal Reserve Bank of St. Louis, there were 14,348 payday lending storefronts in the U.S. in 2017. These lenders also exist in the digital channel to serve up payday loans to cash-hungry customers.

As payday lenders offer high-priced loans to consumers needing to pay monthly bills or emergency expenses, they tend to generate a significant amount of controversy. Consumer advocacy groups argue that payday lenders are predators picking on those who can least afford their services and charging steep rates.

To provide a more affordable alternative, an entire industry has blossomed, serving up EWA advances to hourly workers in need of accessing a portion of their earned wages early. In May, the human capital management firm Ceridian launched its EWA offering, joining the ranks of Branch, PayActiv, Even, Earnin and DailyPay. In July, AnyDay, a unit of QRails, launched an EWA service as well.

“Earned wage access payments are treated as an advance by the payroll processor, but not as a loan,” said Gerard Griffin, founder and CEO of AnyDay, a newly launched earned wage access provider. “We are enabling employers to advance these funds to help their employees, especially those who are living paycheck-to-paycheck. We are all [the EWA industry] trying to replace payday lenders who prey on people that are financially struggling and have few alternatives. Getting access to a portion of money that has been earned but not yet paid is a much better alternative.”