Banking app Revolut gives consumers the ability to advance up to half their salary at any time of the month, using a new feature.
The new payroll access product, Payday, will be available initially to UK businesses and their employees, and to Europe and the US in the coming months.
The British fintech company, which has more than 16 million customers worldwide, believes it will remove the financial stress many employees face between monthly paydays.
Revolut, which now has around 3.5 million UK customers and over 16 million worldwide, has officially become the UK’s most valuable fintech company with a price tag of a whopping £24 billion
It says it will also make them less dependent on expensive credit products such as payday loans.
Nik Storonsky, founder and chief executive at Revolut, said: “We believe in the importance of making financial wellness accessible to all, and this includes focusing on the impact of financial stability on the mental health of employees.
‘After the difficulties of the past year, the last thing employees need now is financial uncertainty and stress.’
He adds: “It’s important to move away from a situation where many are dependent on payday loans and expensive short-term credit, a dependency that is exacerbated by the monthly payment cycle.”
However, others have expressed concerns about the app which may cause some people to get into bad habits.
Andrew Hagger, founder and director of personal finance website MoneyComms, said: “I can see this would be a help to employees who suddenly have to cover an unexpected expense.
“But it’s not really something people should be doing every month, otherwise it could mean they have a deeper problem with spending that exceeds their income.”
“In a way, it’s just another form of being in the red.”
Nik Storonsky, founder and CEO of Revolut, believes the new product will help overcome people’s reliance on payday loans
How does Payday work?
Revolut’s platform and app plugs into an employer’s payroll system, allowing employees to view their available accrued earnings and select the amount they want to withdraw directly into their main account earlier in the month.
Employees must be a Revolut retail customer and choose to have their salary deposited into their Revolut account in order to use the Payday product.
Payday is also only available to customers whose employers have signed up for the service with Revolut.
The fintech company charges a flat fee of £1.50 each time a customer chooses to access their paycheck earlier.
It also allows clients to withdraw up to 50 percent of their accrued wages at any time, although this limit is at the discretion of the employer and can be controlled or reduced by any company.
Are there other products like Payday?
This is not the first salary advance scheme to be introduced.
There are other apps that allow employees to access a portion of the wages already earned, with many not allowing customers to take more than 50 percent of their wages.
Hastee, which launched in August 2017, claimed to be the first Earnings on Demand platform to be launched in the UK.
The app is used by over 300,000 employees from various organizations across Europe, including NHS South London and Maudsley, Mitchells & Butlers and London City Airport.
It offers clients up to 50 percent of their salary upfront and employees receive their first withdrawal, up to £100, for free.
After that, it charges a 2.5 percent transaction fee — but it never charges interest.
In most cases, the compensation is paid by the employee when he withdraws his earnings, but employers have the option to cover these costs for their staff.
Another established early payday provider is Wagestream, which launched in the UK three years ago.
To date, more than 200 employers offer Wagestream’s service to their employees in industries such as hospitality, retail, security and healthcare.
As with Hastee, employees can access 50 percent of their earnings before the end of the pay cycle.
If employers choose to pass on the transaction processing fee, employees will typically have to pay £1.75 each time they access their earnings.
Worrying that this could lead to overspending
While Revolut claims to offer a cheaper alternative to credit cards and payday loans for customers who might otherwise rely on help with their cash flow problems, some commentators view the new product as dangerous.
They fear that this could lead to poor money management and more overspending among people who may already be in a financially vulnerable position.
Debt charity Step Change has warned that while payroll advance schemes may provide some benefit to those who would otherwise switch to high-cost credit, these products also carry some risks depending on how they are used, such as if users fall into a cycle of repeated use.
Peter Tutton, Head of Policy at Step Change said: “While wage schemes have their place to potentially help people avoid more problematic forms of borrowing, we would like the FCA to build on the evidence gathered on these schemes by ensuring that the payroll advance industry develops the strong and effective code of best practice recommended by the review.
“HM Treasury should be ready to bring payroll advances loans under FCA regulations, given signs of growing consumer harm.”
Payday’s opponents say it could lead to more debt for those already struggling financially
Revolut claims it has already taken steps to warn those who misuse the product.
A Revolut spokesperson said: “We have designed responsible use warnings to ensure there is no overuse of the products.”
‘In addition, we will monitor signals that users may be in financial difficulties.
“If it becomes apparent that a customer may be in financial difficulty, Revolut will issue warnings to customers regarding the use of the product and, where appropriate, [them] with the contact details of charities such as Citizens Advice Bureau and Stepchange.
‘In certain cases, we can also gradually lower the limit of the accrued salary that an employee can reach.’
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