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Earned Wage Access vs. Early Direct Deposit: What’s the Difference?

Brink's Money

06 Apr 2021

Why do most of us get paid every two weeks? The answer is about technology—outdated technology, in particular.

Until recent decades, all paychecks were, in fact, physical checks. Checks take time to produce, cost money to mail, and require effort to deposit at a bank. All those factors supported a longer stretch between pay periods. 

But those hurdles are now avoidable.

Contemporary technology has streamlined the payment process, and it’s increasingly harder to explain to employees why they shouldn’t have access to wages soon—if not immediately—after they’ve earned them.

Why employees need access to earned wages—and what hasn’t worked so far

A 2020 survey found that nearly one-third of U.S. homeowners have less than $500 in emergency funds. The percentage increases to 50% for homeowners who earn less than $50,000 per year. A delay of even a few days between wages earned and wages paid can cause serious financial stress.

Until recently, payday lenders have filled the gap between when employees earn wages and when they receive payment. That solution is fraught with negatives, like predatory lending practices and endless cycles of debt.

There are other, better solutions. Two common ways for employees to access earned wages before a slated payday are earned wage access and early direct deposit.

So how does each work? And what are the key differences?

How earned wage access works

The term “earned wage access” was coined by Safwan Shah, the founder of Payactiv. (Brink’s Money uses Payactiv technology to offer earned wage access to enrolled employers. You can learn more here.)

The wording is intentional, Shah explained to Forbes: "It's for wages earned, so it's not early, which connotes impatience; it's wage, not income because income can be commission or something like that; and it's access, not an advance, which implies as if someone did you a favor. The reason for each word was very specific."

As we’ve detailed before, earned wage access, also called on-demand wage access, is an added benefit to employees—an aid to navigate unexpected financial situations, prevent missed payments that may damage credit, and avoid overdue and overdraft fees, which further sap limited financial resources.

Those benefits have a real impact, as a Harvard Kennedy School study found. An analysis there estimated that employee attrition was 28% lower for employers using a program to make wages more “liquid.”

Not all earned wage access programs, however, are the same.

Employer-sponsored vs. third-party earned wage access

Employer-sponsored earned wage access programs have key benefits compared to third-party platforms marketed directly to employees:

  • Employer-sponsored programs calculate wages accurately. Third-party platforms can only estimate wages, making it possible for employees to “overdraw” on their wages based on those platforms’ overestimates, leading employees into debt.
  • Employers can control the rate at which employees can access funds. The rate can include both frequency (i.e. how often employees can request access to funds) and the amount of funds an employee can access (either a percentage of their total paycheck, like 50%, or a hard cap, such as $500).
  • Employer-sponsored programs protect employees from unexpected fees. Many third-party programs don’t have the best interest of employees in mind and layer in complex fees and “optional” but relentless requests for “tips.”

Employer-sponsored earned wage access programs have employees at their center—the goal is to provide a benefit to employees that supports their financial independence and makes them more likely to stick around.

For their part, employers get more loyal employees, reducing turnover and the expenses associated with hiring and training new employees.

But wouldn’t an option like early direct deposit offer nearly the same thing?

How early direct deposit works

First and foremost, early direct deposit—unlike earned wage access—is not a solution for the underbanked. You need a traditional checking account for direct deposit, and many underbanked employees are unable or reluctant to rely on the traditional banking system.

To understand what early direct deposit offers to those with a checking account, you need to know the basics of the direct deposit process:

  1. Employees provide information about their bank account (e.g., routing and account number) to their employer.
  2. Prior to a payday, the employer sends payroll instructions to their company’s bank.
  3. The employer’s bank passes payroll instructions to an Automated Clearing House (ACH).
  4. The ACH aggregates requests from multiple banks and batch processes them.
  5. The employee’s personal bank receives payment instructions and funds from the ACH, which it distributes to the employee’s bank account.

As you can imagine, this process takes time—about three to five days. There’s a gap between when an employer files their payroll information and when an employee receives the payment approved by the employer.

How early direct deposit shortens the process

With early direct deposit, which some consumer banks offer, employees “skip” the waiting period during the last step. The bank assumes that the employer is “good for the money” and releases the funds to the employee prior to processing the payment from the employer.

In practical terms, this change means that employees can often receive their funds two to three days prior to a “standard” direct deposit.

Banks tout early direct deposit as a benefit to customers, so there typically are no associated fees—it’s simply a bank streamlining its process to make it a more attractive choice in a crowded consumer financial market.

What earned wage access and early direct deposit do and don’t solve for

Early direct deposit offers limited, fixed flexibility. Employees can’t access earned wages when they need them. They can access earned wages only a couple of days before they normally would.

The primary benefit of early direct deposit is to ensure that funds show up consistently before end-of-month or first-of-month payments (e.g., rent, mortgage payments, car payments). Employees get peace of mind—they don’t need to worry about late fees because the processing of a debit narrowly beats out the arrival of a credit.

But that solves only one financial challenge. It’s also a perk that’s delivered to employees in the traditional banking system by their bank, not an employer-offered benefit.

True earned wage access, by contrast, offers on-demand access to wages independent of formalized paydays (and traditional banks). For employers who want to help their employees during uncertain times, earned wage access offers a responsible, supportive option.

Find out more about earned wage access from Brink’s Money.

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