How Does Early Payday Work?
If you get paid through direct deposit, you know the anticipation and jubilation that comes with receiving your paycheck on Fridays. But why Friday? What if that exuberance came on Wednesday instead?
“We found a way to process the transactions faster on the backend that’s fully compliant with financial regulations,” Nicolas Kopp, the U.S. CEO of N26, told Reviews.com in August.
So how does it work? Essentially, these startup banks give you access to your money as soon as it’s available to them — often one or two days before the usual Friday. To get the direct deposit process started, your employer regularly submits payroll files to the Federal Reserve, and from there, the Federal Reserve works with your bank to distribute earnings to your personal bank account.
Most banks tend to hold onto your money until your employer’s allotted payday, even if the funds are already available for release. But these new banks will release your direct deposit as soon as they receive notification. This is the reason why you may get paid up to two days earlier than your coworkers at the same company.
It sounds like gaming the system, but really, credit unions have been offering this feature for over 10 years, says Beverly Darnell, an insurance specialist at USInsuranceAgents.com who has worked as a credit and budgeting advisor. Credit unions work with the National Credit Union Administration (NCUA), not the Federal Deposit Insurance Corporation (FDIC), which is more stringent when it comes to releasing funds. This has allowed credit unions to provide people with their paychecks early, which is a strong customer acquisition strategy.
“It’s a win-win-win-win situation for employers, employees, payroll companies, and banks,” Darnell says. “It’s more cost efficient for employers. Employees have access to funds sooner. Payroll companies make money processing the payroll. Banks benefit from bringing in new customers by saying they are able to accept early direct deposits.”
Is Early Payday Worth It?
The desire to copy credit unions also arrived in tandem with growing consumer demand.
The banks who have adopted this policy have used different marketing-speak for it. For example, Chime says that you can “do more with your money” in those two days, promising empowerment for those who may see “waiting for money while it sits in some mysterious electronic limbo” as a simple annoyance. But the real people to benefit from receiving their paychecks early are those who struggle to pay the bills.
Financial insecurity costs money. Payday loan providers, which offer short-term, high-interest loans, are notorious for preying on people who are low-income and have no other avenues for credit. Banks are not much better. If you overdraft your account, you can be hit with overdraft fees as high as $40. Some banks offer overdraft protection programs to float you during those times, but they also come with fees.
Short-term debt relief is, indeed, a relief. But is it really going to revolutionize anyone’s habits or relationships to money? Royal doesn’t think so.
“Getting your deposit early may bail you out of a jam once in a while, but it’s not going to correct a fundamental problem, such as if your spending exceeds your income,” he explains, calling it a “marketing gimmick” that people would eventually get used to.
It also doesn’t correct for the underlying causes behind poor budget management, such as stagnant wages, crippling student debt, the lack of financial education in schools, and the fact that nearly half of Americans wouldn’t be able to afford a $400 emergency. So while early direct deposit doesn’t — and isn’t trying to — solve all of these problems, Royal believes that the desire for it “speaks to larger systemic issues that plague working people.”
The Future of Early Payday — And Other Perks
The tides are shifting for the banking industry, as the consumer — formerly limited to geography — now has access to any bank they want at their fingertips. At this point, brick-and-mortars like Bank of America and Chase and top online banks like Ally and Capital One haven’t jumped on the bandwagon yet.
“The big banks make a lot of money in the status quo,” Royal explains. “They have every interest in slowing the rate of money flowing out of their coffers, because every day is more profit that they can earn on your money. But with upstarts looking for any possible way to get a toehold in the industry, the startups are showing consumers that they can demand more and get it from their banks, and I think the big banks will eventually follow suit.”
This wave could also be the start of something more. “In the long term, I think consumers will want it even sooner,” Darnell says. “Some employers are trying to figure out ways to give employees access to their funds as they earn them instead of making them wait weeks for the funds.”
Regardless of what the future of direct deposit will look like, it will be exciting to see consumers finally in the driver’s seat.