- 10/14/2024
Jeff Cain leads FCAT’s fintech research team, which dissects trends across the industry — from money movement and digital currencies to insurance, superapps, and everything in between. Recently Jeff has been delving into the idea of “dynamic paychecks,” in which payroll providers use APIs to help fintechs give employees more control over how their money is divvied up among accounts.
Direct deposit, it seems, is on the verge of an extreme makeover.
Q: When I think of dynamic paychecks, my mind immediately goes to the fast-food restaurants in my neighborhood that advertise work today, get paid today. Is this something that fits within your research?
A: That was one of the first uses of dynamic paycheck technology. Theoretically, a traditional payroll company could provide daily payouts — but they’re not really set up to do that. So, a bunch of fintechs stepped in and said, “We know you’ve earned that money. We’ll lend you the $100 you earned today. Then, we’ll link into your company’s payroll, so as soon as payday comes, we’ll be the first to get paid.” That means it’s a pretty good credit risk for the fintech. The employee doesn’t get to choose whether to pay back the loan — the only risk is that they might quit or get fired before their next paycheck comes.
Q: How has this expanded since?
A: Today, in addition to early wage access, there are a variety of financial products that can be embedded into payroll, and a worker can allocate their pay amongst these various products. An employee can put some of their pay into a payroll-linked savings account, some into a regular savings account, and a different amount into an investment account. Or, maybe, they took a payroll-linked loan and some of their paycheck is going directly to paying that off. Each pay period, those allocations can change. Maybe one paycheck is split evenly among accounts, and the next time they get paid, the employee wants less to go into savings and more into a checking account because they just had a large expense.
Q: What jumps out most to you about this new tech?
A: What is most interesting to me is that a parallel is developing within the banking system. In the old days, your paycheck would go into your checking account. Then, maybe you’d write a check and take it over to deposit it in your brokerage account. In the last ten years, all of that has been handled electronically, but it all still came into one account first, and then you had to move it manually. Now, we have financial capabilities that are sliding into payroll systems where an employer can say, “Here’s an investment account we’ve partnered with, a savings account we’ve partnered with, and a checking account with a debit card.” Today, it’s not uncommon for young people to go without checks. What if employees never even have to open a bank account outside their employer? How will that impact traditional banks and investment firms?
Q: Do companies so far see dynamic paychecks as something they want to offer their employees?
A: I think they will; employees like these financial products, and HR consultants have told me that benefits teams are responsive to their employees. But, I should add that the idea of dynamic paychecks is very new to most HR teams. Traditional HR teams deal with health, dental, and vision. Now, more offer mental health benefits and pet insurance, but they haven’t been offering financial products. Should they bring in a financial expert from somewhere else in the firm to help them with the decision-making process? Do they need to hire a new type of HR person? They are very interested, but benefits professionals are still sorting out the best ways to vet these products.
Q: In five or ten years, where do you imagine we will be with dynamic paychecks?
A: It will all be much more sophisticated. I think you’re going to see employers offering a suite of financial products. These will be particularly popular with larger employers, who have employees across a range of pay bands. These payroll-linked financial products are particularly attractive to workers with lower pay, who often have difficulty saving otherwise. Also, if you have the kind of company where employees tend to stick around, you want them to take advantage of benefits that help them build wealth.
I think you’re going to see the deployment of rules-based agents. Let’s say there is an employee who earns commissions. They will be able to set rules for any paycheck above a certain amount, and the extra earnings go into a savings account. Another rule might be built around a credit card balance — if it gets above a certain threshold, money that would typically go into an investment account might be paid toward the balance instead. The possibilities are pretty exciting.
