As the UK faces rising credit card debt amid a cost-of-living crisis, David Brown, Founder and CEO of Hi, writes for Payment Expert on how a more flexible approach to being paid is one way employers can ease the debt burden.
UK householders are continuing to turn to expensive credit to meet their rising monthly costs, thanks to a crippling combination of rampant inflation and soaring fuel costs.
Inflation hit a 40 year high of 9.4% in June, sending food and utility bills soaring. Meanwhile energy costs are set to rise even higher than first forecast. Consultancy Cornwall Insight forecasts that the energy price cap will reach £4,266 by the first quarter of 2023.
This has been described as “tragic news” by consumer advocate Martin Lewis and will be devastating for many struggling families.
A study from money manager Abrdn Financial Fairness Trust and Bristol University found that the number of households considered financially secure has fallen to less than a third, from 38% to 31%. According to one of the report’s authors, this is the first “substantial deterioration” in people’s finances since the pandemic began in early 2020.
Unable to clear their monthly debts, a growing number of households have been forced to turn to credit cards to meet these costs. A Bank of England report shows that credit card borrowing is rising at its fastest rate for 17 years.
In June, consumer credit borrowing rose by an extra £1.8bn, double the £900m increase that was seen in May. And credit cards accounted for £1bn of this total, a 12.5% increase to levels not seen since November 2005. An alternative should be considered to reduce consumers taking up expensive short-term debt.
Reconsidering the monthly payroll cycle
There are several benefits to monthly payroll, such as more predictable cashflow, reduced administrative costs and compatibility with various digital payment schemes. However, these are heavily if not entirely skewed to the employer rather than the employee.
The current cost of living crisis should prompt greater questioning of the standard model and lead employers to consider dropping the concept of a monthly paycheck.
Instead, they could adopt a more flexible payment policy that allows employers to choose how they access their wages, on either a monthly, weekly or daily basis.
Employers should also ensure that their workers are given supporting financial data, such as real-time wage updates, helping them to manage their monthly budgets.
This has the potential to reinvent remuneration, transforming how time and pay are tracked, viewed and verified.
Flexible pay improves financial wellbeing by giving greater control over cashflow and allowing for more efficient budgeting. It would also reduce the dependency on loans and credit and lessen the chance of going into long-term debt.
Providing employees with flexible access to their salaries also has benefits for employers. A Mastercard and Ipsos Mori survey found that 61% of workers find it appealing to have instant access to their earned wages. By introducing flexible salaries, employers can better attract and retain talent at a time when competition for talent is fierce, enhance employee wellbeing and reduce absenteeism.
Free vs. paid access to salary
While employees should have flexible access to their own salary, there are questions as to whether it is morally right to charge them for the privilege.
While a £1 to £5 fee might seem like a small price, it equates to a large APR when you consider the amount they are accessing, and the duration of the financing. It raises the question whether employees should be the ones footing the bill and providing free, flexible pay for their employees.
If salary access products are truly designed to improve financial wellbeing and help people through the cost-of-living crisis, they need to be free for the employee.
If employers really want to support their employees though this cost-of-living crisis, they should explore breaking the feast and famine cycle of monthly pay and provide their employees with free, flexible access to their salary. This will bring not only significant benefits to workers during the cost-of-living crisis, but will also help with talent attraction and retention.