You might have seen the ads during coverage of the Olympics. A disheveled woman struggling to buy a drink at a busy bar. And then by magic, her future self, looking slick and in new clothes, hands her a drink and explains that she could be her future self-right now – cashed up and ready to have a good time.
Welcome to the world of “before pay”. That means you get to spend it before you’ve earned it. Before you’ve received it.
Apps offering the services are on the rise, especially in countries like America, where users can get advances on their wages.
Stars like pop singers Meghan Trainor and Ella Eyre as well as rapper French Montana are promoting the apps to young consumers.
But it’s not just rappers and influencers. Former Westpac CEO Brian Hartzer is chairing Beforepay.
BeforePay and MyPayNow are the latest companies to have hit the market. Even the Commonwealth Bank, Australia’s largest, launched its very own app, AdvancePay in December which allows people to access up to $5,000 of their wage.
But the fear is that the emerging sector resembles payday lending and could trap the vulnerable into debt with consumer groups calling for them to be better regulated.
While these apps have been compared to Buy Now Pay Later apps like Afterpay and Klarna, BeforePay and MyPayNow are the complete opposite.
BNPL services allow users to purchase goods immediately for a fee then pay off the cost of the purchase in set instalments, very much like a lay-by system where you receive the goods immediately. But BeforePay and MyPayNow allow users to receive advance portions of their wages before their employer pays them.
How does it work? More pay on demand services operate through an app which connects directly to your bank account or employer. The app then does some quick calculations to work how much money you can withdraw depending on your level of income.
You can then request to cash out the amount you’re eligible for and receive the money almost instantly. The money you’ve cashed out is then automatically repaid once your employer pays you on your next payday.
To be eligible to use pay on demand services, you must be employed and earn an income, meet the minimum income requirement specified, and generally can’t have an irregular pay cycle, rely solely on Centrelink benefits, or have a gambling problem.
The fees, like BNPL’s can be significant. MyPayNow charges five percent on a weekly salary over the course of a year which works out to be an effective annual interest rate of 260 per cent.
But the high interest rates have not deterred users. MyPayNow chief executive Bronson Powe said the company has had over 300,000 downloads of its app since the launch with 95,000 current active users.
A spokesperson from ASIC told Really Simple Money: “An important consideration for consumers is the longer-term effects of accessing their income early and then having less income on their usual payday together with the cumulative effects on their overall financial situation of using this service if they already are repaying other loans or loan type agreements such as BNPL.”
Katherine Temple, director of policy and campaigns at the Consumer Action Law Centre said there needs to be more regulation for wage advance apps, which she warns, are like payday loans.
“Concerningly, wage advance apps are not subject to the same rules as payday lenders, which means they complete even less checks to ensure people can afford to make repayments,” Ms Temple told Savings.com.au.
“Regulation has not caught up with the many new businesses in the space. We need reforms to ensure these new players are captured under existing consumer protection laws that help to ensure loans are affordable for people.
“These lenders are exploiting a loophole in our existing laws, and that loophole needs to be slammed shut.”
While wage advance apps are designed to be used to cover essential expenses like groceries or unplanned bills if you haven’t got enough cash to tide you over until payday, Ms Temple says they’re marketed to encourage people to spend money they don’t have.
“These wage advance apps use slick marketing to make their product seem relatively harmless, but in reality this is a new form of short term lending that targets people living pay cheque to pay cheque,” she said.
“These products could cause significant financial harm to people, particularly given the lack of affordability checks being undertaken.”
Dr Angel Zhong, a senior lecturer in finance in the School of Economics, Finance and Marketing at RMIT University outlined the pros and cons of pay on demand services.
“The pros: to consumers who have liquidity needs, they can access pay earlier, with some transaction fees. And given that the amount to borrowed is linked to salary, it is less likely to encourage people to overspend.
“But the cons are that it adds another form of liability. People tend to have mental accounting bias in which they may not classify this as a liability, compared to bank loan or credit card. As such, it may increase the leverage positions of consumers.”
Wage advances offered
|$300 – $5,000* (*subject to approval)
Most customers access $300 – $1,000
|Up to $1,000
|5% fixed transaction fee
|Up to 25% of your wages up to $1,250
|Up to 25% of your wages up to $350
|Up to 50% of your wages to a maximum of $250
|Flat rate fee starting at $2
|A portion of your wage agreed upon by your employer
|Fees are covered by your employer and no interest is charged
|Up to $500
|$5 per fortnight
|Up to 25% of your wage
|5% flat fee and 25% interest p.a.
|Up to $100
|$100 – $500
|$5 flat fee