Is the payslip dead?

Is the payslip dead?….

…Well, it’s a bit early for the Earned Wage Access (EWA) businesses to declare victory. But they are on the right path!

Definition

First things first. What is EWA? (aka salary finance, salary advance, payslip lending, on demand pay, pay in advance, etc.) EWA is effectively a (near) real-time compensation model. In other words, it is a product that is used by employees or equivalent (such as drivers in the case of ride-hailing companies), which allows them to cash out the income they have earned up to that day of the month (instead of waiting until the end of month/ fortnight). EWA is typically distributed via employers, whilst the cost of the service is incurred by the employer (monthly fee or transaction fee) and/or the employee (transaction fee).

A clear pain point

EWA addresses a clear pain point and has an obvious social impact. People, regardless of their financial health, typically work first and get paid later by their employer. Low-income employees, in particular blue-collar workers, who may be living by the day or week are affected the most by the traditional compensation model. However, the demand goes beyond that very-low-income segment. I would have certainly used such a solution when I first started working in 2005. My position was relatively privileged, as my need was related to social life struggles, not survival ones. Nevertheless, my social life at the start of the month was very different to the one at the end of the month; I was looking for ways to change it, but couldn’t find any.

From a quantitative perspective, the data speaks for itself. 70% of employees experience some financial stress in a year, which contributes by 20% to staff turnover. This in turn costs$300B to employers globally. $1Tn is trapped worldwide in accrued but unpaid compensation.

So, how far are we from the death of the payslip, 10 years after Earnin was founded in the US and 7 years after Salary Finance was founded in the UK?

Current status – promising penetration; lots of funding and vendors

Penetration currently lies at 5% in the US and 3% in the UK. Penetration rates in Continental Europe and Latam are <1%. The sectors that have witnessed the highest penetration are Retail and Fast Food.

Funding in EWA startups in 2021 alone was $1B+, surpassing the funding into the sector during the entire period of 2015-2020.

We have scanned more than 130 EWA players around the world. Below is a simple map of the players looking at HQ geography, FTEs (of the company itself, as an indication of size) and business model.

The top players are:

  • US: Dailypay, Payactiv, Branch, Zayzoon, Rain and Clair
  • Latam: Minu and Payflow
  • Europe: Wagestream, Salary Finance, Payflow, RosalyLooking at various surveys, 30%+ of employees say it’s likely or extremely likely they would use an EWA service.

But, with that many players out there, why is penetration still low?

The challenges – education and adoption

There are a number of barriers to further penetration, including i) education, ii) reliance on digital payroll & HR systems and iii) friction driven by the common revenue model.

First of all, the market is still nascent and requires a lot of education, which needs money and time. On the employer side, companies associate EWA to payday loans and are concerned about their employees entering a negative debt spiral. However, EWA in its purest form (small amounts, just up to earned wages) and done properly (combined with financial education) does not lead to negative debt spirals. On the employee side, some people may initially consider EWA a taboo as it may indicate to their peers that they have financial difficulties. However, we have seen that with time people realise that EWA is simply a fairer way of getting paid and the taboo-related feelings disappear.

Second, the smooth implementation of EWA relies on its integration with the client’s payroll and HR systems. In many markets these systems are either non-existent (e.g. 25% of US SMEs use pen, paper and manual processes or people get paid “under the counter”) or built with legacy on-premise technologies that make integration harder, slower and not replicable.

Finally, many EWA vendors have followed the “employee pays” revenue model, under which the employee is charged a fee every time they use the service. This naturally causes friction and hinders adoption, given that i) the person who needs the money the most is the one that needs to pay, and ii) many employers are not proud of charging their employees, hence they don’t promote the service that much. As expected, EWA founders have realised this and have been working on finetuning their revenue model.

The future is bright – further adoption and consolidation

We see EWA adoption picking up significantly around the world for various reasons:

  • The impact of the Cost of Living crisis that started in 2022. We have been witnessing recently a horizontal penetration of EWA, i.e. penetrating nearly every sector at the lower compensation/ entry-level employee segment.
  • Further vertical penetration beyond Retail and Fast Food. There are some other low-hanging fruits, such as Manufacturing and Transport, that are taking off.
  • Funding into the sector has increased significantly and a big part of it is going towards customer education
  • Growth in emerging markets, where i) there is a larger proportion of population who lives by the day or week, and ii) some employers already experience the administrative pain point of paying employees multiple times a month.
  • Many vendors have been removing adoption friction by reducing or eliminating fees for employees (see competitive landscape above)

Also, we believe there is more consolidation to come to the market in the near term, which will be positive for the sector’s growth. Consolidation is driven by the following:

  • Integrations with a fragmented set of legacy systems is faster through M&A
  • Entering new countries is faster through M&A, given that the product is relatively sticky and the sales cycle can be long
  • Product expansion is faster through M&A vs. in-house development

Despite the young age of the market, we have indeed seen some consolidation already:

  • Earnin acquired Tipyourself in the US to launch faster a savings product
  • Hastee acquired Typs in Spain to expand faster into Southern Europe
  • Wagestream acquired Earnd in Australia to expand faster into the country
  • Salary Finance acquired Neyber in the UK to consolidate the market

So is the payslip dead? Not quite yet. But, it will likely be a thing of the past for the next generation of workers.

Acknowledgements

A lot of information in this article come from a great report published by E&Y and an article published by Pitchbook.

Disclaimer: I am part of the investment team of Seaya, a VC fund that has invested in Payflow.

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