Pay workers in real time, end debt cycle

Help people access their earnings and avoid high interest payday loans

The fundamental structure of America’s banking system has remained virtually unchanged since the 1950s. Yet one simple update could open the door to people who have been locked out of basic banking services for far too long.

Millions of Americans today get paid twice a month, often on the first and the 15th. But why?

That made sense when payroll was entered manually and checks were cut by hand. The reality is that digital financial technologies have made it possible for workers to get paid on their individual schedules instead.

Not only is this a more fair way to go, but it could also help workers stay in the banking system and out of the cycle of debt.

This is not science fiction. Walmart, for example, has partnered with a tech company that allows employees to access a portion of their wages as they earn them, instead of at the end of a pay period. And Lyft has a program that permits drivers to “cash out” their earnings before their regularly scheduled payday.

Most of these programs charge a small fee for the service, and some companies have opted to pay that cost for their employees.

It makes a lot more sense than forcing employees to give American companies a two-week loan of their labor, which is what happens under the current system.

This delay often compels workers to spend money they don’t have just to access needed cash. About 12 million Americans use payday loans to cover emergencies and living expenses at effective interest rates that exceed 300 percent.

The loans are supposed to be repaid when workers’ paychecks land in their bank accounts, but many are still short of cash when it’s time to repay. They must borrow again, racking up more fees in the process and falling into the debt trap that leads payday loan borrowers to spend on average $520 to re- peatedly borrow $375.

The loan fees cost Americans $9 billion a year. Overdraft fees are even worse, taking $14 billion annually out of people’s pockets — often because bill payments and other transactions clear instantly, while deposits can be held for days.

In addition, 13 million Americans don’t have bank accounts and are stuck using costly check-cashing services to get same-day access to their funds.

According to the Brookings Institution, using payday loans and checkcashing vendors can cost the unbanked and underbanked as much as $40,000 in fees and interest over the course of their working life. Those fees and interest often trap them into debts that can take years to dig out of.

Many of America’s unbanked and underbanked work in the service industry, get paid by the hour, and can experience extreme income volatility thanks to variable schedules.

That makes budgeting and saving very challenging. Because they are living paycheck-to-paycheck with just a few dollars left over each month after paying bills and necessities, they might not be able to wait two weeks to be paid for their work.

That’s why companies need to rethink how payroll functions in America so that it works for all employees. Employers must eliminate the need for their workers to enter into a cycle of debt that prevents them from achieving financial security.

Real-time payroll is not a panacea for the unbanked and underbanked. There also needs to be a focus on expanding other important banking services — such as low-fee accounts, microloans and other mobile financial services. But it would be a huge step in the right direction.

We have the technology to address this persistent problem. Employers should step up to do their part to reduce the ranks of the unbanked, starting with how they pay their employees.

Tim Chen, CEO and co-founder of NerdWallet, is a former member of the Consumer Financial Protection Bureau’s Consumer Advisory Board. He’s on the board of the National Foundation for Credit Counseling.