A Closer Look at Earned Wage Access

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Lower-wage workers tend to run out of cash before payday. This is true everywhere. But even more so in Africa where 30-day pay cycles are common.

These cash crunches often lead workers to take out high-interest short-term loans to survive until the next payday. These can be street loans or their legitimized cousin, the payday loan.

In most cases, these loans go toward food and transport until payday finally comes along. In fact, according to Simon Ellis, founder and CEO of South African EWA platform SmartWage, lack of money for transport is a leading cause of worker absenteeism in South Africa.

Earned wage access (EWA) platforms have stepped into this void. They offer a simple solution to a vexing challenge. Just give workers early access to the wages they have already earned. This will cost the workers a small fee, a practice that has generated some controversy. But these fees are substantially lower than the 50% to 100% or higher monthly interest workers pay to usurious payday lenders.

Of course, employers could step in and offer to cover these fees and provide this as a perk to employees. And some do. But not as many as one might think. Or hope. However, employers do need to participate in the process, even if they are not paying the fees.

Ellis explained the SmartWage revenue model as having two options.

“We offer two models. A subscription model is 30 Rand per registered employee per month, with unlimited transactions and a minimum amount of 100 Rand [about US$7],” Ellis explained. “And we cap the amount that you can access at 25% of what the worker has actually earned. And the other model is a 3% transaction fee.”

The 25% cap is important, given growing critiques that workers may become over-reliant on EWA advances. Also, it’s important to emphasize that these platforms only offer access to wages already earned, hence the name earned wage access. So if an employee is five working days into a month, they only have access to 25% of five day’s labor, according to the SmartWage model.

BNPL’s Cousin

A close corollary to the EWA space is the instant-payments trend popularized in the gig economy. Today, most gig platforms offer some version of instant payments, of course in exchange for a fee. And in lieu of waiting a defined period to access earnings. EWA applies this concept to wage workers, but with more boundaries and a mission-driven layer around financial literacy that you don’t see in the gig economy.

EWA is also often compared to the buy now, pay later phenomenon. The latter is mostly about giving consumers the flexibility to buy goods in installments. And the former is about giving workers early access to wages. Yet they have structural similarities — the avoidance of interest in lieu of fees and the common mission of saving consumers or workers from high-interest alternatives.

And both BNPL and EWA platforms finance the transactions and cover their finance costs through fees. BNPL charges the merchant (in most cases) and EWA charges the worker (in most cases).

These two related branches of fintech have also emerged on similar timetables.

While both models have been around for a while globally, most BNPLs on the continent are less than three years old. And similarly, most EWAs platforms began cropping up across Africa and the Middle East just over the last two to three years.

Investors have also taken notice of both EWA and BNPL.

We all have seen the investments in BNPL across Africa-Middle East. From Checkout.com’s investment in Tamara and Afterpay’s investment in Postpay to ZipCo’s acquisitions of both Spotti and Payflex.

Investors have also taken notice of the region’s EWA industry, though not at the same scale as BNPL. At least not yet.

In South Africa, EWA platform Floatpays (launched 2019) was recently accepted into YCombinator’s summer cohort. The legendary incubator offers startups a standard deal — a US$125,000 investment in exchange for a 7% stake.

FloatPays’ closest competitor in South Africa, SmartWage, also launched in 2019 and raised ZAR6 million (US$347,000) last year to get off the ground in a round led by Chris Lister-James’s FiTech Ventures.

Another South African competitor, Level Finance, launched in 2020 and led by Raeesa Gabriels, was accepted into the AlphaCode incubator program.

And former South African Springboks rugby player Bryan Habana co-founded Paymnow in 2019. The company raised a seed round in 2020 from ViaMedia for its EWA platform. Paymenow cites as its differentiator gamification features that promote responsible financial behavior and encourage saving.

In Egypt, EWA NowPay (formed 2019) is a YCombinator alum that raised a $2.1 million seed round last year. And in the U.A.E., Flexxpay has raised US$4.5 million since its 2018 launch.

Cadana, a U.S.-based company founded by Ghana native Albert Owusu-Asare and Pakistan native Ameer Shujjah, launched its Ghana-focused EWA in 2020. The company has raised an unspecified pre-seed round from 500 Startups and Better Tomorrow Ventures.

Cadana has a specific focus on helping small businesses in Ghana improve worker satisfaction and productivity by reducing financial stress.

In a recent interview with Forbes, Owusu-Asare and Shujjah articulated this central argument to employers. Stress-free workers are happy workers.

“Research shows that about 67% of all workers experience some version of financial stress. When workers are stressed, they are unproductive and spend about five hours a week dealing with their financial issues. So business leaders globally are looking for innovative ways to help their workers reduce financial stress,” the two founders told Forbes.

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