$750 straight to your bank account: What is pay on demand?

A new breed of apps want to fix the problem of 8 million Australians who live pay cheque to pay cheque.

Dubbed ‘pay on demand’, or a wage advance service, these apps are designed to give you a portion of your pay as you earn it, rather than waiting days or weeks for your next paycheck.

But some experts have warned about the risks of using these platforms as getting an advance on wages could lead consumers down a dangerous path of overspending.

• Also read: Afterpay offers banking via Westpac: What it means for you

• Also read: Would you like to access your pay as you earn it? Here’s how.

Here’s a breakdown of how they work, the benefits and the dangers, and what you need to know.

How does it work?

Every app will differ a little bit, but the concept is generally the same: sign up to the app and link it to your employer or directly to your bank account (depending on the technology behind the app).

You’ll have to prove your identity through your driver's license, Medicare card or Australian passport.

The app carries out some calculations and algorithms in order to figure out what your cash limit is, dependent on your level of income.

So if you don’t earn an income, you most likely won’t be eligible for the service. For example, a leading pay on demand platform MyPayNow has a minimum income requirement of $450 a week, or $900 a fortnight.

You then ‘request’ the amount you want to cash out, as many times as you want, up to your limit.

For instance, MyPayNow lets you cash out up to a quarter of your next pay, up to $750, while Beforepay’s absolute upper limit is currently $200 per pay cycle.

Other reasons why you might not be eligible could include major gambling habits, irregular pay cycles, or you’re only receiving Centrelink benefits.

The benefits of pay on demand

Pay on demand is designed to give consumers more flexibility with their pay, particularly if you’re in a tight spot and you need to cover a sudden expense.

“Early access to your salary can offer a financial liferaft when emergencies spring up, like a broken-down car or an unexpected vet visit for your furry friend,” said Finder money expert Bessie Hassan.

It isn’t really designed to help you make big-ticket purchases, Beforepay CEO Tarek Ayoub told Yahoo Finance.

“What we do find is most users are spending it on groceries and transport. So it’s things you can’t really get buy-now-pay-later on,” he said.

“It’s just for regular little items. We don't want you to get into big debt. We just want you to be able to repay it quickly and efficiently so you’re not in any trouble with your budget.”

Many of the pay on demand platforms also position themselves as a better alternative to payday loans, which can sink Aussies into a debt black hole through expensive fees. A $2,000 pay day loan could ultimately cost you $3,360 in repayments, according to ASIC’s MoneySmart.

“It also means people are less likely to take out ongoing financial products like a payday loan or credit card,” Hassan added.

“Pay on demand fees generally range from around $2-$5 and are deducted from your salary, but this is often cheaper than paying interest on a payday loan or credit card.”

More broadly, the pay on demand services are just part of the bigger trend of accessing anything and everything on demand, like food, travel, entertainment, our online purchases, to our workforce.

The risks

The app can facilitate liberal spending, if you’re not careful.

“There’s the potential to develop bad money habits over time – constantly accessing your pay early can wreak havoc on your budget and fuel destructive habits,” said Hassan.

“As an emergency backup, pay on demand can be useful, but it shouldn’t become a regular occurrence – you’re better building an emergency savings fund instead.”

This is one of those instances where you might actually be better off with a credit card, she said.

“Credit cards can be a good option to cover small expenses if you are eligible for a low or 0 per cent interest card and can pay off the entire balance within your statement period, and you can build your credit history in the process.”

Financial commentator and money expert Nicole Pedersen-McKinnon said she had two “huge” warnings about pay on demand, or instant pay.

“The first is that whenever you spend money you haven’t yet received – whether you’ve technically earned it already, or not – you pay a penalty. Here, it’s potentially an interest rate and withdrawal fees,” she said.

Pay on demand apps do typically charge a 5 per cent flat fee, which covers the cost of moving your money.

“That means your money doesn’t go as far, straight up.”

“But my second big warning is that accessing your money in small chunks like this leaves you in danger of falling short of the big savings that you need, for everything from bills and insurances, to your next holiday.

“Sitting down with a fortnightly or monthly amount, and slicing and dicing it in the cleverest way, is a far better strategy.”

Which pay on demand apps are out there?

This is still a fairly young industry, but the brands MyPayNow, BeforePay (previously Cheq), Fu, and Earnd are becoming more well known.

EmploymentHero also has its own pay on demand feature, called InstaPay, that is integrated with its platform.

How much does it cost?

Every app will differ on this, but here’s a quick summary of the main players:

• Beforepay: 5 per cent flat fee

• MyPayNow: 5 per cent flat fee

• Fu: 5 per cent flat fee

• Earnd: Free for employees, because it hooks up to your employer, who covers the cost of Earnd

• EmploymentHero’s InstaPay: Free for employees as it’s a feature of EmploymentHero

The money that you cashed out is then withdrawn from your next pay cycle, along with the flat 5 per cent fee.

Bottom line

Pay on demand can be a boon when you’re in an emergency and you haven’t got a huge savings pool to draw upon – but not if you start becoming dependent on it.

Whether the app will be ‘good’ or ‘bad’ for you will come down to how you use it, which comes down to your financial education, says Earnd CEO Josh Vernon.

“Employees no longer come to work just for a pay cheque,” he said, adding that workers want wellness included in their workplace benefits.

“We know that if you’re able to improve financial wellness it has the biggest impact on someone’s working life.”

Yahoo Finance’s views are independent and does not receive any commission for this article.

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