Early Wage Access (EWA) or salary advance is being touted as the next big employee benefit and helping drive financial inclusion. With EWA, employees can access a portion of their earned wages before the salary payout. While EWA allows employees quick access to money that may be required for urgent needs, it comes with potential drawbacks that can have a lasting financial and emotional impact on the employee as well as the employer.
The temptation to overspend is the biggest downside of salary advances. EWA gives employees the ability to access their earnings before payday, which may encourage them to spend more freely and frequently than they would if they had to wait for their scheduled salary. The temptation to use the service regularly could increase the risk of living paycheck to paycheck or it could leave an employee with little or no actual income to cover larger bills. Not to mention constantly paying interest and fees.
EWA also has a negative impact on financial behaviour. Scheduled monthly salary makes people budget rather than spend at will. Allowing employees to take their salary earlier also takes away the focus from long term financial planning.
Then there is a risk of relying too heavily on this service. Since these advances do not get reported to credit bureaus, it may lead individuals to stretch themselves too much. The experience overseas has shown that employees tend to depend on this program just to get through each month, which leads them to be unprepared for to meet any further goals. It will also lead employees to add on to their existing outstanding debt, thus ultimately harming their long-term financial health.
We are borrowing too much money!
Consumption loans taken by the salaried class have been steadily increasing. A recent RBI report shows that household debt increased to 41% of GDP in FY24 from 37.9% in FY23 and is estimated to have reached 43.5% in the first half of FY25. Housing loans make up about 30% of this debt, but non-housing debt has grown substantially, reaching 32.3% of GDP by the second quarter of FY25.
RBI has been flagging off the growing risk in unsecured loans especially credit card loans. Credit card outstanding amounts have grown by a compounded annual growth rate of 24% in the last 5 years, mainly led by millennials and Gen Z. The growing lifestyle aspirations and reliance on credit cards and instant loans to fund this spending is leading many into a debt trap. Providing EWA is only adding fuel to the fire.
EWA providers also market their services as a way to “get ahead” financially, without fully addressing the potential risks and downsides of not receiving the full salary at the end of the month.
Hence, EWA would be contributing to a culture of financial illiteracy, where individuals neglect to take a more thoughtful and proactive approach to managing their finances.
Employers must implement EWA responsibly
The effect of employee debt on employers is multifaceted, as financial stress can negatively impact several areas of the workplace. Employees dealing with debt may experience decreased focus, lower productivity, and more frequent absenteeism. This financial strain can also lead to reduced engagement and motivation, ultimately affecting team dynamics and overall morale. In the long term, these challenges can have a significant impact on the organization’s employee healthcare costs.
EWA at best should be provided as a product for emergencies and not as a service to be used on an ongoing basis. Financial stress is more due to how people manage their income and expenses. Hence EWA needs to be a part of the benefits provided like home loans at special rates, instead of being treated as financial wellbeing. Certainly a lot of financial education is required to prevent mindless uptake of these loans.
Employee Financial Wellbeing is about helping employees build a solid foundation, so that they are equipped to manage their finances independently and effectively. This means providing knowledge, education, and resources that encourage positive financial habits. EWA cannot deliver any of this and if the ultimate objective is wellness, then EWA is not the solution.