At a time when the financial services industry is moving toward faster payments, a handful of entrepreneurs are looking to narrow the gap between an honest day's work and an honest day's pay.
These apps are seen as alternatives to late bill payment fees, overdraft fees and payday loans for those with volatile income, like Uber drivers, freelancers or even some hourly paid employees.
The emerging technology comes as slower payments look increasingly anachronistic in the mobile era. It calls into question the tradition of paying people on the first and fifteenth and tackles one of the thorniest issues in consumer finance: liquidity.
"Household liquidity affects so many Americans," said Ryan Falvey, who oversees the Financial Solutions Lab, a $30 million, five-year initiative managed by the Center for Financial Services Innovation with founding partner JPMorgan Chase & Co. "It's a problem on one hand and it's also a pretty significant market."
According to CFSI, 57% of American adults are struggling financially and fintechs and employers alike are seeing the ability to put earnings in workers' pockets faster as an opportunity to build relationships.
Most recently, Uber has been reportedly in discussions with banks so its drivers would, among other things, get access to their pay daily if they wished. Lyft, which partnered with Stripe, announced same-day or next-day payments for interested drivers starting in November and for a fee.
Startups like Activehours, FlexWage, Clearbanc, Even and Payactiv are working to disrupt payroll for hourly paid workers or contractors. Some, like Activehours, let the user access portions of their wages owed before payday. Others like Even are working to smooth out irregular income. All are combing transactions and other data to deliver funds to individuals on their terms, rather than the employer.
"The cost of holding back someone's pay is high," said Ram Palaniappan, chief executive of Activehours. He said consumers should be able to choose when they get paid just as they choose when to take money out of the ATM. "They shouldn't really have to wait for paydays anymore."
Activehours was born from a personal experience Palaniappan encountered while working at his prior company, Rushcard, where an employee working in the call center had taken out a payday loan. He saw the employee's money trouble as a cash flow issue, not a salary issue. Instead, he floated the employee the money. That idea turned into Activehours, which launched last year.
"I knew if I didn't try to do this, I'd always feel bad about myself," he said.
The company relies on its users' direct deposit and employment history and has integrated several time and attendance systems to verify hours worked before floating the money. It then automatically withdraws the money from its users' bank accounts on payday. It says its users represent more than 4,000 companies currently.
What Activehours does is essentially lending, but the company is adamant that the product is decidedly different from storefront payday lenders.
The starkest difference is the fee structure. Activehours has no fees, or at least no set ones. It asks its users to give what they think is appropriate. Payday lenders, which are facing increasing scrutiny from regulators for predatory practices, can charge customers an interest rate upwards of 500% when expressed annually.
Activehours describes itself as an "ATM for your wages." And observers, like Jennifer Tescher, president of CFSI, say companies like Activehours shouldn't be viewed like payday lenders.
"Calling them lenders because of how they are structured takes away from the mission they are trying to accomplish," Tescher said. "I don't think any of those companies would say they are in the loan business. They are in the cash-flow-smoothing business."
Disrupting the payday cycle is just one way of tackling the cash-flow problem for on-demand workers who don't always know how much they will earn or when they will receive a payout.
There is more than $1 trillion held up for over two weeks in the payroll system, according to a whitepaper by Activehours, and the stakes can be extreme. The whitepaper highlighted a consumer who wrote that on-demand pay "has been there to help me keep my bills going and has eliminated the choice of do I pay my bill or do I get to eat or drive to work."
The apps are responding to a changing economy that has more on-demand workers. In the past, freelance work was often a side gig, and therefore, slower payments caused fewer issues, said Jay Bhattacharya, chief executive and co-founder of Zipmark, a payments company.
"This is becoming a hot, hot topic," Bhattacharya said.
The emergence of payroll disruption apps also shines a spotlight on the problems payment delays cause, said Jordan Lampe, director of communications and policy affairs at the real-time-payments company Dwolla.
ACH, which is often used to move salaries for those with bank accounts, can take several days to deposit into an employee's or contractor's account for numerous reasons such as banks' batch systems, risk mitigation techniques or holidays.
Banks "will need to anticipate and enable a reality where the economy and our lives won't be willing to wait two to three business days," Lampe wrote in an email.
Activehours' model is currently direct to consumer, but Palaniappan is not ruling out partnering with a bank and already has bank employees using his app.
"We are trying to make it a really good customer experience," he said.
Building relationships with happy customers could be the intrinsic value in a company that has a pay-what-you-want model. The startups provider users with money when they need it and aim to get them out of the cycle of overdrafts, payday loans and late fees. And by requiring direct deposit, the startups are building relationships with people who have bank accounts.
There are some potential hurdles, of course. Most direct deposits rely on the ACH system, so receiving the funds won't be instant. They also run the risk of potentially introducing other bad consumer habits, like people exhausting their paychecks perpetually.
The upstarts' work to overcome cash flow challenges comes as some banks are looking to guide consumers out of the habit of living paycheck to paycheck. Recently, USAA rolled out financial assessment scores, for instance. KeyBank is working to weave financial scores into its customers' digital experiences and already has an app that forecasts customers' cash flow. The Consumer Financial Protection Bureau has also been encouraging banks to step up their financial literacy endeavors.
Bringing together tools that smooth and forecast cash flow is where banks and startups should be looking next, Tescher said.
"We now have a series of products that allow you to pull down money you've earned when you need it and ones that give you cash flow estimates so you can plan. We need to put those together," Tescher said. "That's my idea of nirvana."