SameDay Paychecks: Payroll by Bank
By Sandeep Malineni
Introduction
Two of the biggest prevailing trends that are occurring are people are living paycheck to paycheck, 60% as reported by pymnts.com , and a trend of moving away from the high fee structures in every part of the economy as costs increase due to inflation, etc.
As early as 2019, MacDonald’s has offered a daily paycheck as an incentive for employee retention and recruitment.
As an example of moving away from fees, the bank is being introduced as a new payment rail. This is being piloted by Walmart to help their consumers by using Pay by Bank approach of removing the fees with credit cards.
These two trends now show that Payroll as Bank is an approach that could revolutionize payroll for millions of Americans. Payroll as Bank is an approach that would allow removal of fees and make money available immediately.
What’s the value for a solution that provides SameDay paychecks?
For Banks:
JPMorgan Chase is already doing this….in partnership with Gusto. They are helping customers eliminate fees.
It is an organic growth strategy for a bank. A single employer can bring in a lot of micro-deposit accounts.
Banks already make money off of Deposit Income (~4%) as well as a split on the ~2.2% from Debit Card fees with VISA/Mastercard.
It could be adapted as a Pay by Bank or a Gig platform for workers.
For Employers:
Higher job retention.
Easier recruitment.
For Employees:
Can pay their bills on time and not incur late fees for bills, overdraft fees, etc.
Less likely to incur payday loans or other banking products with high interest rates.
Alternatives to achieve Daily Payroll:
Uber, DoorDash and other apps provide a daily payroll capability via the ability to credit the employee’s wallet using the Visa/MasterCard network. The Visa/MasterCard network typically involves a surcharge of 2 to 3% of the monied total. Lower rates can be negotiated by firms that do large enough volume. This is not available to all business owners.
ADP, DailyPay, TapCheck and other payroll providers offer services like this but charge fixed fees that are expensive to employees.
Most, if not all of these payroll providers charge fees as a percentage or fixed fees as third parties don’t have the advantages of being a bank (bank infrastructure, deposit income, etc.).
What are the requirements for an alternative?
It must meet the following criteria.
1. Deliver earned funds at the end of a shift. (Near Real-time)
2. Zero fees or percentage off the payroll.
3. Calculate tax for employee and employer with statements
4. Near universal ability to adopt using existing Financial Frameworks (ATMs, Bank Accounts, etc.)
Money Movement (Payment Rails and Products)
This table highlights the speed of delivery, and the cost associated with delivering money to employees.
| Money Movement Type | Cost | Time to Delivery | Comments |
|---|---|---|---|
| ACH | ~$0.25 to $1 dollar per transaction | 2 to 3 Days | Utilized by most payroll providers |
| Same Day ACH | ~1 to 5 dollars | Near Real Time | Expensive |
| Wires | ~$35 to $50 | Near Real-Time | Typically used for asset purchases |
| Internal Bank Transfer | Zero Cost | Instantaneous | Money is instantly available via existing banking infrastructue. Limited to internal bank usage. |
| Real Time Payments (RTP) | ~$0.24 to ~1.50 | Instantaneous | Money is instantly available via existing banking infrastructue. Avaliable to all banks. |
| Visa and Mastercard | ~2 to 3% of the total | Instantaneous | The percenatage is really for covering Risk for disputes, fraud, etc. for Point of Sale transactions. |
| DailyPay | Fee Based | Instantaneous | Expensive and limited to hourly workers |
| Venmo | Fee based | Instantaneous | Exchanging money is easy between parties. Fees to get it out of the eco-system. |
| Zelle | Banks currently pay fees to remain competive | Instantaneous | Banks underwrite costs as well as funds to cover Risk costs for disputes, fraud, etc. |
Internal Money Transfer and Real Time Payments seem to be the best bets to build the Payroll by Bank that delivers daily paychecks at near zero costs to the employees.
Most, if not all the solutions that provide instantaneous money movement and near zero cost are administered by banks. Third-party services by their nature are limited to access to payment rails that are low cost, but not real time. Banks hold an advantage as part of their licensing with the government that allows payment rails that are near zero or free and real-time. And they already make money off Deposit Income.
How does this Solution work?
Employer Systems - This includes systems that record financial transactions (G/L) as well as the On-boarding systems for HR like Workday, etc.
SameDay Paychecks project basically calculates the tax based on the timesheet submitted and initiates the money movement
Core Deposit Providers - FIS, FIServ and Jack Henry provide APIs that facilitate the money movement from the Employer to the Employee.
What’s your Plan then?
1. Open Source a prototype solution that
a. Integrates data between a HR System (WorkDay, Gusto, etc.) and existing API’s universally provided by Core Deposits system providers like FIS, Fiserv, Jack Henry, etc.
b. Allows a User to enter their timesheet, onboard, look at their payroll statement, approve timesheets, etc.
c. Calculates taxes for employee and employer.
2. Let the banks use the prototype to build their solutions specific to their needs. It lowers the cost as well as reducing the risk of launching something new.
3. Provide Point of View papers from the perspectives of Employees, Employers, and Banks to allow internal bank staff to sell the solution.