Employer salary advance schemes (ESAS) are becoming increasingly popular in the payments sector. Much of the public focus of the review carried out by Christopher Woolard published on 2 February 2021 (the Woolard Review) was on buy now pay later (BNPL) products but the review also discusses the benefits and the increased risk that comes with offering ESAS and warns the Financial Conduct Authority (FCA) that closer monitoring of these types of payment arrangements is required.
What are ESAS?
The Woolard Review set out the scope of ESAS as an arrangement that allow employees to access a percentage of their monthly pay in advance of their payday. This allows for a split income throughout the month and provides more flexibility for consumers.
The Woolard Review found that certain specialist providers are currently partnering with large company employers, mainly in the retail and hospitality sectors, in order to provide this form of payment arrangement to individuals. It is for the employer to decide what percentage of an employee's salary can be used as part of an advance for the payment. A provider will also usually charge the employee a fixed fee per withdrawal for using this service.
Why is there a risk?
Although ESAS are not as frequently used as, for example, BNPL products, the Woolard Review identified certain shortfalls of this type of payment arrangement which needed to be addressed by the industry:
Proposals
Unlike the Woolard Review’s proposal that BNPL products should be FCA regulated (read here for more information), the Woolard Review states that there is not yet a need for the FCA to regulate ESAS. Closer monitoring of such payment arrangements should however be implemented by the FCA.
The Woolard Review further proposes to the FCA that ESAS providers and the major employers using these services should 'draw up a code of best practice' and major employers should only contract with providers following such high standards of practice.
Firms offering such forms of payment should therefore ensure that their digital platforms are built to encourage responsible financial decision making, which should include increased transparency on fees.
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