How ACH Innovation Ushers In A New Normal For Payroll

The U.S. workforce doesn’t look like it used to. The surge in gig workers and independent contractors has professionals, service providers and regulators engaged in new debates about what it means to be an employee or a small business.

It’s also opened up conversations about how professionals get paid. While there has been some innovation in wage payment mechanisms as more employers shift away from the paper check toward direct deposit and payroll cards, little has changed about the timing of those payments.

But the biweekly paycheck simply doesn’t work for everyone, particularly workers living paycheck to paycheck with bills to pay between paydays.

In a recent conversation with PYMNTS, Everee CEO Brett Barlow, as well as Co-founder and President Ron Ross, discussed how to help employers take the leap from the legacy of biweekly payroll, and why innovations in the ACH network have finally opened up the doors to a new normal of employee compensation.

Balancing Employer-Employee Needs

The payroll status quo has created cash flow challenges for many employees, particularly the estimated 60 percent of U.S. consumers living from paycheck to paycheck, according to PYMNTS’ latest Navigating the COVID-19 Pandemic report.

“Payroll has been done the same way for decades,” said Ross, “and the payroll cycle really doesn’t work for living paycheck to paycheck. It doesn’t align well with the cash flow needs of the employee.”

But the legacy solutions to this challenge — namely, payday loans — have created their own financial, and legal, headaches.

As more FinTech solutions introduce the concept of early access to future or earned wages, employers can struggle to adjust their back-office administrative processes to accommodate their employee needs.

Ross noted that many enterprise apps that sit on top of existing payroll systems may only offer employees access to a portion of earned wages because those funds are available based on estimated, not actual, time worked. For employers, signing onto a financing vehicle can not only mean greater risk exposure, but significant disruptions to their payroll.

These factors helped shape Everee, Ross said, which has its own bank and financing relationships to connect employees to wages that are based on validated hours worked, while employees continue to run their payroll schedules as usual.

ACH Innovation Breaks The Mold

One of the biggest barriers to payroll innovation in recent decades has been the process’s reliance on ACH. Traditional ACH takes a few days to process, meaning it simply wouldn’t feasible for a company to run payroll and push out wages every day, even if it wanted to.

It wasn’t until recently that the U.S. kicked off its Same Day ACH functionality, which Ross said became a major launching pad for capabilities to offer early wage access solutions.

“Phase 3 [of NACHA’s Same Day ACH implementation plan] wrapped up in March 2018,” said Ross. “That’s when I thought this was going to be an enabler of allowing payroll to transition to something new, where employees get paid on a much more accelerated basis. I incorporated the business the next month, in April 2018.”

He added that Everee uses Same Day ACH for all of its transactions, having secured a relationship with a digital native bank that offers competitive rates. With Same Day ACH adoption proliferating, he said, larger financial institutions aren’t experiencing the negative impact on wire transfer fee revenue they had initially expected, meaning these banks are also expanding their interest in participating in FinTech solutions like Everee’s.

While the Federal Reserve’s FedNow and other real-time payment capabilities aren’t yet on the market or mature enough to adopt, Ross said the company will be watching the U.S. migration toward faster payment capabilities closely.

A New Normal For Payroll

Adoption of faster and real-time payments is part of a broader trend within the U.S. financial system: a new normal is headed our way.

According to Barlow, the proliferation of the gig economy introduced a whole new set of expectations for how professionals work and get paid.

“There hasn’t really been any innovation in payroll platforms and the way these products operate,” he said. “They’re archaic and monolithic.”

Developing a cloud-based, mobile-first payroll platform that focuses on the experience of both the employee and employer is key to promoting payroll innovation. That, coupled with accelerated ACH infrastructure, puts the technological capabilities in place to disrupt the payroll status quo.

But beyond the technology, the ecosystem overall is also experiencing a paradigm shift in the way payroll as a concept is approached, and as Barlow predicted, the time of the biweekly payday is coming to an end.

Particularly in times like today, forcing employees to live paycheck to paycheck is no longer feasible, he said.

“This was a problem well before the pandemic, but it’s particularly relevant now, and will continue to be after we come out of these challenging times,” he said. “People are questioning the norms more and more.”

For employers, offering same-day payroll can be a strategic advantage to attract and retain employees, Barlow continued, adding that companies have largely been open to rethinking their legacy payroll ways.

“Our competition really is the status quo,” he said. “If people aren’t interested in trying to provide new, innovative ways to run their business and payroll, then that might be a hurdle. But we’ve found an overwhelming interest in thinking differently.”