Unlocking the financial leverage of the wage
In emerging markets, the majority of workers earn very low incomes and work in informal economies. As a result, these individuals live paycheck to paycheck and are often unable to access traditional forms of credit - many work in informal economies and lack financial histories due to cash dominant environments, making banks reluctant to give them loans.
Earned Wage Access (also known as salary/wage advance) provides a non-traditional form of credit for financially excluded workers by allowing them to access a portion of their future earnings before payday.
In this thought piece, we discuss the importance of salary advance in emerging markets and how it can help to improve financial inclusion and stability for low-income workers.
The first reason why wage advance is so important in emerging markets is that it can help to bridge the gap between paydays. Living paycheck to paycheck means that workers in emerging markets have adopted a ‘subsistence’ way of life, and often have little-to-no emergency savings. This can create huge problems when unexpected expenses arise (e.g., medical emergencies or car repairs). By allowing employees to access a portion of their future salary before payday, employers can help to provide a financial safety net and thus preventing people from taking on predatory debt or having to rely on friends and family. The provision of Earned Wage Access presents a huge opportunity to fintechs in emerging markets. For example, in Africa, the lack of liquidity in-between paychecks has led to a $30bn funding gap every month. Many startups are capitalising on this gap, for instance, Bento Africa is a Nigerian startup leveraging cloud based solutions to help African businesses automate the disbursement of salaries.
Another important benefit of salary advance in emerging markets is that it can help to improve financial inclusion. Due to a combination of poor financial reporting and large informal economies dominated by cash transactions, many people in emerging markets can’t access traditional banking services. They are therefore often unable to access credit or other financial products. Salary advance can help to fill this gap by providing a simple and accessible way for low-income workers to access credit.. Salary advance can also help to improve financial stability for low-income workers in emerging markets: By providing a source of credit that is tied to the employee's salary, EWA can help to reduce the risk of default or late payments. This can help to improve the overall creditworthiness of low-income workers and make them more attractive to traditional lenders, thus enabling long term inclusion and financial wellness.
Looking more broadly at the space, there are three sectors that have dominated the Earned Wage Access space so far:
- Gig Economies: Flexible pay for flexible workers. As gig workers don’t have permanent employment, fast access to cash every time they work is crucial.
- Retail: Responsible employers supporting their workforces. Large retailers are starting to recognise that employee wellness needs to be at the forefront of business strategy, and so are employing Salary Advance as a way of helping their workforces maintain financial stability.
- Healthcare: Supporting staff at a time of crisis. Staff within the healthcare industry have had to go above any beyond in recent times, with the pandemic resulting in unprecedented levels of pressure. Financial worries only add to this strain and so health services are looking to alleviate stresses and support their workers via EWA.
Our Portfolio
How do we translate this into our investing activity and decision making?
Minu in Mexico are supporting over 300 employers to drive financial security for their workforce. Since launch, they have expanded their offering to include savings, loans, payroll dispersion and a range of employee benefits, including medical consultations, insurance and financial education. One enterprise customer showed reduced consumer indebtedness by $160,000 in 4 weeks and employee NPS was 94.
We continue to look for companies who operate innovative Earned Wage Access models and whom we think can create lasting impact.
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