Are you an hourly worker paid 2-4 times a month? Then your employer is holding on to your wages waiting to give you your paycheck. Until payday, however, your company creates a “cash float” to pay its bills and maintain reserves. Every company needs reserves–retailers, manufacturers and banks–especially small companies that don’t have high cash balances in accounts.
But Ram Palaniappan, the Activehours CEO, thinks the reserves created by unpaid wages are excessive. Ram claims employers in the U.S. float an average $2 TRILLION in money owed to workers. In comparison, Forbes reports the total U.S. Healthcare cost for 2013 was $3.8 TRILLION. That means employers float 45%+ of the annual national healthcare cost continuously.
Companies use this huge “cash float” to maintain buildings, pay utility and other bills, invest in their businesses and, of course, pay salaries. Ram argues you’ve already earned wages. So why should employers float the money when you could use the money to pay bills?
Activehours Advances Your Wages..for a Tip
Activehours is a mobile money pre-pay company that advances earned wages before someone’s next paycheck. Activehours verifies earned income through the same firm supplying Mint (owned by Intuit) with online paid wage information.
Recently, the company launched iPhone and Android apps. After taking a photo of a recent pay stub and sending to Activehours, users request part or all of their earnings and pay a “tip.” The cost? Well, that’s up to each user. Like tipping a taxi driver or restaurant server, you give whatever you want. Ram says, however, that the company is satisfied so far with its tip earnings, although he didn’t reveal the average amount.
Activehours initiates a transfer of its own funds to an employee’s checking account. The customer then uses a banks ATM to access and use the funds. On the next payday, Activehours withdraws the “borrowed” amount and the tip from the worker’s checking account. The difference between Activehours’ accounts payable (advance the funds) and accounts receivable (take the funds back) is the company’s cash float. The tip is gross income. By keeping expenses low, investing the float and tips, Activehours eventually becomes profitable as its assets rise.
Here’s a quick video explaining how customers use the service:
Using Activehours May Hurt You More than Help You
Activehours’ appeal is certainly alluring: “Don’t pay banks outrageous fees for overdrawing your account. Don’t mortgage your financial freedom to “loan shark” Payday companies. You’ve earned your wages and should have access to them whenever you want.”
Outside of using the service for emergency funds, however, I wouldn’t recommend Activehours. Hourly workers, like exempt employees, overspend and find it difficult to budget. If payday doesn’t come soon enough to cover the rent, utilities and credit card dates, then work with each payee so it fits your pay schedule. If you’re paying on time, credit card and utility companies will adjust monthly bill cycles to ensure they get paid on time.
Second, the argument that “the money is yours…so take it when you want” puts a lot of pressure on people to adjust to variable wage payments every paydays. The accounting is much simpler if you know what you will be paid on an upcoming date.
Third, the “tip” is a really a fee. Sure, you don’t have to pay anything, but Ram at Activehours says most people are. Think of it this way. If you give a 5-10% tip on part of your wages, you’ve just reduced your income by the same amount. Now when the next payday comes, you not only have to pay Activehours back, you have even less money in your checking account. (Read this New York Times article for more information.)
Activehours released a bar chart indicating that most overdraft charges occur by customers exceeding their bank balances by only $10-$15 dollars. If that’s the case, then pay yourself $10 every payday by leaving an extra small amount untouched in the account. In only two-three months you’ll have a cushion that prevents going over your balance and won’t need a wage advance.
Activehours Terms of Service
Before deciding to load the apps on your smartphone, please carefully read Activehours Terms of Service. Here are a couple of key negatives about the service:
- You must keep an amount equal to the amount borrowed in your account. “By Activating Virtual Assets, you authorize us to charge your bank account for all payments due to us. You agree to maintain a balance that is sufficient to fund all payments you initiate.” True, Activehours will remove the funds at your next paid, but the terms don’t say that. It’s also amusing that Activehours refers to money you earn as “virtual assets” as soon as they loan you the money
- Activehours may not retrieve the borrowed funds on the day you think, making it even harder to budget if they don’t. On top of that, you’re responsible for any overdraft or other charges when their ETF hits your account.
“You will indemnify and hold Activehours harmless from any claims by any other owner of the account. If we are unable to access funds from your bank account to complete a payment that is owed to Activehours, you agree that:
- you will reimburse Activehours immediately, upon demand, the transaction amount to the extent that it was not collected by Activehours;
- you will reimburse Activehours for any fees imposed on us as a result of the failed transaction; and
- you will reimburse Activehours for any fees we incur in attempting to collect the amount of the failed transaction from you.
Activehours is not responsible for any overdraft fees, over-the-limit fees, or insufficient fund charges (including finance charges, late fees, or similar charges) that result from your failure to maintain a balance or available credit in the bank account that is sufficient to fund all payments you initiate.” I am not aware of any bank that charges finance charges on checking accounts. Perhaps Activehours has other products in mind for the future
- Finally, Activehours is creating the same “cash float” that they blame on corporate America. When I asked Ram in the interview when the company would become profitable, he hedged, but seemed to imply that gaining customer trust and experience with Activehours is more important. It’s what many social media conscious companies do.
- Facebook is the biggest example, but venture capitalists and entrepreneurs now realize that creating a company with raving fans is job number one. “Tips” will undoubtedly grow for Activehours, but the big money is the cash float and the investors know it. Ram said during our interview that “everyone who earns an hourly salary should leave the Activehours app on it.” This is the dream of every mobile application company, although the average new app only occupies iOS and Android real estate for 48 hours. If the app is on your phone, you’re more likely to use Activehours regularly.
For the rest of the story, listen to my podcast interview with Activehours CEO Ram Palaniappan.
Resources:
Lifehacker article with many comments
Other articles and interviews about financial inclusion on MobileBeyond
Media Consumption and Diminishing Marginal Utility (MobileBeyond)
This is the fifth in a series of interviews and articles about financial inclusionof people using mobile devices to gain access to financial services. These and other financial inclusion pioneers will be featured in Carol Realini’s forthcoming book “Financial Inclusion at the Bottom of the Pyramid.” See her Facebook page for further information.
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