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Earned wage access both a boon and a bane

Getting a portion of your salary before pay day is now possible, but some have expressed fears that it can have a negative impact on savings. (Freepik pic)

PETALING JAYA: A financial emergency does occur once in a while and for some, having to wait until the end of the month for their salary may be too late.

To fulfil such needs, some companies have introduced a programme that enables employees to be paid before they receive their salary.

The system, called earned wage access (EWA), has gained acceptance among employers, and it has given employees a breather when facing a difficult situation.

Malayan United Industries Bhd (MUI), one of many companies that already have the EWA in place, said it could give employees better control over their finances.

However, the amount disbursed is limited to the sum already earned, subject to a maximum of 50% of the employee’s monthly salary.

MUI chairman and CEO Andrew Khoo said the 50% limit ensures that employees will not put themselves under financial strain.

But while it seems well-intentioned, the EWA has also earned criticisms and garnered scepticism.

An employer interest group and a think tank expressed fear that such a practice could have a negative impact on an individual’s savings.

Only a short-term relief

EWA was first introduced in the US in the 2010s to help Americans who did not have access to credit or traditional banking. It was not until last year when Malaysian employees were given that option.

Proponents of EWA say it ensures that employees do not get into debt in the lean periods or when there is an emergency that requires a financial outlay.

The Malaysian Employers Federation (MEF) said it could reduce financial stress for workers, which would lead to job satisfaction, increased productivity, improved attendance and lower attrition rates.

However, MEF president Syed Hussain Syed Husman also cautioned that failing to manage EWA with prudence could lead employees to spend more on non-essentials, eventually leading to reduced savings.

“It is therefore critical for employees to be given training on financial literacy so that they can reap the benefits of prudent financial planning,” he told FMT Business.

National Union of Bank Employees (NUBE) general-secretary J Solomon is sceptical on how it could bring benefits to workers.

“Apart from the financial flexibility there is no real benefit for employees. Companies will only use it as a gimmick to position themselves as a caring employer,” he said.

In reality, he said, the EWA encouraged spending rather than saving and budgeting.

“It can create a culture of indebtedness given that by the end of the month the employee will have spent most, if not all, of his earnings,” Solomon added.

Instead, he said, companies should be compelled to pay employees a “liveable” wage rather than promote their own image by introducing a wage mechanism that does not enhance an employee’s livelihood.

Challenge for employer

Economist Carmelo Ferlito said it would be a challenge to put such a practice in place.

He questioned how it could benefit businesses if they have to continuously make funds available for withdrawal.

“Who will make the money available in the employee’s bank account? Is the bank giving an advance?” he asked.

He said it could also affect the company’s cash flow.

Ferlito, who heads the think tank Center for Market Education, also agreed that it could erode savings.

He said that in a country with a low level of financial literacy, the EWA could facilitate immediate spending, thus undermining saving capacity.

Little left for a rainy day

EWA sceptics have good reason to cast doubt on its efficacy.

Putting some money aside every month remains a major challenge for Malaysian wage earners, according to the result of a survey conducted by financial consultancy service provider RinggitPlus.

Of the 3,144 persons covered in the survey carried out last year, 53% said the savings they had could last them only up to three months if they lost their jobs.

Of those who managed to save, 70% put aside less than RM500 a month. Some don’t have any money left at the end of the month.

The survey also showed that 55% of Malaysians were living from paycheck to paycheck.