One way companies finance themselves is by paying employees bi-weekly.
In business, some costs require upfront payments, while others can be deferred. In business-to-business transactions the timing is usually negotiable. However, employee wages are almost ALWAYS deferred.
Does that make sense? Why can’t the timing between when sales are made and when employees are paid be reduced to zero?
The Answer: Incentives + Inertia
Banks and payment companies earn transaction revenue by facilitating payments between customers and business owners. Payments are often delayed a few days and sent in “batches” which creates a receivable for the business owner. The owner’s working capital goes up.
Luckily, the owner will receive their payments before they are required to pay their employees. The restaurant owner’s net working capital goes down. Phew.
But what about the employee? They have obligations too, but unlike a business, consumer’s obligations can RARELY directly be deferred. Consumers are therefore forced to either deplete their savings or use credit. Banks and fintech companies fill the void through credit cards, personal loans, earn waged advances, etc. Some of these products are better than others, but all of which would certainly would be less necessary in a world where employees are paid every day.
While getting a daily paycheck would be nice, the financial system lacks the incentives to do so. Remember, financial institutions collect fees by processing payments, financing employees through consumer credit, and through factoring business receivables, among many other mechanisms. All of these products are made possible due to delays in financial intermediation, which creates the need for credit. Banks are generally happy because they earn fees and interest throughout the system. The owner’s generally happy because they can finance operations by paying employees later. In short, neither financial firms nor business owners are incentivized to change.
But if businesses had the option to pay employees daily AND receive revenue instantly, the spread that financial institutions traditionally capture through financing could be split between the employee and employer. Overall, credit would decrease de-risking many businesses, more broadly. Building a company to facilitate such a world, would require enormous scale, and large near term losses, but if done successfully, one firm could uproot a Trillion dollar payment industry.
