Revolut says new service will act as an alternative to payday lenders, which charge exorbitant interest rates, as well as increasingly popular Buy Now Pay Later programs
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The Revolut banking and payment app is launching a new service where workers will be able to withdraw up to half of their salary before payday.
The fintech company, which has 3.5 million customers in the UK, said its payday program will work as a payday advance service and is in talks with companies to sign them up.
It further claims it will act as an alternative to payday lenders, which charge exorbitant interest rates, as well as the increasingly popular Buy Now Pay Later services.
With Payday, workers will be able to receive up to half of their wages as they earn it weeks before they are paid.
You will be charged a fee of £ 1.50 per transaction and your salary will need to be deposited into a Revolut account. The company you work for will also need to be registered for the service.
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But debt activists have issued warnings, saying such a program could encourage people to borrow more than they can afford.
Revolut is not a full-fledged bank in the UK – it applied for a banking license in January.
This means that it is not covered by the Financial Services Compensation Scheme, which protects up to £ 85,000 of your money in the event of a business going bankrupt.
Payday advance plans are also not covered by credit rules and remain unregulated
Revolut, which was founded in 2015, says the new program will help clients who need cash in an emergency between paydays.
Nik Storonsky, CEO and Co-Founder of Revolut, said: “After the hardships of last year, the last thing employees need now is financial uncertainty.
“It’s important to get out of a situation where many are dependent on expensive short-term payday loans and credit.”
But Sara Williams, who runs financial website Debt Camel, said it could trigger bad debt cycles.
She said: “I’m afraid we’re going to see people whose wages are cut every month, so they have to keep borrowing.”
What is a payday advance system?
Payday advances are a type of loan where a business works with your employer to give you access to your paycheck – sometimes 25-50% of your income – before you get paid.
They are sometimes referred to as Access to Earned Wages (EWA) schemes.
Technically, since it’s not a loan, there is usually no interest and you don’t have your credit checked, but companies usually charge you a fee for using their service.
You should also keep in mind that when payday arrives you will be paid less because you have already accessed some of your money.
This means that you will have to increase your salary a little more than usual.
There are several high profile payday advance services that have popped up in recent years.
Wagestream, for example, allows employees to access 50% of their salary. Employers subsidize most of the costs, while workers pay £ 1.75 to use the EWA feature.
Another is Level which gives workers access to £ 500 and its website says there is an administration fee of £ 2 up front.
A recent review of the unsecured credit market by the Financial Conduct Authority (FCA) stated that these programs can be a low-cost alternative to other means of borrowing.
However, he said they need to be used responsibly and with tools that encourage good saving habits.