Keynes liquidity preference theory states that people hold money for three reasons; Transaction, Speculative, and Precautionary. What Keynes was saying, in essence, was that people demand money to spend, invest, and save. The last reason is a reflection of uncertainty; that is, people hold money because of unforeseen circumstances.
An important question that is worth asking is how would people without savings deal with such unplanned events. A perfect answer is through loans or credit. There is a downside to this, credit or loans attract interest rates. But what if you could pay a service fee for borrowing from yourself. In other words, what if there is a platform that allows you to borrow from your salary without paying an interest rate but a service fee. This is what Revolut is trying to achieve with its newly launched feature Payday - an alternative to credit card debt and short-term credit.
Payday lets users unlock a portion of their wages early. When a business integrates with Revolut, its users can access the Payday feature directly from the app.
Although the Payday feature is limited to businesses in the UK, Revolut also plans to launch this feature to businesses in the US and European Economic Area. However, Payday will not be available to all those who receive their salary in their Revolut account via direct deposit.
Nikolay Storonsky Revolut, co-founder and CEO, said, "We believe in the importance of making financial wellbeing accessible to all, and this includes focusing on the impact of financial stability on employees' mental health.
"After the difficulties of the past year, the last thing employees need now is financial uncertainty and stress. It is important to move away from a situation where many are dependent on payday loans and expensive short-term credit, a reliance that is exacerbated by the monthly pay cycle. "
How Payday works
The fintech has to plug into the employer's payroll system to know how much employees are earning. Also, it notes that employees need not change their payroll system. With this feature, employees can unlock a portion of their earned pay when they want. They can withdraw up to 50 per cent of what they earn in advance.
While businesses can use this feature for free, users will be charged a meagre, flat fee to use Payday. Also, it does not act like debt and will not impact their credit score. Only a portion of their salary is withdrawn in advance, and they will receive lesser money when they get their pay. Those who do not use the salary-advance feature can see how much they have earned so far in the month.