As South Africa attempts to navigate itself out of the Covid-19 second wave a year after going into hard lockdown, it is apparent that the pandemic has held a magnifying glass over fault lines in our society. The perpetual pay-day debt trap is one such fault line and it is as bad as ever, having a material impact not only on the lives of those affected, but also on the companies where they work.
According to Caroline van der Merwe, Co-Founder of technology company SmartWage, which provides a platform for earned wage access (EWA) for employees across sectors, informal lenders have built sophisticated networks and have infiltrated businesses, employing agents within these companies to target co-workers.
“In most cases we have found that loan sharks are operating within the workplace itself. We have discovered that there is a system of lenders that recruits company employees to act as agents between the loan shark and employees. Typical rates for the loans disbursed range between 30% and 100% for the month,” she says. She says EWA is a compelling tool in the toolkit to combat the problem.
“We spoke to a user of our service who explained that before, if she found she could not pay the agent back, she would skip work on the day the payment was due so she could borrow from another loan shark to make good on the debt she owed at her own workplace. Employers need to recognise that these systems exist and cut them off at the source,” she says.
“Those South Africans lucky enough to have kept their jobs during the pandemic have not been spared from financial pain. Many have had to spread their income even further as family members who lost their jobs became dependents.” says van der Merwe.
Reduced hours and shifts have had a marked impact on employees. “We know that many companies cut hours or reduced salaries as a direct result of the pandemic. The effect of that is obvious. SmartWage has conducted research among users of our EWA product across various industries, and we have been able to develop a detailed view of the lived reality of workers. One finding is their increased cost of living,” she says.
The findings of this research are being compiled into a report, which when available, will help build a clearer picture of the state of employees and debt in the South African workplace.
The great tragedy of the payday debt trap is that it makes the poor poorer by virtue of the exorbitant interest they pay. A wealthier person would not have to pay this penalty on a routine or emergency expense.
Our research has shown that financially distressed employees are less likely to be totally focused on the job at hand and will have poor attendance records, which will affect their performance and the company’s bottom line. Finding sustainable solutions benefits everyone and here, all stakeholders have a shared responsibility.
As SmartWage has expanded its presence in South Africa and gathered insights, van der Merwe says there are a few realities that have come to light that all employers should know. These are:
- Employees may miss work if they’re unable to repay a debt to a co-worker agent.
- Employers must recognise that whether they choose to acknowledge it or not, many if not most of their employees are in a debt trap.
- EWA is not a silver bullet solution to the problem. There are outliers who are already so deep in a debt trap that wage access will not be useful. There are also those who do not struggle with debt and may not need EWA. But for the broad middle, this is an effective tool that employers can provide that makes their employees more resilient to financial shocks.
- Psychologically, employees who are worried about their finances will be less focused, productive and safe at work.
- Employers can build a powerful retention tool and employee value proposition using a tool such EWA.