A small number of banks have started to offer advance direct deposit – a move that will cost them revenue in the short term but could help them preserve market share and boost their public image in the long term.

This service, sometimes called prepayment, allows customers to access their paycheck a day or two earlier than normal to avoid overdraft fees or the need to turn to a payday lender.

Early direct deposit was made popular over the past decade by challenger banks like Chime, Varo, and One, although a few community banks have offered it for years. Many traditional banks have been unwilling to waive the overdraft fees they can reap in the days leading up to payday. But some – including Capital One Financial – embraced direct deposit early to appeal to consumers, who are increasingly drawn to a growing field of consumer-friendly neobanks.

Capital One and LendingClub Bank are two of the few commercial banks that allow customers to access their paychecks up to two days before payday at no charge. “We’ve already helped more than a million customers access their paychecks sooner, and we hope this change will make them less worried about money,” said John Durrant of Capital One.

Bloomberg, LendingClub

Typically, for people who get paid every other Friday, banks receive payroll files from providers like ADP and Paychex on a Wednesday and make those funds available to customers that Friday. Several fintechs make the funds available to customers upon receipt of this file. Recently, Capital One and a few other banks have started doing the same.

Getting paid on a Wednesday or Thursday instead of a Friday might seem like a trivial change. But for people struggling to make ends meet, “having access to your money closer to when you earned it is a big step,” said Aaron Klein, senior fellow in economic studies at the Brookings Institution. in Washington. “It will make a big difference for a small number of people.”

Nine percent of consumers account for 80% of overdraft fees, according to research from the Brookings Institution.

Advance payment should not be confused with early access to salary or Access to Earned Wages, through which fintechs and third parties like Even, PayActiv, DailyPay, Branch and Earnin provide small loans to employees based on their next paycheck. These programs are sometimes controversial for their payday loan aspects: some charge high interest rates or require “tips” that end up amounting to high fees. Additionally, customers may overwork themselves and need to borrow more to keep paying their bills.

These offers are part of a wider effort by some financial providers to help consumers avoid overdraft fees. Last week Allied Financial eliminated all overdraft fees. In April, PNC Financial Services Group launched a Low cash mode digital service that alerts account holders when their balance is about to go negative and gives them 24 hours to block transactions or add funds before charges are assessed. Some challenger and commercial banks, including Huntington BancactionsUse artificial intelligence to analyze clients’ cash flows and upcoming bills and alert them that they are about to go overdrawn.

Politicians and consumer activists have long criticized banks for preying on the vulnerable to bolster non-interest income.

In a recent hearing, Sen. Elizabeth Warren, D-Mass., chastised the CEOs of big banks for collecting billions in overdraft fees in 2020. The senator singled out Jamie Dimon for the $1.5 billion JPMorgan Chase made in 2020 from overdraft fees — more than any other bank, including Wells Fargo and Bank of America, which raised $1.3 billion and $1.1 billion, respectively, according to filings with Federal Deposit Insurance Corp.

Dimon told Warren his company waives fees for customers “upon request.” When asked by Warren if the bank would refund customer overdraft fees it had collected during the pandemic, Dimon said, “No.” When Warren asked other commercial bank CEOs on the panel if they would do the same, none gave an answer.

A JPMorgan spokeswoman contacted for this story said the company is considering offering early direct deposit.

“This is one of many solutions we’re looking at to improve the customer experience, but it’s too early to share more at this point,” she said.

A Wells Fargo spokeswoman pointed to Overdraft Rewind, a service the bank launched in 2017 to help customers whose paychecks are deposited directly with the bank avoid certain overdraft fees. The bank reviews the 24 hours before paycheck funds become available and waives some overdraft fees. This feature is “extremely useful,” Klein said.

In the first quarter of 2018, Wells Fargo announced a $73 million drop in deposit service fees from the prior quarter, “largely due to the impact of customer-friendly initiatives, including the impact of the first full quarter of Overdraft Rewind,” Chief Financial Officer John Shrewsberry said in a earnings call.

A Bank of America spokesperson did not respond to a request for comment.

The case of advance direct deposit

Capital One, which is based in McLean, Va., began in April allowing funds from certain direct deposit transactions to be available up to two days early.

“Listening to our customers, we know that consumers want and need fast access to direct deposit and broad digital offerings to feel confident in their financial journey,” said John Durrant, executive vice president of services. personal and small business banking at $425.2. “As one of the first major banks to offer Advance Direct Deposit, we’ve already helped over a million customers access their paychecks sooner and we hope this change will make them worry less. money and focus more on their financial and personal well-being.”

OneUnited Bank, a $650 million community development finance institution in Boston; the $4.5 billion LendingClub Bank, formerly Radius Bank, which is now a San Francisco-based unit of LendingClub; Randolph-Brooks Federal Credit Union in Live Oak, Texas, which has $13 billion in assets; and Andrews Federal Credit Union, with $2 billion in assets, in Suitland, Maryland, also offer advance direct deposit. None of them responded to a request for an interview.

These banks are offering early direct deposit to compete with neobanks like Chime, Varo and One that make paychecks available in five minutes, according to Shamir Karkal, co-founder of Simple, former BBVA executive and current CEO of fintech Sila Money. .

“People love early direct deposit,” Karkal said. “Do you want to get your salary on Friday?” Or do you want to get it Wednesday at 4 p.m.? Why wouldn’t I want my money? It is something very concrete. Everyone who gets a paycheck gets it. And that’s a big reason why people switch accounts from a traditional bank to Chime or Varo. »

Why aren’t more banks doing this?

Banks contacted for this story declined to discuss why they weren’t offering advance direct deposit. But a recent RFI from Nacha, the organization that runs the ACH network, raised some objections to the concept.

In this document, Nacha says that because there could be errors or fraud in the payment files, the banks need several days of settlement time to recover the funds. Nacha’s RFI is discussing the idea of ​​changing its rules so that receiving banks that make the funds available early bear the loss for any error or fraud on the payments they dispersed.

“Nacha has requested public comment on the balance between the early availability of funds and legitimate risk management needs,” said Nacha spokeswoman Heather McElrath. “Once the information has been collected, we will take the results of the consultation into account when deciding whether to propose a change to Nacha’s rules in the future.

When payroll processors like ADP and Paychex send a payroll file to a bank on a Wednesday, they stipulate a settlement date of that Friday, which means the funds must be available to the customer by Friday morning. According to Karkal, the bank that receives this file could make these funds available immediately or wait until Friday.

“The fact that you can send the file two days in advance and say that the settlement is not now but in the future, is in itself an archaic holdover from the days when people carried around big magnetic stripe readers by truck,” Karkal said.

Big banks tend to hold on to cash for as long as possible, Karkal said. This is not to the benefit of the float, because interest rates are so low. According to several industry observers, it’s about getting overdraft fees from people who are struggling to pay their bills or meet unexpected expenses during the day or two before the day. of pay.

“A lot of people are living paycheck to paycheck, and they’re not all low-income people,” Karkal said. Even people with big six-figure incomes end up with $20 or less at the end of each pay period, he said.

There have always been small banks and credit unions that didn’t have the capacity to store an ACH file Wednesday through Friday, Karkal said, because their systems wouldn’t allow it, so they just put the money in. immediately available.

“What is the risk for them to provide access to the money earlier? There is none,” Karkal said. “For the recipient, if Paychex or ADP sent you a payroll ACH entry on Wednesday and you post the money on Wednesday, you’ll get the funds settled from the Fed on Friday.”

The chances of errors or fraud in payroll files are low, Karkal said.

It is possible for a payroll provider to make a mistake and include a paycheck to an employee who has left the company, and that person will spend all of that amount immediately, so that when the payroll company requests an ACH reversal , the money is gone.

“But it’s an extremely small issue,” Karkal said. His company has run hundreds of thousands of payroll transactions, and he’s never seen this happen.

In Karkal’s view, if a payroll service provider makes a mistake, they should be responsible for the loss.

If Nacha changes its rules to make receiving banks liable for problems with ACH payments, it could cause Chime’s partner banks and other challenger banks to stop supporting early direct deposit or charge more for it.

On the other hand, “if everyone could get their paycheck 48 hours earlier, I wouldn’t be surprised if half the payroll industry died right there,” Karkal said.

This story has been updated to include a comment from Nacha.