Workers are borrowing more to cover transport and food costs

Earned wage access lenders see spike in activity as prices surge.
Statistics show that workers who have requested advance salary payments have done so mainly to cover their transport costs. Image: Siphiwe Sibeko/Reuters

The costs of the Ukraine war have started to hit closer to home in South Africa. Workers are spending more on transport, food and electricity to make it through the month.

Spiralling international oil prices, largely on the back of the Russia-Ukraine conflict, have seen record fuel prices locally, which is also fuelling higher food prices.

Read: A world that’s more expensive is starting to destroy demand

Earned wage access companies Paymenow and Level Finance say already stretched workers are battling to make it through the month without drawing down on wages before the end of the month.

Through the earned wage access process, workers can access part of their earned salary or wages in advance of month-end. Lenders are also able to keep close track on the reasons for borrowing.

As petrol prices are expected to hit around R24 a litre in April, wage increases are starting to fall behind cost of living increases.

Read:
Record fuel price hikes on the horizon for SA
How high could petrol go?

According to Transaction Capital, which finances minibus taxi fleets around the country, taxi fares have increased by more than 9% per year since 2013.

This outstrips growth in salaries over the same period by some distance.

Statistics gathered by Paymenow show that those workers who have requested payments have done so mainly to cover their transport costs.

In January, employees signed up with Paymenow requesting advances were trying to cover commuting costs to work 46% of the time. By comparison, only 23% of disbursed payments were used for food. The trend continued in February and March.

‘The first step to being trapped’

“Taking on debt simply to cover monthly living costs is the first step to being trapped by the unreasonably high interest rates associated with loan sharks,” says Deon Nobrega, Paymenow co-founder and CEO.

“Earned wage access as a concept is designed to prevent this by allowing workers to draw portions of their earnings throughout the payment cycle to meet everyday needs or deal with financial emergencies.

“Historically, not being able to meet transport costs has been a key driver of employee absenteeism and churn in South Africa,” says Nobrega.

“The majority of those in our economy who have a formal job are blue-collar workers and financially vulnerable,” he adds.

Read: SA’s cost of living remains unaffordable for many

Raeesa Gabriels, CEO and founder of earned wage access company Level Finance, has likewise observed an uptick in borrowings due to higher public transport costs.

“In January we saw a lot more people accessing borrowings through our platform for school books and uniforms. In recent weeks, borrowings have increased due to higher fuel costs, which impact taxi fares and public transport costs, as well as for food, electricity, data and sudden emergencies,” she says.

“We are seeing people run out of money much quicker than was the case previously, and this is obviously due to the rising costs of living,” adds Gabriels.

Earned wage access has grown in popularity, with companies signing on to help workers out of the unsecured credit trap, or from having to borrow from family and friends to make it through the month.

Level Finance, which is backed by fintech financier AlphaCode, allows employees of client companies to borrow up to 25% of income that has been earned and not paid. This is particularly useful for workers who are paid monthly.

They are able to borrow against income accrued during the month. The client company deducts the borrowed amount at the end of the month to settle the lender. The costs vary, but Level Finance charges 2.5% per transaction, with a R10 a month once-off flat fee.

Read: RMI’s AlphaCode invests in bitcoin

“It’s designed to get people out of the debt trap and avoids them having to borrow at exorbitant rates from the money lenders,” says Gabriels.

State support

The South African government is yet to announce measures to help consumers cope in the face of spiralling fuel costs.

Countries such as Brazil, Japan, South Korea and India have all announced domestic fuel tax cuts and subsidy increases to maintain affordable price levels.

“South Africa did protect consumers from a petrol price jump in 2018, but the seemingly protracted time frame of the Russia-Ukraine conflict looks set to test the country’s balance sheet as global fuel price hikes drive consumer inflation,” says Nobrega.

Read: SA weighs petrol-price cap, rationing to curb costs

“Ultimately, South African workers will not be able to cover all their basic costs if input prices continue to drive inflation in the prices of basic goods …

“In a country with a poor savings rate and an economy under pressure, those without early access to their wages stand the greatest chance of falling into a debt trap and potentially losing their jobs as a result. This will be a disaster for the country,” he adds.

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The Cantillon Effect explains how inflation creates inequality. The same monetary policy by the US Federal Reserve that drives the growth rate of sharemarket indices in the US, raises the cost of living for workers in SA.

The individuals and institutions who stand first in line to receive the newly-created money enjoy an increase in purchasing power. By the time that new money reaches those who stand at the back of the line, namely the workers in the Developing World, it has lost purchasing power as the new money circulates alongside the old money to compete for the same amount of goods and services.

So, if we consider the consequences, what is the ultimate effect of Quantitative Easing and manipulation of interest rates in the developed world? It is an opaque mechanism that transfers purchasing power(wealth) from developing nations that need currency reserves, to developed nations that print those reserve currencies. Inflation transfers wealth from workers to investors, from savers to borrowers, and from the poor to the wealthy. The government itself is the main beneficiary through the inflation tax.

Inflation is like a Robin Hood gone rogue. It robs the poor to support the wealthy owners of assets. This process always leads to social unrest, as proven by the French Revolution, the Arab Spring, as well as the local xenophobic attacks.

“By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security, but at confidence in the equity of the existing distribution of wealth.” – John Maynard Keynes

And yet a certain operation spends energy on foreigners instead of using their energy to drive economic transformation and growth!

As a matter of fact I for 1 will definitely employ a Zimbabwean before I employ an indigent person.
Simple really — the Zim people have a decent education and they want to work !!!!

End of comments.

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