Electronic payments smooth consumption by reducing transaction costs and avoiding drops in consumption at the end of the month, thereby generating welfare benefits for workers and business. However, this is dependent on the timing of the payment.

Low-income households around the world face the challenge of budgeting their monthly lump-sum salary payment until the next payday. Often, households come up short. But there may be a solution: electronically depositing workers’ salaries into a bank account. This can have the same impact as doling out salaries in installments, allowing workers to better plan their spending.

The case of Bangladesh

Consider Bangladesh. Garment factory employees there often come up short before the next payday, according to a representative survey of workers who receive monthly salaries in the first week of every month. According to the survey, 39% of respondents reported not having enough money for food or having to skip meals in the last week of the month.

Being unable to smooth their consumption over the month, these garment workers resorted to borrowing at exorbitantly high interest rates from money lenders and shopkeepers, often crippling their ability to save. The result: Declining levels of food consumption and nutritional deficiencies at the end of the month among workers can lead to missed work, diminished cognitive abilities, and lower productivity.

Empirical evidence suggests that spreading wage payments into incremental amounts, as opposed to paying lump-sum amounts, can help workers plan their financial needs and curb wasteful spending (Laib-son 1997; Stephens 2008; Mullainathan and Shafir 2013).

The study:

In this experimental study, we examined whether changes in the timing of wage payments can help workers smooth consumption and avoid scarcity at the end of the month.

The methodology           

We tracked 632 workers in a large garment factory in Bangladesh. The experiment was conducted on a sub-sample of workers, to assess the impact of moving from cash to electronic monthly wage payments.

Our intervention involved paying a one-time cash bonus equal to approximately 10%-15% of the monthly wages of the workers. Some workers in our treatment group received electronic wage payments, while others were paid in cash. Keeping the amount of the bonus constant across all workers, the experiment randomly varied its timing:

  • In the treatment group, workers received the bonus one week before the regular payday – the time when they are most likely to experience financial constraints.
  • In the control group, workers received the pre-announced bonus on the factory’s regular payday. 

The findings

Significantly large number of workers reported cutting consumption and borrowing from shopkeepers and informal lenders at baseline. We found evidence of significant heterogeneity in financial constraints and the ability to smooth income over time.

  1. Greater savings and lower borrowing
  •  Workers who received a pre-payday bonus saved significantly more money, suggesting that at least some individuals did not face financial shortfalls before the bonus.
  • The results also showed that workers who received a pre-payday bonus were less likely to have borrowed money from informal lenders in the prior seven days.
  1. Increased consumption – but only for workers paid in cash 
  • After receiving a pre-payday bonus, workers that were paid in cash increased their food consumption.
  • By contrast, those workers on payroll accounts with electronic salary deposits did not report eating more food.

The implications:

  • The findings suggest that workers paid in cash might be more liquidity constrained at the end of the month than workers receiving electronic wage payments into an account.
  • It also indicates that electronic wage payments and the use of a bank or mobile account act like an automatic tool of consumption smoothing that can generate large welfare benefits for workers.
  • Our results suggest that changes in the timing of wage payments can affect the ability of households to smooth their consumption over time.
  • However, the fact that we observe this effect only among workers who still receive their wages in cash – but not among workers with payroll accounts – suggests that receiving one's wage as a direct deposit into a formal account can produce the same effect as varying the timing of one's income stream.


Electronic payments allow workers to smooth income over time by reducing transaction costs and avoiding sharp drops in consumption at the end of the month. This is beneficial for employees—and good for business.

Editor’s Note: Read more about this project here