As the U.S. introduces tough new rules to curb payday lenders, young financial technology companies are taking aim at the high-interest loan shops in their own way, building products and services that let workers tap into their pay as it accumulates.
Companies with such names as PayActiv, FlexWage, Activehours, Clearbanc, and Even aim to smooth the ragged income streams of many workers that can send them to payday lenders when financial emergencies strike, often deepening their troubles.
PayActiv chief Safwan Shah, for example, sells his services to employers as a way to improve productivity by easing the stress that payday loans can cause their staff. PayActiv works with them to allow employees to tap into their wages outside the normal salary cycle, within limits. Shah did a ZIP code analysis of every employer he talked to and checked how many payday lenders were in each zone.
"Then we went back to employers, gave them the list of payday lending stores, and said you are the biggest employer in this area and payday loans are a function of payroll," he said. "We asked if they'd ever thought that simply making employees wait two weeks for their pay is something that has sent employees out to payday lenders."
The argument intrigued Kendall Johnson, chief executive of Baton Rouge General Hospital. He signed on with PayActiv, and now about 400 of his employees have enrolled in the service. One of them, 28-year-old hospital recruiter Amber Thompson, used it when she faced a sudden cash crunch between paychecks when she was moving. Instead of turning to a payday lender or risking big overdraft fees, she walked to the PayActiv ATM in her building and took out $400. PayActiv just won a Best of Show award at FinovateSpring 2016 for its use of technology to ease the "cash flow struggles of working families." 1
Weekly and biweekly paychecks don't fit the way many people work anymore. In a sign of the times, ride services such as Lyft and Uber have rolled out Instant Pay and Express Pay services for their drivers.
“So many of our financial services today are based on a stability of lifestyle and income that very few people have now,” said Ryan Falvey, who oversees the Financial Solutions Lab at the Center for Financial Services Innovation. The Lab supports companies working on creative services that help Americans improve their finances.
That doesn't mean having constant access to one's earnings is risk-free. Activehours, which lets consumers choose what to pay for transactions through what it calls "tips," helps employees with budgeting, said Ram Palaniappan, the company's CEO. “If you need to spend, you check if there are earnings in the app, and if there aren’t, you need to work more before you spend,” he said. “It’s very much like business, trying to make revenue meet expenses.”
Moreover, the percentage of earnings that employees can take, and how often they can take it, may be limited by employers. For now, Baton Rouge General caps withdrawals at 50 percent of wages earned and a maximum of $500. An employee can’t take out another loan until the first one is repaid out of his or her paycheck.
Other companies may set the limit at 75 percent to 80 percent of earnings and limit the service's use to once per pay cycle, said FlexWage CEO Frank Dombroski. "We're here to help employees that need funds avoid high-cost alternatives, not to help them act less responsibly," he said. "Overdrafts are a bigger socioeconomic problem than even payday lending and cost consumers $32 billion last year."
The service is often positioned as a financial wellness benefit that can increase retention. PayActiv's Shah said being able to tap earnings this way can lead to better financial behavior. He compared it to grazing on food, rather than bingeing.
“Access to money in small dollar amounts when it’s needed has far more value than waiting to be paid and, in the interim, getting into a debt trap, à la payday lending,” he said.
It’s too early to measure the results, though some companies offer positive anecdotal evidence.
At Baton Rouge General, Johnson says employees are using it when they have cash flow problems and need such things as car repair, he said, not turning to it every month—which was an initial concern about the service. He's seen a decrease in the number of employees using check-cashing sites and payday lenders, which call Baton Rouge General to verify employment.
These early-stage companies are likely to face increased regulatory scrutiny as the sector grows. Shah said PayActiv has had more than a dozen meetings in the past two years with 25 to 30 people associated with the Consumer Financial Protection Bureau's Project Catalyst "in the spirit of keeping them updated." Project Catalyst's "mission is to encourage consumer-friendly innovation in markets for consumer financial products and services," according to the CFPB website.
Dombroski said FlexWage has been working with Project Catalyst on a study to quantify the impact of financial stress. The CFPB said in an e-mail that it "meets regularly with a range of industry and advocacy stakeholders" but generally doesn't "comment on or discuss specific products."
"I don't think the Consumer Financial Protection Bureau has put a broad eye on these companies yet because the numbers aren't there yet," said Sam Maule, digital practice lead for NTT Data Consulting. "The onus is on these companies to educate the regulators."
It also falls to them to educate customers about how the product is meant to be used, said Cherian Abraham, a payment expert at credit-tracking company Experian. "It's harder for companies like these because their customers have been called unprofitable by the traditional financial institutions," Abraham said. "So they have a tougher job."