Generic online lenders, payday lenders and banks are facing yet another competitor in the personal lending space – payroll lending. A number of fintech players are now emerging across the globe, with innovative ‘plug and play’ payroll lending solutions for employers. It has the potential to upend or at least transform the multi-billion dollar payday industry, not to mention other forms of consumer finance.
And it’s a big market to transform. In the US alone, data from Pew Charitable Trusts signals payday lending is used by 12 million American adults annually. Borrowers spend approximately $7.4 billion each year at both store fronts and online lenders to meet their short-term cash flow shortfalls and, on average, take out 8 payday loans a year.
Payday lending is a sector that, rightly or wrongly, has long suffered image problems and accusations of consumer exploitation. However the stark reality is, many people aren’t great at managing their personal finances, living pay check to pay check. There is no question there is a market for solutions that plug short term cash flow gaps or help improve financial literacy. Banks have traditionally been shy of the sector, perhaps, some argue, because their version of payday lending, the overdraft, is a relatively good money earner they’d rather not ruffle the feathers of.
Unlike banks perhaps, employees however have a clear vested interest in keeping their employees healthy – both in the traditional sense and financially. If both aren’t kept in check, then performance at work can suffer. But for employers, providing the financing themselves really isn’t their domain
For specialised ‘financial wellbeing’ providers, it is. And for this new breed of hip, ethical and socially responsible short-term financiers, what better distribution channel then a solid business with ready, qualified leads in the form of income-earning employees? Cost of customer acquisition is a big burden on lending profits, so this is a savvy move.
Financial literacy and personal financial management (PFM) fintech startups have been some of the first to sprint out of the starting blocks in this regard. Big advice and employee superannuation (401 (k)) platforms have been quick to see the potential. In May PFM MoneyBrilliant was acquired by AMP, an Australian financial services company with a market cap of $16B. Future Penny, an Australian roboadvice and financial education platform recently announced it will partner with Australian and New Zealand employee benefits company Super-Advice to provide education systems for employees in large organisations across Australia.
But lending money directly to employees is a different game altogether. Below are several fintech startups that want to do exactly that.
One of KPMG’s Fintech 100 ‘emerging stars’, UK based SalaryFinance lets employers utilise its platform in order to give employees access to loans at a flat interest rate of 7.9 percent, regardless of income or credit score. It’s free for employers to implement, and all loans are funded by the startup. Next stop in the financial well-being train for the company is SalarySaver, a tool to help employees save towards financial goals.
For what it calls a ‘nominal ATM like flat fee’, employees enrolled in PayActiv can access their earned wages in advance, eliminating the need to use a payday lender. The platform is free for employers to offer.
Taking a slightly different approach, US based Ziero plans to offer interest free loans to employees. It can afford to do so, because it charges employers a fee for the service instead, roughly 10 percent of the loan principal.
A unique hybrid financing model, Zebit is not only challenging payday lending, but instore financing and checkout finance as well. Other fintech’s in this space like Affirm should potentially be watching this player closely. Zebit targets employers with the sole aim of getting them to pay for what I’m calling a ‘company membership’, which allows said company’s workforce to access a Zebitline, a zero interest finance facility on purchases made in the Zebit marketplace. The Zebit Market has 20,000 products across a range of well-known brands.
Alongside a flagship partnership with MassMutual to provide loans via its BeneClick! Platform, US based Kashable is waving the banner for socially responsible lending. Like the other players, it integrates with an employer’s payroll platform to assess borrowers and facilitate repayments. Rates start at 6 percent, with review website Supermoney claiming they peak ‘around the mid-teens’.
The question of how close we want our employers to be to our personal finances seems to not rate to highly as a discussion point across the various articles put out by commentators. But like most things in life these days, data privacy seems to be willingly sacrificed by most of us when we want to make our lives easier or our finances more straightforward.
There’s no doubt employers could play a far larger role in helping their staff become more financially literate. However that’s an easy statement to throw out there for big corporates and quite a different thing for small businesses of less than 100 staff to try to realise. So if innovative, light touch platforms can do that, for little to no cost, it’s a very interesting fintech space to watch indeed.