As banks delay offering consumers alternatives to payday loans despite encouragement from regulators, a small but growing group of non-bank lenders are working with U.S. employers to provide low-dollar payroll financing.
United Way started offering the Salary Finance platform, operating in the UK since 2015, to its employees in October and linking it to some of the Fortune 500 companies that the association has partnered with for decades. Walmart Inc. is partnering with PayActiv, a fintech based in San Jose, Calif., To offer payroll advances to its 1.4 million employees. Uber drivers can collect their hours worked digitally through Earnin, based in Palo Alto, California.
“We are seeing an increase in payroll or employment related revenue. I think that’s one way businesses are trying to solve this problem of access to credit, ”Laura Scherler, senior director of economic mobility and business solutions at United Way, told Bloomberg Law. “Until now, there was no solution that worked on the market.
Companies connect their employees, often low-wage workers, to Salary Finance’s lending platform, and loans are repaid through fixed payroll deductions. Operating through employers lowers the costs of acquiring loans from Salary Finance and reduces underwriting fraud, CEO Asesh Sarkar told Bloomberg Law.
This, in turn, leads to more affordable loans. The company charges no fees and only earns income on loan interest, which it strives to keep low, nearly 10% on average, which the company says helps l The average American employee saves just over $ 1,000 compared to other loan options, Sarkar said. Loan sizes vary, although the average is around $ 4,000, Sarkar said.
The link to payroll makes employer-based solutions distinct and powerful compared to other low dollar loan products, Todd Baker, senior researcher in law and public policy at the Richman Center, told Bloomberg Law. ‘Columbia University.
“Because of this link, Salary Finance has an information advantage over a market lender because direct observation of employment and stability is greater than reliance on indirect data from the credit bureau. for credit analysis, ”said Baker, also managing director of Broadmoor Consulting LLC.
Tying a loan to an employee’s salary “allows someone who would otherwise pay 400% for credit to get it at 10 to 15%,” Baker said.
Find a foot
So far, United Way has helped introduce Salary Finance to nine companies, Scherler said. The Alexandria, Virginia-based nonprofit receives a marketing fee for each company that agrees to offer salary funding to its employees. Employers do not pay or receive payment on Salary Finance loans, Sarkar said.
Salary Finance has partnerships with the UK branch of Weight Watchers International, Inc. and the aerospace company General Dynamics Corp, among others. But it’s still small in the United States, so far with only one other publicly announced loan partnership besides United Way, insurer L&G America.
The fintech company continues to chart the regulatory waters of the United States, partnering with Axos Bank for its lending products, obtaining state licenses and adapting its platform to different state regulations relating to loans and wages.
With that groundwork laid, Sarkar said he expects Salary Finance to announce several new U.S. employer partners in the first quarter of 2019. The fintech company is also in talks to partner with state governments. Sarkar said, especially in states that have taken a hard line. against payday loans, but where other options are not readily available.
“We think we’re kind of on a growth curve here,” he said.
Trend of wages earned
Other types of salary-related fintechs are on the rise. PayActiv advances to Wal Mart employees are deducted from an employee’s next paycheck.
“Our ability and agility to integrate seamlessly with pre-existing business systems enables execution” that banks are unable to accomplish, Ijaz Anwar, co-founder and COO of PayActiv, told Bloomberg Law via email .
PayActiv has also partnered with community banks and credit unions to offer salary advances to employees of financial institutions, Anwar said.
Earnin’s program for Uber drivers, based in Palo Alto, Calif., Relies on users to tip the app company for immediate access to wages. Earnin’s no-charge, interest-free advance is also deducted from a user’s next paycheck. Partnering with Uber is strategic for employees who work unpredictable hours, but the app can be used by any employee with a bank account and direct deposit.
The Office of the Comptroller of the Currency issued a bulletin in May encouraging national banks to return to the low-value loan market with the goal of taking business from payday lenders. The Federal Deposit Insurance Corp. seeks public comment on a possible similar decision. But most traditional financial institutions withhold low dollar offers.
One potential hurdle is the wait for the Bureau of Consumer Financial Protection’s small dollar lending regulations and their application to banks. Rules completed in 2017 required payday lenders and other installment lenders to determine in advance whether borrowers can afford their loans and also set limits on the number of consecutive loans borrowers can take out. These regulations are now under review under Republican leadership from the office.
US Bank has been one of the few banks to intervene so far. In September, the Minneapolis-based lender began offering installment loans up to $ 1,000. Repaid over three months, the annualized interest rate is just over 70%, well below the triple-digit rates common to payday loans.
Banks are ideally located to offer low-value loans because they have existing relationships with potential clients, Jonathan Thessin, senior attorney at the Center for Regulatory Compliance at the American Bankers Association, told Bloomberg Law. But many are reluctant to enter the market until all federal regulators, including the CFPB, are on the same page.
“If we are to encourage banks to offer broader products that meet greater demand, we must first remove the barriers that prevent banks from offering small dollar loans,” Thessin said.
The OCC declined to comment and the CFPB did not respond to a request for comment for this story.
Reach the ladder
While the fintech-employer partnership models are promising, they lack the potential breadth of the banking industry to provide consumers with alternatives to payday lenders, Alex Horowitz, senior executive of the financing project, told Bloomberg Law. the consumption of the Pew Charitable Trust.
Pew estimates that consumers spend $ 9 billion a year on fees and interest on payday loans, in addition to paying off the principal.
“What every payday loan borrower has in common is an income and a checking account,” he said. Banks and credit unions are “possibly the safest way for millions of borrowers to save billions of dollars,” he added.
Consumers generally rate ease of application, speed of origination, and cost as the main factors in taking out an emergency loan. “The banking model has the ability to tick all of these boxes,” Horowitz said.
The scale issue is significant across the board, but the employer-based model works today, Baker of Columbia University said. “If you could do that at an employer like Walmart, you would hit at least a million employees,” he said.
“In the short term, non-bank companies like Salary Finance are going to have a significant impact on a significant number of consumers,” Baker said.