At a time when the industry is moving towards faster payments, a handful of entrepreneurs are looking to bridge the gap between an honest day’s work and a decent salary.
These apps are seen as alternatives to late payment fees, overdraft fees, and payday loans for those with unstable incomes, like Uber drivers, freelancers, or even some hourly paid employees.
Emerging technology comes as slower payments seem increasingly anachronistic in the mobile age. It challenges the tradition of paying people first and fifteenth and tackles one of the thorniest issues in consumer finance: liquidity.
“Household liquidity affects so many Americans,” said Ryan Falvey, who oversees the Financial solutions laboratory, a five-year, $ 30 million initiative run by the Center for Financial Services Innovation with founding partner JPMorgan Chase & Co. “It’s a problem on the one hand and it’s a pretty big market as well.”
According to the CFSI, 57% of American adults struggling financially, and fintechs and employers alike see the ability to put income in workers’ pockets faster as an opportunity to build relationships.
More recently, Uber would have been in discussion with the banks so that its drivers have, among other things, access to their daily payroll if they wish. Lyft, which has partnered with Stripe, announced same-day or next-day payments for interested drivers starting in November and for a fee.
Startups like Active hours, FlexWage, Clearbanc, Same and Payactiv strive to disrupt the payroll of workers or subcontractors paid by the hour. Some, like Activehours, allow the user to access a portion of their wages owed before payday. Others, like Even, strive to smooth out irregular income. All of them comb through transactions and other data to provide funds to individuals on their terms, rather than to the employer.
“The cost of withholding someone’s salary is high,” said Ram Palaniappan, Managing Director of Activehours. He said consumers should be able to choose when to get paid, just like they choose when to withdraw money from an ATM. “They shouldn’t really have to wait for pay days anymore.”
Activehours was born from a personal experience Palaniappan met while working at his old company, Rushcard, where an employee working in the call center took out a payday loan. He viewed the employee’s money problem as a cash flow problem, not a salary problem. Instead, he floated the money to the employee. This idea turned into Activehours, launched last year.
“I knew if I didn’t try to do this I would still feel bad about myself,” he said.
The company relies on direct deposit and the employment history of its users, and has integrated several time-and-attendance systems to verify hours worked before floating the money. It then automatically withdraws the money from its users’ bank accounts on payday. It says its users currently represent more than 4,000 companies.
Basically what Activehours does is loan, but the company is adamant that the product is decidedly different from in-store payday lenders.
The most striking difference is the fee structure. Activehours has no fees, or at least no fixed fees. It asks its users to give what they think is appropriate. Payday lenders, who are increasingly monitored by regulators for predatory practices, may charge clients an interest rate greater than 500% when expressed annually.
Activehours describes itself as an “ATM for your paycheck”. And observers like Jennifer Tescher, president of CFSI, say companies like Activehours shouldn’t be seen as payday lenders.
“Calling them lenders because of the way they’re structured takes away from the mission they’re trying to accomplish,” Tescher said. “I don’t think any of these companies would say they’re in the lending business. They are in the business of cash flow smoothing.”
Disrupting the payroll cycle is just one way to solve the cash flow problem for on-demand workers who aren’t always sure how much or when they’ll be paid.
According to an Activehours white paper, more than $ 1 trillion is stuck for more than two weeks in the payroll system, and the stakes can be extreme. The white paper highlighted a consumer who wrote that pay-on-demand “has been there to help me keep my bills and eliminated the choice of paying my bill or eating or driving to work.” .
The apps respond to a changing economy with more on-demand workers. In the past, self-employment was often side work, and as a result slower payments caused fewer problems, said Jay Bhattacharya, managing director and co-founder of Zipmark, a payments company.
“It is becoming a hot topic,” Bhattacharya said.
The emergence of pay-break applications also highlights the late payment problems causesaid Jordan Lampe, director of communications and political affairs at real-time payments company Dwolla.
The ACH, which is often used to shift the salaries of bank account holders, can take several days to be deposited into an employee or contractor’s account for many reasons such as batch processing systems. banks, risk mitigation techniques or public holidays.
Banks “will have to anticipate and allow a reality where the economy and our lives will not be willing to wait two to three working days“Lampe wrote in an email.
The Activehours model is currently direct to the consumer, but Palaniappan does not rule out partnering with a bank and already has bank employees using its app.
“We try to make it a very good customer experience,” he said.
Building relationships with happy customers could be the intrinsic value of a business that has a payment model that you want. Startups provide users with cash when they need it and aim to get them out of the cycle of overdrafts, payday loans, and late fees. And by requiring direct deposit, startups are building relationships with people who have bank accounts.
There are of course potential obstacles. Most direct deposits are based on the ACH system, so receiving funds will not be instantaneous. They also run the risk of potentially introducing other bad spending habits, such as people perpetually draining their paychecks.
The upstarts’ work to overcome cash flow challenges comes as some banks seek to help consumers break the habit of living paycheck to paycheck. Recently, USAA has deployed financial evaluation notes, for example. KeyBank works to weave financial notes in the digital experiences of its customers and already has an application for forecasting customer cash flows. The Consumer Financial Protection Bureau has also encouraged banks to step up their financial literacy efforts.
Putting together tools that smooth and forecast cash flow is the next step banks and startups should look to, Tescher said.
“We now have a series of products that let you withdraw the money you’ve earned when you need it and others that give you cash flow estimates so you can plan. We need to put them together,” Tescher said. “It’s my idea of nirvana.”