With banks slow to offer consumers alternatives to payday loans despite encouragement from regulators, a small but growing group of non-bank lenders is working with U.S. employers to offer small-dollar financing tied to wages.
United Way began offering the platform of Salary Finance, operating in the U.K. since 2015, to its employees in October and is connecting it with some of the Fortune 500 companies the charity has partnered with for decades. Walmart Inc. partners with PayActiv, a San Jose, Calif.-based fintech, to offer pay advances to its 1.4 million employees. Uber drivers can digitally cash out on their hours worked through Palo Alto, Calif.-based Earnin.
“We’re seeing an increase in products that are attached to payroll or employment. I think that is one way that companies are trying to address this credit access issue,” Laura Scherler, United Way’s senior director of economic mobility and corporate solutions, told Bloomberg Law. “Up until now there hasn’t been a solution that works in the marketplace.”
Companies connect their employees, often low-wage workers, to Salary Finance’s lending platform and the loans are repaid through set payroll deductions. Operating through employers cuts Salary Finance’s loan acquisition costs and reduces underwriting fraud, CEO Asesh Sarkar told Bloomberg Law.
That, in turn, leads to more affordable loans. The company doesn’t charge fees and only earns revenue on loan interest, which it strives to keep low, on average near 10 percent, which the company estimates saves the average U.S. employee just over $1,000 compared to other lending options, Sarkar said. Loan sizes vary, though the average is around $4,000, Sarkar said.
The payroll link makes employer-based solutions distinct and powerful compared to other small-dollar lending products, Todd Baker, a senior law and public policy fellow at Columbia University’s Richman Center, told Bloomberg Law.
“Because of the link, Salary Finance has an information advantage versus a market lender, as direct observation of employment and stability is superior to reliance on indirect credit bureau data for credit analysis,” said Baker, also managing principal at Broadmoor Consulting LLC.
Linking a loan to an employee’s salary “allows someone who would otherwise be paying 400 percent for credit to get it at 10 to 15 percent,” Baker said.
Finding a Footing
United Way has helped introduce Salary Finance to nine companies so far, Scherler said. The Alexandria, Va.-based non-profit receives a marketing fee for each company that agrees to offer Salary Finance to its employees. Employers don’t pay for or receive payment on Salary Finance loans, Sarkar said.
Salary Finance has partnerships with the U.K. branch of Weight Watchers International, Inc. and aerospace firm General Dynamics Corp, among others. But it’s still small in the U.S., so far with only one other publicly announced lending partnership besides United Way—insurer L&G America.
The fintech company is still charting the U.S. regulatory waters, partnering with Axos Bank for its loan products, obtaining state licenses, and adjusting its platform for different state lending and payroll-related regulations.
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 discussions to partner with state governments, Sarkar said, particularly in states that have taken a hard line against payday lending but where alternative options aren’t readily available.
“We think we’re kind of on a growth curve here,” he said.
Earned Wage Trend
Other types of salary-linked fintechs are on the rise. PayActiv’s advances to Wal Mart employees are deducted through an employee’s next paycheck.
“Our ability and agility to seamlessly integrate into businesses pre-existing systems allows for an execution” that banks are unable to accomplish, Ijaz Anwar, PayActiv’s co-founder and chief operating officer, told Bloomberg Law by email.
PayActiv has also partnered with community banks and credit unions to offer wage advances to financial institution’s employees, Anwar said.
Palo Alto, Calif.-based Earnin’s program for Uber drivers relies on users to tip the app company for immediate access to wages. Earnin’s no-fee, no-interest advance is also deducted from a user’s next paycheck. The partnership with Uber is a strategic one for employees working 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 get back into the small-dollar lending market in a bid to take business from payday lenders. The Federal Deposit Insurance Corp. is seeking public comment on a potential similar move. But most mainstream financial institutions are holding off on small-dollar offerings.
One potential hurdle is pending small-dollar lending regulations from the Consumer Financial Protection Bureau and whether they would apply to banks. Rules completed in 2017 required payday lenders and other installment lenders to determine upfront whether borrowers can afford their loans and also set limits on the number of consecutive loans that borrowers could take out. Those regulations are now being revised under the bureau’s Republican leadership.
U.S. Bank has been one of the few banks to step up so far. In September, the Minneapolis-based lender began offering installment loans up to $1,000. Paid back over three months, the annualized interest rate is just over 70 percent—well below the triple-digit rates common to payday loans.
Banks are ideally situated to offer small-dollar credit because they have existing relationships with potential customers, Jonathan Thessin, senior counsel at the American Bankers Association’s Center for Regulatory Compliance, told Bloomberg Law. But many are hesitant to enter the marketplace until all the federal regulators, including the CFPB, are on the same page.
“If we want to encourage banks to have broader products that meet a greater amount of demand, we first need to remove the barriers that impair 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.
While fintech-employer partnership models show promise, they don’t have the potential scale of the banking industry to give consumers alternatives to payday lenders, Alex Horowitz, a senior officer for the Pew Charitable Trust’s consumer finance project, told Bloomberg Law.
Pew estimates consumers spend $9 billion annually on fees and interest on payday loans, in addition to repaying principal.
“What every payday loan borrower has in common is an income and a checking account,” he said. Banks and credit unions are “probably the surest path to millions of borrowers saving billions of dollars,” he added.
Consumers typically weigh ease of application, speed of origination and cost as the main factors in taking out an emergency loan. “The bank model has the ability to check all those boxes,” Horowitz said.
The question of scale is a meaningful one down the line, but the employer-based model works today, Columbia University’s Baker said. “If you were able to do this at an employer like Walmart, you’d be hitting a million employees at least,” he said.
“In the near term, the non-bank companies like Salary Finance are going to have a significant impact on significant numbers of consumers,” Baker said.