At any given time, millions of workers are overdue with at least one invoice. But it’s the rare employer who cuts their paychecks too late or throws them back altogether.
Herein lies an opportunity for lending companies like Kashable and OneBlinc, and for retailers doing business on sites like payrolljewelry.com and Purchasingpower.com: Put yourself at the top of the payback line by benefiting directly from these reliable paychecks. Make other billers wait to see if customers reject a payment from their bank account or don’t care at all.
This clever maneuver is made possible by payroll mechanisms known by terms such as “allocation” and “shared deposits.” As long as your employer allows it — and some notable big ones like the federal government do — employees can set it up themselves.
The customers who agree to this often lack good or no creditworthiness. Without a better option, they risk their paychecks, using part of their wages to pay for goods or pay off debts within a few years each pay period. Some retailers include the cost of their payment plans in their prices and technically don’t charge interest, while lenders charge up to an APR of $35.99.
The pay-via-paycheck mechanisms are not new. Since 1889, members of the US military have been able to pay bills and transfer money through an allotment system. According to a 1978 report by the Government Accountability Office, the federal government also allowed civilian federal employees to use the system in the 1960s.
That made sense for the military. Long before online payments with the push of a button and almost free phone calls, paying a bill while on international duty was complicated. And while the GAO report isn’t clear on the matter, federal employees must have asked for that convenience at some point.
What’s new – and fascinating – about how the Pay-via-Paycheck process works these days is that companies require or encourage customers to use it when setting up their accounts. Then they explicitly dress their processes in the language of financial empowerment and social betterment.
“You can be yourself and own your life with a better way of shopping,” is the chorus at Purchasing Power.
One way Kashable finds clients is by persuading HR people to offer their services as an employee benefit.
Kashable’s mission is to “improve the financial well-being of working America,” according to the company’s website. “As an employer-financed voluntary benefit, we offer employees socially acceptable financing,” it continues.
OneBlinc addresses this issue. It says it offers “socially responsible lending” and that its loan is “for people who work hard and need help to make ends meet”. This form of inclusion “is the best way to reduce social inequality” and “a real alternative to the vicious cycle of predatory lending” that protects borrowers from “abusive bank charges”.
Read between these lines and you’ll get a sense of who the desired customer is and who isn’t. There are millions of people who put all of their household expenses on a single debit card or credit card to earn loyalty points. They are not the primary targets here.
But many millions more fall short each month, paying fees to their bank when their checking account can’t cover a charge. Others may not qualify for credit cards or have lost their banking privileges. They may turn to payday lenders for short-term help, and those lenders can drag them into a cycle of high-interest debt.
Saving people some of that is a noble cause indeed. Tying the repayment to a paycheck is a potentially more reliable way to do this.
But for companies, the pay-by-paycheck process is secondary. For them, the breakthrough is the proprietary digital tools that allow them to lend to people based on their employment status and income that other companies would ignore. OneBlinc doesn’t even use credit checks, although it reports customer payments to Equifax, Experian, and TransUnion.
“We don’t believe in creditworthiness,” CEO Fabio Torelli said in a 2019 press release, a statement he reiterated in an interview this week. “It’s the ultimate symbol of an outdated model that we’re determined to break up,” the publication continues.
The bet here is that knowing a person’s employer, tenure and salary, plus the still fairly important paycheck tie should be enough to thrive as a business.
Kashable does credit checks but also follows an employment-centric underwriting model. Einat Steklov, a co-founder, explained the logic to me in an interview this week.
Just because someone is employed doesn’t mean lenders are willing to do business with them at low interest rates. Even among people who work, she said, two-thirds are so-called near prime (with elevated credit risk) or subprime (with high credit risk).
So how do you service them? A large portion of Kashable’s borrowers are federal employees. They don’t get fired very often and usually stay in the job for a while. This should make them less risky to subscribe than their credit rating suggests.
Ms. Steklov made another point: People often get bad credit because they are late with their payments, not because they never pay off their debts. This is where the pay-via-paycheck system comes into play.
“We were looking for a better mechanism to help them become successful borrowers,” she said of allocation and similar repayment schemes. “Who benefits from this? We believe that the customer is the main beneficiary.”
She added that 64 percent of people who had a credit file when they took out their first Kashable loan later saw an improved score.
That could be a very good thing. But Nadine Chabrier, senior policy and litigation counsel for the nonprofit Center for Responsible Lending, still has some issues on her mind.
First, what happens when a disaster wreaks havoc on borrowers’ budgets? Sure, these lenders will allow people to turn off paying by paycheck and pay by other means, but customers need to remember it’s possible and then take the steps to turn it off in any emergency, with that they are facing. Will you?
Speaking of budgets, if you’ve never been in a huge financial bind, you might not be familiar with the ensuing act of juggling. Ms Chabrier described it as “robbing Peter to pay Paul”.
You might prioritize car payments (withdrawal means you can’t go to work) and rent or a mortgage (to avoid eviction or foreclosure) over a personal loan. But if that personal loan is the only obligation coming out of your paycheck before the money even gets into your bank account, then that lender has an advantage as long as the paycheck connection lasts.
And then there’s this: If a lender doesn’t check your creditworthiness, how do they know if their credit could suddenly make other obligations unpayable?
OneBlinc’s Mr. Torelli said his underwriting included looking at people’s checking statements, which gave him insight into whether a new loan payment would be appropriate.
Meanwhile, Ms Chabrier ticked off a list of questions that anyone considering pay-by-paycheck loans or retailers should ask.
“How does underwriting work?” she said. “What are the fees and how are they disclosed? Do they comply with state and federal debt collection rules? Do they investigate inaccuracies in the credit report? Are There Deceptive Marketing Practices? And what are the interest rates?”
Recruiters with the power to grant access to loans like these can act as gatekeepers and also ask questions.
Is such a loan actually a benefit, Ms. Chabrier wondered aloud, or something that drives employees even deeper into debt? Then she caught herself.
“By definition, it puts your employees in even deeper debt,” she said, although it’s possible they could use the loan proceeds to pay down debt at even higher interest rates and get better terms in the process. “But does this introduce unexpected problems that weren’t made known to you as a hiring manager in the first place?”