At any given time, millions of employees are late on at least one bill. But it’s the rare employer that’s late in cutting their paychecks or making them bounce altogether.
Therein lies an opportunity for lenders like Kashable and OneBlinc and for retailers who do business on sites like payrolljewelry.com and purchasepower.com: Put yourself at the forefront of the repayment line by drawing directly from those reliable paychecks. Have other billers wait to see if customers return a payment from their bank account or don’t bother making one at all.
This clever maneuver is possible thanks to payroll mechanisms that deal with terms such as ‘allocation’ and ‘split 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 a good or some credit history. Without a better option, they risk their paychecks and with a portion of their pay per pay period pay for goods or pay off debts within a few years. Some retailers include the cost of their payment plans in their prices and technically do not charge interest, while the lenders charge an annual rate of 35.99.
The pay-via-paycheck mechanisms are not new. Since 1889, members of the United States military have been able to pay bills and transfer money through a so-called allocation system. According to a 1978 report by the Government Accountability Office, the federal government also began allowing civilian federal employees to use the system in the 1960s.
This made sense to the military. Long before one-touch online payments and near-free calls, it was complicated to pay a bill while serving abroad. And while the GAO report isn’t clear on this, federal employees must have asked for this convenience at some point.
What’s new – and fascinating – about how the pay-by-salary process works today is that companies are urging or requiring their customers to use it when setting up their accounts.. They then explicitly disguise their processes in the language of financial empowerment and social improvement.
“You can be yourself and own your life with a better way to buy,” is the chorus at Purchasing Power.
One way Kashable finds customers is by persuading human resources people to offer its services as an employee benefit.
Kashable’s mission is to “improve the financial well-being of working America,” according to the company’s website. “We provide employees with socially responsible funding as an employer-sponsored voluntary benefit,” it adds.
OneBlinc ties in with this theme. It says it offers “socially responsible credit” and that the credit is “for people who work hard and need help making ends meet.” This form of inclusion “is the best way to reduce social inequality” and is “a real alternative to the vicious circle of predatory lending”, protecting borrowers from “absurd bank charges”.
Read between those lines and you’ll get an idea of who the desired customer is and who isn’t. There are tens of millions of people who put all their spending on one debit card, for budgetary purposes, or on one credit card to accumulate loyalty points. They are not the primary target here.
But many millions fall short each month and pay fees to their bank when their balance can’t cover a charge. Others are not eligible for credit cards or have lost their banking rights. They can turn to lenders for short-term help, and those lenders can trap them in a cycle of high-interest debt.
Saving people from all this is indeed a noble goal. Linking repayment to a paycheck is a potentially reliable way to do this.
But for the companies, the pay-per-salary process is secondary. For them, the breakthrough is their proprietary digital tools that allow them to provide loans to people based on their employment status and income, which other companies would ignore. OneBlinc doesn’t even use credit checks, but does report customer payments to Equifax, Experian, and TransUnion.
“We don’t believe in credit scores,” Fabio Torelli, the chief executive, said in a 2019 press release, a sentiment he echoed in an interview this week. “It’s the ultimate symbol of an outdated model that we are determined to break,” the release continued.
The bet here is that knowledge of one’s employer, employment and salary, as well as the still quite important paycheck, should be enough to give it a try as a company.
Kashable runs credit checks, but it also follows an employment-oriented underwriting model. Einat Steklov, a co-founder, explained the logic to me in an interview this week.
Just because someone is employed does not mean that lenders are willing to do business with them at favorable interest rates. Even among people who work, she said, two-thirds are supposedly near prime (with increased credit risk) or subprime (with high credit risk).
So how do you operate them? A large portion of Kashable’s borrowers are federal employees. They don’t get fired often and usually stay on the job for a while. This should make them less risky to insure than their credit scores suggest.
Ms Steklov made another point: often people get bad credit because they pay late, not because they never repay their debts. That’s where the pay-via-paycheck system comes in.
“We were looking for a better mechanism to help them become successful borrowers,” she said of allotment and similar repayment systems. “Who benefits from that? We believe that the customer is the main beneficiary.”
She added that 64 percent of people who had a credit record when they took out their first Kashable loan saw a better score later.
That could be a very good thing. But several cases still concern Nadine Chabrier, a senior policy and litigation attorney for the nonprofit responsible lending center.
First, what happens when a disaster throws borrowers’ budgets into chaos? Sure, these lenders let people turn off paycheck paychecks and pay by other means, but customers should remember that it’s possible and then take the steps to turn it off no matter what emergency situation they face. Shall they?
Speaking of budgets, if you’ve never been in a massive financial situation, you might not be familiar with the juggling act that ensues. Mrs. Chabrier called it “Robbing Peter to pay Paul”.
You can prioritize car payments (repossession 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 that comes out of your paycheck before the money is even in your bank account, then that lender has an advantage as long as the paycheck lasts.
And then there’s this: If a lender doesn’t check your credit, how does he know if his loan could suddenly make other obligations unaffordable?
mr. Torelli of OneBlinc said his acceptance included a look at people’s account statements, giving insight into whether a new loan would be reasonable.
Meanwhile, Ms. Chabrier ticked off a list of questions anyone considering a salary-based loan or retailer should ask.
“How does the acceptance work?” she said. “What are the fees and how are they disclosed? Do they meet state and federal collection rules? Do they investigate inaccuracies in credit reports? Are there deceptive practices in marketing? And what are the interest rates?”
Personnel officers who have the authority to provide access to such loans can serve as gatekeepers and they can also ask the questions.
Is such a loan actually a benefit, Ms. Chabrier wondered aloud, or something that drives employees deeper into debt? Then she caught herself.
“By definition, it drives your employees deeper into debt,” she said, though it’s possible they could use the loan proceeds to repay even higher interest debt and get better terms in the process. “But are there unexpected problems that you, as an HR director, were not aware of in the beginning?”