At any given time, millions of workers are behind on at least one invoice. But it’s the rare employer who is slow to cut wages or rebound them altogether.
This is an opportunity for loan companies like Kashable and OneBlinc and for retailers doing business on sites like payrolljewelry.com and Purchasepower.com: Get ahead of the cashback line by tapping directly into these reliable paychecks. Let other billers wait to see if customers reject a payment from their bank account or don’t bother to make one at all.
This clever maneuver is possible thanks to payroll mechanisms that use terms such as “attribution” and “split deposits”. As long as your employer allows it — and some big notables, like the federal government, do — employees can set it up on their own.
Customers who agree to this often lack a good credit history or history. Without a better option, they put their paychecks on the line, and with part of their paycheck each pay period, they pay for goods or pay off a debt in a few years. Some retailers include the cost of their payment plans in their prices and technically don’t charge interest, while lenders charge up to 35.99 percent annual rate.
Paycheck payment mechanisms are not new. Since 1889, members of the U.S. military have been able to pay bills and transfer money through what’s called an allotment 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.
For the military, that made sense. Long before push-button online payments and near-free phone calls, paying a bill while serving overseas was complicated. And, although the GAO report is unclear on the matter, at one point federal employees must have asked after this convenience.
What’s new — and fascinating — about how the paycheck payment process works today is that companies encourage or require customers to use it when setting up their accounts.. Second, they explicitly hide their processes in the language of financial empowerment and societal betterment.
“You can be yourself and own your life with a better way to buy,” sounds the refrain of Purchasing Power.
One of the ways Kashable finds clients is by persuading HR to offer its services as benefits.
Kashable’s mission is “to improve the financial well-being of working Americans,” according to the company’s website. “We provide socially responsible funding to employees as a voluntary employer-sponsored benefit,” he adds.
OneBlinc echoes this theme. He says he offers “socially responsible credit” and that his credit is “for people who work hard and need help to make ends meet.” This form of inclusion “is the best way to reduce social inequalities” and constitutes “a real alternative to the vicious circle of predatory lending”, protecting borrowers from “abusive bank charges”.
Read between these lines and you will have an idea of who the desired customer is and is not. There are tens of millions of people who put all their spending on a single debit card for budgeting purposes, or on a single credit card to accumulate loyalty points. They are not the main targets here.
But many millions more default each month and pay fees to their bank when their checking balance can’t cover a charge. Others cannot qualify for credit cards or have lost their banking privileges. They may turn to payday lenders for short-term help, and these lenders can trap them in a cycle of high-interest debt.
To spare people all this is, indeed, a noble cause. Tying the reimbursement to a paycheck is a potentially reliable way to do this.
But, for businesses, the paycheck payment process is secondary. For them, the breakthrough lies in 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 does report customer payments to Equifax, Experian, and TransUnion.
“We don’t believe in credit ratings,” chief executive Fabio Torelli said in a 2019 press release, a sentiment he reiterated in an interview this week. “It is the ultimate symbol of an outdated model that we are determined to disrupt,” the statement continued.
The bet here is that knowing someone’s employer, seniority and salary, and the still fairly important payroll link, should be enough to be successful as a business.
Kashable does credit checks, but it also follows an employment-centric underwriting model. Einat Steklov, a co-founder, explained the logic to me in an interview this week.
Just because a person is employed does not mean lenders are willing to do business with them at favorable interest rates. Even among working people, she said, two-thirds are supposedly near-prime (with increased credit risk) or subprime (with high credit risk).
So how do you maintain them? A large portion of Kashable’s borrowers are federal employees. They are not laid off often and tend to stay on the job for a while. This should make them less risky to underwrite than their credit ratings suggest.
Ms. Steklov brought up another point: Often people end up with bad credit because they’re behind on their payments, not because they never pay off their debts. This is where the paycheck payment system comes in.
“We were looking for a better mechanism to help them become successful borrowers,” she said of similar award and repayment systems. “Who does it benefit? We believe the customer is the primary beneficiary.
She added that 64% of people who had a credit record when they took out their first Kashable loan saw their score improve afterward.
It could be a very good thing. But several questions still preoccupy Nadine Chabrier, senior policy and litigation adviser for the nonprofit Center for Responsible Lending.
First, what happens when a calamity throws borrowers’ budgets into chaos? Of course, these lenders will allow people to turn paycheck payment off and pay another way, but customers should remember that this is possible and then take steps to turn it off regardless. emergency they face. Are they going?
Speaking of budgets, if you’ve never been in a huge financial bind, you may not be familiar with the resulting act of juggling. Ms Chabrier called it “robbing Pierre to pay Paul”.
You can prioritize car payments (repossession means you can’t get 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 arising from your paycheck before the money even hits your bank account, then that lender has an advantage as long as the paycheck tie persists.
And then there’s this: If a lender doesn’t check your credit, how do they know if their loan could suddenly make other obligations unaffordable?
OneBlinc’s Mr. Torelli said his subscription included an overview of people’s checking account statements, giving him visibility into whether any new loan payments would be reasonable.
Meanwhile, Ms. Chabrier ticked off a list of questions anyone considering paycheck loans or retailers should ask.
“How does the subscription work? ” she says. “What are the fees and how are they disclosed? Do they follow state and federal debt collection rules? Do they investigate credit report inaccuracies? Are there misleading practices in marketing? And what are the interest rates?
HR managers with the authority to provide access to loans like these can serve as gatekeepers and they can also ask the questions.
Is a loan like this really a benefit, Ms. Chabrier wondered aloud, or something that pushes employees into more debt? Then she caught up.
“By definition, it pushes your employees further into debt,” she said, although it’s possible they could use the proceeds of the loan to pay off even higher interest debt and get money. better conditions in the process. “But does that come with any unexpected issues that you, as HR manager, weren’t aware of in the first place? »
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