At any given moment, millions of workers are late with at least one invoice. But it is the rare employer who is late in cutting his salaries or bounces them altogether.
Here lies an opportunity for loan companies like Kashable and OneBlinc, and for retailers doing business on sites like payrolljewelry.com and Purchasepower.com: Put yourself at the forefront of the repayment line by tapping directly into those reputable paychecks. Let other billers wait to see if customers bounce a payment from their bank account or don’t bother making one.
This intelligent maneuver is possible thanks to payroll mechanisms that go under the name of “allotments” and “split deposits”. As long as your employer allows it – and some major big players, like the federal government, do – employees can set it up for themselves.
Customers who agree often don’t have a good or any credit history. Without a better option, they stake their salaries and, with a portion of their salary each pay period, pay off the assets or pay off the debt within a few years. Some resellers include the cost of their payment plans in their pricing and technically charge no interest, while lenders charge up to an annual percentage rate of 35.99.
Pay-via-paycheck mechanisms are not new. Since 1889, members of the United States Army have been able to pay their bills and transfer money via the so-called allotment system. According to a 1978 report from the Government Accountability Office, the federal government also began allowing civilian federal employees to use the system in the 1960s.
For the military, this made sense. Long before online one-button payments and near-free phone calls, settling an account while serving abroad was complicated. And, while the GAO report isn’t clear on the matter, federal employees must have asked for this convenience at some point.
The novelty – and fascinating – about how the payroll process works today is that companies solicit or require customers to use it when setting up their accounts.. Hence, they explicitly mask their processes in the language of financial empowerment and societal improvement.
“You can be yourself and own your life with a better way to buy,” sounds the refrain of Purchasing Power.
One way Kashable finds customers is to persuade HR 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. “We offer socially responsible funding to employees as an employer-sponsored voluntary subsidy,” she 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 making ends meet.” This form of inclusion “is the best way to reduce social inequality” and is “a real alternative to the vicious cycle of predatory lending”, protecting borrowers from “abusive bank charges”.
Read between those lines and you will have an idea of who is and who is not the desired customer. There are tens of millions of people who put all their expenses on one debit card, for budget reasons, or on one credit card to accumulate loyalty points. They are not the primary goals here.
But many millions more fail each month and pay commissions to their bank when their current balance can’t cover a charge. Others cannot qualify for credit cards or have lost their banking privileges. They can turn to payday lenders for short term help and such lenders can trap them in a cycle of high interest debt.
Sparing people all of this is, in fact, a noble cause. Hooking the refund to a paycheck is a potentially reliable way to do this.
But, for companies, the payroll process is secondary. For them, the breakthrough is 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 use credit checks either, although it does report customer payments to Equifax, Experian, and TransUnion.
“We don’t believe in credit scores,” Fabio Torelli, chief executive, 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 destroy,” the release continued.
The bet here is that knowledge of someone’s employer, mandate and salary, as well as the still rather important bond of the paycheck, should be enough to make it a business.
Kashable performs credit checks, but also follows an employment-focused 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 that lenders are willing to do business with them at favorable interest rates. Even among working people, he said, two-thirds are so-called near prime (high credit risk) or subprime (high credit risk).
So how do you assist them? Most of Kashable’s borrowers are federal employees. They don’t get fired often and tend to stay at work for a while. This should make them less risky to underwrite than their credit scores might suggest.
Ms. Steklov made another point: Often, people end up with bad credit because they are late in paying, not because they never pay off their debts. This is where the payroll system comes into play.
“We were looking for a better mechanism to help them become successful borrowers,” he said of similar allocation and repayment systems. “Who benefits from it? We believe that the customer is the main beneficiary ”.
He added that 64% of people who had a credit card when they took out their first Kashable loan saw a better score afterwards.
That could be a great thing. But many issues still concern Nadine Chabrier, a senior policy and controversy consultant at the nonprofit Center for Responsible Lending.
First, what happens when a disaster throws borrowers’ budgets into chaos? Sure, these lenders will allow people to turn off paycheck payment and pay in another way, but customers need to remember that this is possible and then take steps to shut it down in any emergency they face. Will they do it?
Speaking of budget, if you’ve never been in a huge financial problem, you may not be familiar with the resulting act of juggling. Mrs Chabrier called it “stealing Peter to pay Paul”.
You could 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 gets into your bank account, then that lender has an edge as long as the paycheck link persists.
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 untenable?
OneBlinc’s Mr. Torelli said his subscription included a peek into people’s bank statements, which gave him visibility into the reasonableness of a new loan payment.
Meanwhile, Ms. Chabrier has ticked off a list of questions anyone considering pay-by-pay loans or resellers should ask.
“How does the subscription work?” she said. “What are the rates and how are they disclosed? Are they complying with state and federal debt collection rules? Are they investigating the inaccuracies in the credit report? Are there any misleading marketing practices? And what are the interest rates? “
Human resources officials with the power to offer access to loans such as these can act as gatekeepers and can also ask questions.
Is a loan like this really an advantage, Ms Chabrier wondered aloud, or something that pushes employees into even more debt? Then she recovered.
“By definition, it’s pushing your employees into even more debt,” he said, though it’s possible they could use the loan proceeds to pay off the debt with even higher interest and get better terms in the process. “But is it coming with unexpected problems that you, as HR director, weren’t alerted to at first?”