At any moment, millions of employees are late with one or more bills. But rarely does an employer delay or reject a salary cut entirely.
This is the opportunity for loan companies like Kashable and OneBlinc, and for retailers who do business with sites like payrolljewelry.com and purchasepower.com: Put yourself in the forefront of the payoff by drawing directly from these credible payouts. Let other payers wait to see if customers are returning from their bank account or are not bothering to pay at all.
This clever maneuver is made possible by pay mechanisms that are based on terms such as “allotment” and “split deposits”. As long as your employer allows it – and some important ones like the federal government do – employees can do it themselves.
Customers who agree to this often lack a good or no credit history. Having no better option, they put their paychecks at stake and, having some of their earnings in each billing period, pay off goods or pay off debt over the course of a few years. Some retailers include the cost of their payment plans in their prices and technically don’t charge interest, while lenders charge an annual interest rate of up to 35.99.
The paycheck payment mechanisms are not new. Since 1889, members of the United States military have been able to pay bills and transfer money through what is known as the quota 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.
It made sense to the military. Long before online payments with the touch of a button and almost free phone calls, settling your bill when servicing abroad was complicated. And while GAO’s report is not clear on the matter, at one point federal workers had to inquire about this convenience.
What’s new – and fascinating – about how the pay-by-pay process works today is that companies encourage or require customers to use it when setting up their accounts. They then clearly mask their processes with the language of financial empowerment and social improvement.
“You can be yourself and have your own life with a better way to buy,” is the chorus of Purchasing Power.
One of the ways Kashable finds customers is by convincing human resources employees to offer their services as an employee benefit.
Kashable’s mission is to “improve the financial situation of working America,” according to the company’s website. “We offer employees socially responsible financing as an employer-sponsored voluntary service,” he adds.
OneBlinc relates to this topic. 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 inequalities” and is “a real alternative to the vicious cycle of predatory lending”, protecting borrowers from “abusive bank charges”.
Read between these lines and you will understand who the desired customer is and who he is not. There are tens of millions of people who put all their expenses on one debit card, for budgetary purposes, or on a single credit card to accumulate loyalty points. They are not the main targets here.
But many millions of others end up in a shortage each month and pay fees to their bank when their checking balance fails to cover the fee. Others may not be eligible for credit cards or have lost their banking privileges. They can turn to payday lenders for short-term help, and these lenders can trap them in a cycle of high-interest debts.
Saving people all of this is indeed a noble affair. Linking a payout to a payout is a potentially foolproof way of doing this.
But for businesses, the pay-for-pay process is secondary. The breakthrough for them is proprietary digital tools that allow them to borrow 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 scores,” said Fabio Torelli, chief executive, in a 2019 press release, which he reiterated in an interview this week. “This is the ultimate symbol of an outdated model that we want to destroy,” continued the press release.
I bet that knowledge of someone’s employer, seniority and salary, as well as the still quite important wage tether, should be enough to make it a business.
Kashable performs credit verification but also follows an employment-focused insurance model. Einat Steklov, co-founder, introduced 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 favorable interest rates. She said that even among those who work, two-thirds are so-called near prime (with increased credit risk) or subprime (with high credit risk).
So how do you handle them? A large proportion of Kashable’s borrowers are federal workers. They are not often fired and tend to stay at work for a while. This should make their underwriting less risky than their credit score might suggest.
Ms Steklov made another point: People often have bad loans because they are late with payments, not because they never pay their debts. This is where the “payment by payout” system comes in.
“We were looking for a better mechanism to help them become successful borrowers,” she said of allocation and similar repayment systems. “Who is using it? We believe that the customer is the main beneficiary. “
She added that 64 percent of those who had credit records when they took out their first Kashable loan saw an improvement in their score afterwards.
It can be a very good thing. However, several cases still involve Nadine Chabrier, Senior Policy and Litigation Adviser at the Responsible Lending Center for Nonprofits.
First, what happens when misfortune plunges borrowers’ budgets into chaos? Sure, these lenders will allow people to turn off pay by paycheck and pay otherwise, but clients need to remember that it is possible and then take steps to turn this off whenever they find themselves. Will they be?
Speaking of budgets, if you’ve never been in huge financial trouble, you may not be familiar with the juggling that comes with it. Mrs. Chabrier described it as “robbing Peter to pay Paul.”
You can prioritize car payments (car repossession means you can’t get to work) and rent or mortgage (to avoid eviction or foreclosure) over a personal loan. But if that personal loan is the only obligation on your earnings before the money goes to your bank account, then the lender has an advantage as long as the payout link persists.
And then this is this: if the lender doesn’t check your loan, how does he know if his loan could suddenly render other liabilities unprofitable?
Mr. Torelli of OneBlinc said his insurance included viewing current account statements which gave him insight into whether any new repayment of the loan would be reasonable.
Meanwhile, Ms Chabrier ticked off a list of questions that should be asked by anyone considering payday loans or retailers.
“How does underwriting work?” she said. “What are the fees and how are they disclosed? Do they follow state and federal debt collection policies? Do they investigate inaccuracies on your credit report? Are there any fraudulent practices in marketing? And what are the interest rates? “
Human resources officers with the right to offer access to such loans may act as watchdogs and may also ask questions.
Is a loan like this really a benefit, Mrs. Chabrier wondered aloud, or something that is driving employees into increasing debt? Then she caught herself.
“By definition, this makes workers even more indebted,” she said, although it is possible they could use the proceeds of the loan to pay off even more interest debt and get better terms in the process. “But is it related to unexpected problems that you, as the HR director, were not informed about at the beginning?”