At any given time, millions of workers are behind on at least one bill. But it’s the rare employer that delays cutting your paychecks or bounces them altogether.
Therein lies an opportunity for lending companies like Kashable and OneBlinc and for retailers who do business on sites like payrolljewelry.com and shoppingpower.com: get to the front of the checkout line by drawing directly from those trustworthy paychecks. Let other billers wait to see if customers bounce a payment from their bank account or don’t bother to make one.
This clever maneuver is made possible by payroll mechanisms that use terms like “allocation” and “split deposits.” As long as your employer allows it, and some big notables like the federal government do, employees can set it up themselves.
Customers who agree to this often lack good credit. Without a better option, they risk their paychecks and, with a portion of their wages each pay period, pay off assets or pay off 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 an annual percentage rate of up to 35.99.
Payroll 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 allotment system. According to a 1978 Government Accountability Office report, the federal government also began allowing civilian federal employees to use the system in the 1960s.
For the military, this made sense. Long before push-button online payments and near-free phone calls, paying a bill while servicing abroad was complicated. And, although the GAO report is not clear on this, at some point federal employees must have asked about this convenience.
What’s new, and exciting, about how the paycheck payment process works today is that companies encourage or require customers to use it when setting up their accounts.. Then they explicitly cloak their processes in the language of financial empowerment and social upgrading.
“You can be yourself and own your life with a better way to shop,” sounds the refrain on Purchasing Power.
One way Kashable finds customers is by persuading human resources people to offer their services as an employee benefit.
Kashable’s mission is to “improve the financial well-being of working Americans,” according to the company’s website. “We offer socially responsible financing to employees as a voluntary employer-sponsored benefit,” 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 genuine alternative to the vicious cycle of predatory lending”, protecting borrowers from “abusive bank commissions”.
Read between the lines and you’ll have an idea of who is and who isn’t the desired customer. There are tens of millions of people who put all their spending on a single debit card, for budgeting purposes, or on a credit card to accumulate loyalty points. They are not the main objectives here.
But millions more fall short each month and pay fees to their bank when their checking balance 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 trap them in a cycle of high-interest debt.
Sparing people some of this is indeed a noble cause. Linking the refund to a paycheck is a potentially reliable way to do this.
But for businesses, the check payment 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, whom other companies would ignore. OneBlinc doesn’t even use credit checks, though it 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 news release, a sentiment he reiterated in an interview this week. “It is the latest symbol of an outdated model that we are determined to discontinue,” the statement continued.
The wager here is that knowledge of someone’s employer, tenure and salary, as well as the still-quite-important paycheck tie-up, should be enough to succeed as a business.
Kashable does credit checks, but also follows an employment-focused subscription model. Co-founder Einat Steklov 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 favorable interest rates. Even among working people, he said, two-thirds are called quasi-prime (higher credit risk) or subprime (high credit risk).
So how do you serve them? A large portion of Kashable’s borrowers are federal employees. They don’t get fired often and tend to stay on the job for a while. This should make signing them up less risky than their credit scores might suggest.
Ms. Steklov made another point: People often end up with bad credit because they fall behind on payments, not because they never pay their debts. That’s where the paycheck payment system comes into play.
“We were looking for a better mechanism to help them become successful borrowers,” he said of the allocation and similar payment systems. “Who benefits from that? We believe that the client is the main beneficiary”.
It added that 64 percent of people who had a credit file when they took out their first Kashable loan saw an improvement in their score later on.
That could be a very good thing. But several issues still concern Nadine Chabrier, senior policy and litigation adviser at the nonprofit Center for Responsible Lending.
First, what happens when a calamity throws borrowers’ budgets into chaos? Sure, these lenders will allow people to turn paycheck off and pay another way, but customers should remember that this is possible and then take steps to turn it off in the midst of any emergency they face. They will do it?
Speaking of budgets, if you’ve never been in a huge financial bind, you may not be familiar with the juggling act that results. Ms. Chabrier referred to it as “stealing from 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 salary before the money reaches your bank account, then that lender has an advantage as long as the paycheck link persists.
And then there’s this: If a lender doesn’t check your credit, how do you know if your loan could suddenly make other obligations unaffordable?
OneBlinc’s Mr. Torelli said his subscription included a look at people’s checking statements, giving him visibility into whether any new loan payments would be reasonable.
Meanwhile, Ms. Chabrier ticked off a list of questions anyone considering pay-by-check or retail loans should ask.
“How does the subscription work?” she said. “What are the fees and how are they disclosed? Are they complying with state and federal debt collection regulations? Are they investigating credit report inaccuracies? Are there deceptive practices in marketing? And what are the interest rates?
Human resources officers with the power to offer access to loans like these can serve as gatekeepers and can also ask the questions.
Is a loan like this really a benefit, Chabrier wondered aloud, or something that drives employees deeper into debt? So she caught herself.
“By definition, you’re putting your employees further into debt,” he said, though it’s possible they could use the loan proceeds to pay off even higher-interest debt and get better terms in the process. “But does it come up with unexpected problems that you, as a hiring manager, weren’t warned about from the start?”