Companies that take money straight out of your paycheck

At any given moment, millions of workers are late on at least one bill. But it is rare for an employer to delay reducing wages or reject them altogether.

Therein lies an opportunity for payday loan companies like Kashable and OneBlinc, and for retailers who do business on sites like payrolljewelry.com and purchasingpower.com: Put yourself at the front of the payday line by drawing directly from these trusted payrolls. Let other billers wait to see if customers decline a payment from their bank account or don’t bother making one at all.

This clever maneuver is made possible by the wage mechanisms used by terms such as “distribution” 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.

Customers who agree to this often do not have good or any credit history. With no better option, they put their wages on the line and use a portion of their wages each pay period to pay for goods or pay off debt over several years. Some retailers include the cost of their payment plans in their prices and technically charge no interest, while lenders charge up to 35.99 APR.

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 disbursement 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.

To the military, it made sense. Long before online payments at the touch of a button and almost free phone calls, settling a bill while serving overseas was complicated. And while the GAO report is unclear on the matter, at some point federal officials must have requested this convenience.

What’s new—and fascinating—about the way the payroll process works these days is that companies are prompting or requiring customers to use it when they set up their accounts. They then explicitly cloak 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,” is the refrain at Purchasing Power.

One of the ways Kashable finds customers is by persuading HR people to offer its services as an employee perk.

Kashable’s mission is to “improve the financial well-being of working America,” according to the company’s website. “We offer socially responsible financing to employees as voluntary employer-sponsored assistance,” he adds.

OneBlinc covers this topic. It says it offers “socially responsible credit” and that its 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 “abuses of bank fees”.

Read between the lines and you’ll get an idea of ​​who is a desirable customer and who is not. There are tens of millions of people who put all their spending on one debit card, for budgeting purposes, or on one credit card to earn loyalty points. They are not the main goals here.

But many millions more fail every month and pay fees to their bank when their current balance can’t cover a fee. Others can’t qualify for credit cards or have lost their banking privileges. They may turn to payday lenders for short-term help, and those lenders may trap them in high-interest debt.

Saving people all of this is a truly noble cause. Tying the payout to salary is a potentially reliable way to do it.

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, which other companies would ignore. OneBlinc doesn’t even use credit checks, although it reports 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, which he reiterated in an interview this week. “It is the ultimate symbol of an outdated model that we are determined to destroy,” the publication continues.

The bet here is that knowing one’s employer, tenure and salary, and the still quite important link to salary, should be enough to turn it into a business.

Kashable does credit checks, but also follows an employment-oriented underwriting model. Einat Steklov, co-founder, 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 people who are working, she said, two-thirds are so-called close (high 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 them less risky to sign than their credit scores suggest.

Ms. Steklov noted something else: People often end up with bad credit because they make late payments, not because they never pay off their debts. This is where the pay-via-paycheck system comes into play.

“We were looking for a better mechanism to help them become successful borrowers,” she said of distribution and similar repayment systems. “Who benefits from this? We believe that the customer is the main beneficiary.”

She added that 64 percent of people who had good credit when they took out their first Kashable loan saw an improved score later.

This can be a very good thing. But several questions still concern Nadine Chabrier, senior policy and litigation counsel for the nonprofit Center for Responsible Lending.

First, what happens when a disaster throws borrowers’ budgets into chaos? Of course, these lenders will allow people to switch off payday and pay in some other way, but customers should remember that this is possible and then take the steps to switch it off in whatever emergency they are upright. Will you?

Speaking of budgets, if you’ve never been in dire financial straits, you may not be familiar with the juggling act. Ms. Chabrier called it “robbing Peter to pay Paul.”

You might prioritize car payments (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 liability arising from your paycheck before the money even reaches your bank account, then that lender has the upper hand as long as the paycheck bond continues.

And then there’s this: If a lender doesn’t check your credit, how does it know if its loan could suddenly make other obligations unaffordable?

OneBlinc’s Mr. Torelli said his underwriting involves peering into people’s checking statements, giving him visibility into whether a new loan payment would be reasonable.

Meanwhile, Ms. Chabrier ticked off a list of questions that anyone considering a payday loan or retailer should ask.

“How does insurance work?” she said. “What are the fees and how are they disclosed? Do they follow state and federal debt collection rules? Do they investigate inaccuracies on credit reports? Are there deceptive marketing practices? And what are the interest rates?”

Human resources officers with the authority to offer access to loans like these can serve as gatekeepers, and they can also ask the questions.

Is a loan like this actually a benefit, Ms. Chabrier wondered aloud, or is something driving employees even deeper? Then she caught herself.

“By definition, it puts your employees even 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 better terms in the process. “But does it come with unexpected problems that you, as the HR director, weren’t made aware of at the outset?”

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