Harvard Business Review November-December 2020 pp19-22 |IdeaWatch| New Research and Emerging Insights| In Theory| “Helping Low-Income Workers Stay Out of Debt” “Employer-sponsored fintech products can enhance financial resilience and inclusion”. Research paper cited “The Power of Safety Link: Assessing the Benefits of Employer-Sponsored Fintech Liquidity and Credit Solutions for Low-Wage Working Americans and Their Employers” by Todd Baker and Snigdha Kumar (Working Paper)
2244 thinks it’s aware of the struggles low-wage earners face but this brief shares research-findings into 3rdparty fintech firms PayActiv and Salary Finance. The piece explains how biweekly pay hurts workers needing to cover unexpected expenses and the high costs they pay for current tools available to low FICO borrowers via payday loans etc. PayActiv and Salary Finance have new solutions that partner with employers to offer much-needed cash-flow and low interest loans to low-wage earners to create a win/win for large retail employers and their front-line workers. Apparently, while not solving living wage as an issue, these solutions provide needed relief from worry about transient financial insecurity and now even the Federal Reserve is pushing for banks to clear transactions faster. Read the HBR article for detail.
ADP has helped some companies and 3rd party firms execute this cash-flow services. They are granted access to records verifying work-hours accrued and rate for enrolled employees. The 3rd party firms then enable cash flow and secure repayment for any loans that were made.
Companies and organizations implementing these services
Summary of the article covering the research performed by Baker and Kumar (Harvard Kennedy School)
· “Rising cost of living, and increasingly irregular schedules routinely forces many working Americans onto a financial knife’s edge; they’re able to pay their usual bills but lack a buffer to hand even small financial shocks.”
· Issues-Biweekly pay provides no access to what they have already earned. Often having low FICO scores make it impossible to “qualify for standard market-rate loans.” Having to resort to high interest payday loans, auto-title loans and bank overdrafts pushes “them further toward financial ruin.” Finally, the “pandemic-related recession, only increased dependence on these services.”
· How PayActiv and Salary Finance work. PayActive advances wages “accrued but haven’t yet received” and Salary Finance is “offering…low-cost loans that are automatically repaid through paycheck deductions. The key to both services is having a “’salary link’-the provider's ability to directly access wages to ensure repayment of advances or loans.”
· Data backing up claims of benefit to workers. PayActiv's charge of $5 is lower than $30-$35 overdraft bank fees. Salary Finance's loan rates averaged 11.8% in this study versus “21.9%-71% among conventional lenders assessed.” Salary Finance reports to credit agencies. Positive reports can actually help raise a worker's credit scores.
· Data backing up the beneifit to large retailers. They key finding is lower turnover for employees using this service. With a hypothetical retailer having 340,000 employees the employee turnover rate is 50% the savings could be as high as $567,000,000/year. Even a 5% reduction would “be worth about $28 million”. Small but accretive nonetheless while benefiting employees.
· “Baker and Kumar speculate that eventually pay will be instantaneous.” Meaning that workers would be paid end of each completed day of employment. Such direct pay is one good feature of Gig-operators like Uber. The Federal Reserve is now “nudging banks to clear funds rapidly by rollout an instant payment service…”