Home Fico score ‘Advance pay’ apps aim to disrupt payday loans, two-week cycle

‘Advance pay’ apps aim to disrupt payday loans, two-week cycle

‘Advance pay’ apps aim to disrupt payday loans, two-week cycle

HR managers at G4S, a global security company that employs guards in offices and residential buildings, recently noticed a disturbing trend.

As many as 72% of the company’s American hourly workers quit their jobs every year. The company launched an employee survey to find out why so many people were heading for the exit.

The guards overwhelmingly responded that they were struggling to make ends meet.

“Not only were salaries problematic, but so was the wait for the two-week pay cycle,” said Geoff Gerks, director of human resources.

G4S has therefore joined a growing group of companies, such as Walmart Inc., Taco Bell, The Kroger Company., and Boston Market Corp., which offer their employees the power to access at least some of their paychecks before the traditional two-week period. Gerks says that decision, and a push to raise security workers’ wages under new contracts, was an “easy decision” in a “tough job market that is very, very competitive.”

As the job market tightens, companies, especially in low-wage sectors, are looking for new ways to attract and retain employees. This has created opportunities for Silicon Valley tech startups offering app-based prepayment services to ease some of the pain for workers who live paycheck to paycheck.

“These funds are for work they’ve already done that they can use to deal with unexpected life events,” Wal-Mart spokeswoman Michelle Malashock said. The company has partnered with two prepayment providers, Even and PayActiv. “When our associates are more secure financially, they are better able to do their jobs.”

The rise of prepayment options follows similar moves by gig companies such as Uber and Lyft, which allow drivers to cash in several times a day. It could challenge the traditional payment cycle and help people avoid high-interest loans and credit card bills.

But some worry that prepayment providers are payday lenders in sheep’s clothing. Accelerating compensation cycles could mask a larger problem: wage stagnation.

“Smoothing wage availability over a pay period is beneficial for people who have very little savings,” Chris Tilly, a labor economist at the University of California, Los Angeles, told Bloomberg Law. “What it doesn’t address is why these people have very little savings in the first place. Low pay is low pay, and this is intensified by rising housing, health care and other costs in many places.

Meanwhile, prepayment companies are trying to navigate a legal and regulatory minefield. This includes banking, tax, and employment issues that some states, including California, where many prepayment providers are based, and New York, are just beginning to address. These states could be the first to regulate a burgeoning industry that has yet to catch the attention of Congress and federal agencies.

“Major Life Changer”

Prepayment providers operate under two models. Some, like DailyPay and PayActiv, partner with companies to offer employees payday advances in exchange for monthly or per-transaction fees. The third-party provider faces the money – they don’t transfer money from the user’s employer – and then collects the users’ money either directly from their next paychecks or via a bank account debit payday. Some companies subsidize part of the cost, but in many cases employees must pay transaction or membership fees.

Others, like Earnin, Dave and Brigit, provide services directly to end users. These providers collect advanced funds directly from users’ bank accounts on a specified date.

Some providers have added a revenue stream by partnering with prepaid card services. Dave and PayActiv offer reloadable Visa cards on which users can get advance payment transfers.

Some 350,000 Walmart employees use the Even app to manage their finances or get paid ahead of schedule, according to Malashock. The app has completed more than 5 million transactions totaling $900 million since the Walmart program launched in December 2017.

Prepayment services are similar to setting up an ATM in the lobby of an office, says Jason Lee, co-founder of DailyPay. The company has partnered with G4S, Westgate Resorts, Kroger, Adecco Personaland others in exchange for fees of $1.99 to $2.99 ​​per transaction.

“The thesis here is that when employees can access salaries whenever they want, it creates a major life change,” says Lee. “If they can access the money whenever they want, they can also press a button and then pay their bills on time. Because this is an employer-assigned benefit, the employee actually stays longer.

DailyPay currently has around 500,000 users, who make 1.2 transactions per week. Users receive around $66 in advance pay per transaction, most of which is done at the end of the month. This means that the average user spends a maximum of $3.60 per week in prepayment fees.

Major players in the advance pay market have largely targeted low-wage industries. DailyPay’s Lee and Jon Schlossberg, CEO of Even, say they see the market moving towards white-collar workers as well.

“To pretend that we’re going to magically solve this problem by simply raising wages is to overestimate the impact of raising wages,” says Schlossberg. “Many people who live paycheck to paycheck are already earning more than the median income.”

Nearly 40% of Americans don’t have $400 in their bank accounts, according to a 2019 Federal Reserve study. That forces them to turn to credit cards and payday loans that often come with interest rates. high interest. For payday loans, the cost of repayment is often triple the amount of money borrowed or more, despite federal and state efforts to cap rates.

But some worry that rolling up the pay dates won’t solve the problem of why people live from paycheck to paycheck.

Hitting these workers with new fees to access their money early could make matters worse, says Rachel Schneider, resident of the Aspen Institute’s Financial Security Program.

State laws have been enacted to require employers to regularly pay their workers, but partnering with prepayment providers doesn’t cost many of them a dime, Schneider says. Because prepayment providers pay out the money to users and then collect it directly, employers can continue to process payroll on the two-week cycle without losing interest on the money they pay workers or take on new tax and accounting charges.

“It’s not a rule of thumb to pay every two weeks,” says Schneider. “It’s just that employers would otherwise be happy to delay paying their workers.”

Regulation playing field

California lawmakers are tinkering with legislation that would establish some ground rules for prepayment providers.

A bill passed by the state Senate in May would cap prepayment transaction fees at $14 per month and limit such transactions to three per pay period and 50% of a worker’s unpaid earnings. The measure, backed by PayActiv and other prepayment providers, would also prevent such businesses from being regulated like credit services.

“The Senate bill favors the industry by not allowing it to be treated like a financial institution,” Pedro Ibarra, former COO of PayActiv, told Bloomberg Law. Ibarra recently sued PayActiv, alleging he was fired after reporting the company.

Ibarra questioned PayActiv’s practice of allowing users to obtain cash advances they have not yet earned, according to the lawsuit. He said that made PayActiv a traditional lender, subject to federal and state restrictions and required to disclose fees as interest charges.

“Doing this has the potential to create an ecosystem of users who get trapped there because they keep withdrawing money that they have to pay back later,” says Ibarra.

PayActiv COO Ijaz Anwar called the lawsuit “bogus and baseless,” in a statement provided to Bloomberg Law.

“In some cases (less than 5 percent), an employee may spread the payroll adjustment over two pay periods,” Anwar said. “This option is in place to give users more control over their finances. For example, if a user has an emergency that requires a $400 transaction in one pay period, having the ability to designate a $200 adjustment over two pay periods helps them better manage their cash flow. and avoid more expensive alternatives such as late fees or overdraft fees. . When this happens, the user’s ability to access wages earned in the next pay period is reduced by $200 to ensure paycheck guardrails remain in place.

The company, which says it processed more than $1 billion in advance wages for some 650,000 users, has yet to respond to the lawsuit, which was filed July 2 in Santa Clara County Superior Court in California. .

In March, the New York Department of Financial Services reportedly subpoenaed another prepayment provider, Earnin, for information about the company’s business model. Earnin does not partner with employers to offer its services and collects money directly from users’ bank accounts. The company charges a suggested “tip” of up to $14 per transaction.

The DFS declined to comment, and Earnin did not respond to requests for comment.

Laws in California, New York and a handful of other states tightly limit the deductions that can be made directly from workers’ paychecks. Prepayment providers in these states circumvent these limits by requiring users to sign agreements allowing them to automatically debit front-end funds from their bank accounts on payday.

The services are also designed to avoid tax consequences for employers. By paying the money to a user instead of transferring it from the user’s employer, the payments are not considered an “implied receipt” of wages under federal and state tax laws. This means the employer does not have to immediately withhold income taxes or impose Social Security and other employment obligations on Uncle Sam.

In other words, transactions are tailored so as not to disrupt the traditional two-week payroll cycle.

“Payroll is not going to change,” says DailyPay’s Lee. “The company still runs payroll every two weeks, but the employee can access payroll whenever they want.”

—With the help of Lydia Beyoud.