How access to earned wages can disrupt predatory lending and boost employee financial well-being
Could you handle a $ 500 emergency? According to BankRate, only 37% of Americans can cover an expected expense of $ 500, noting that the majority of working Americans essentially live off paychecks. To make ends meet between paychecks, many workers have had to turn to notoriously predatory payday loans, which can lead to dramatically high interest repayment rates and push people into a cycle of debt. deeper and deeper. Recently, however, there have been companies that allow employees to access their paycheck without the threat of an expensive loan and with the added benefit of building up savings and stepping out of the risky financial cycle. This payment method was recently called Earned Wage Access (EWA).
Payactiv, a pioneer of EWA, works with thousands of employers to bring its “employee financial well-being” solution to more than one million employees. The Payactiv app is connected to an employer’s time and attendance tracking system and allows employees to access a percentage of their salary as they earn it, rather than having to wait for a regular payday or turn to a predatory loan service when needed.
“I had the very strong conviction that, for this service to be provided correctly, the employer must be part of the solution. And I firmly believe that employers care, ”said Safwan Shah, founder and CEO of Payactiv. “I operate from this underlying assumption that employers care about the conception of capitalism: employers care because it’s in their best interest. Ultimately, they live and die on the altar of their paying customers, and they care about the employees because they are a part of that success.
Payactiv is also a certified B company exceeding certain social and environmental impact thresholds established by the non-profit B Lab. As part of my research on special purpose businesses, I spoke with Shah to learn more about EWA and to discuss how the coronavirus pandemic has affected him.
Christophe Marquis: On your website it says that Payactiv invented Earned Wage Access in 2012. Can you explain Earned Wage Access, how it works and describe the problem it solves?
Safwan Shah: We were very aware of every word of the term Earned Wage Access. it’s for salaries won, so it’s not early, which evokes impatience; this is salary, not income because the income can be a commission or something like that; and his access, not an advance, which implies like someone is doing you a favor. The reason for each word was very precise.
Today, 8 to 9 years later, we have welcomed many competitors in the space and also the recognition of our model by the US Consumer Financial Protection Bureau. During this time I have encountered the CFPB dozens of times and earlier this year our product was the first CFPB approved EWA product, they recognized that EWA was not a “credit” and therefore exempt of the Federal Loan Act.
The key idea of EWA is that when you get paid is completely in the control of your employer. It’s a technological decision. So that was the start of this idea about 10 years ago. I said if technology determines the timing of pay then we could create a technology and a product where people can access their money as they earn it. I had the very strong conviction that, for this service to be provided correctly, the employer must be part of the solution.
Payactiv even made a documentary on the importance of Timing of Pay:
I operate from the underlying assumption that employers care about their employees and want to do good through them. This is simply based on self-interest. Ultimately, businesses live and die on the altar of their paying customers, and they care about employees because they are part of how products and services are delivered to customers.
The Payactiv model was designed to be B2B. We go to businesses and we say, “Let’s be the supplier to give your employees early access to their paycheck, even if they need it every day or every other day. We give them the money, then you pay us back. This was done at the very beginning for a basic reason: an employee should not be burdened with the stress of debt.
Shah also gave a TEDx talk explaining the importance of EWA:
Marquis: Does Payactiv think payday loans should be replaced?
Shah: I’ve never been against products that help people make ends meet between paychecks. The payday loan was just a first step in that process because the payday lenders didn’t, I think, bother to hire the employers. It was probably very difficult to do, so they sat on street corners near the big employers to get access to individual employees.
So I don’t blame them at all. I don’t criticize them. I am not the judge of the payday loan industry. I put a product on the market and I say, “If you still want to use payday loans, I can’t stop you. It’s like you want to drive a car that does 9 miles per gallon, it’s up to you, but there are cars that will do 50 miles per gallon.
People use payday loans, but no one has ever asked them why. There is a time lag between receiving salaries every two weeks and the multiple days in between that bills and other expenses must be paid. Bills and expenses don’t wait for payday. This misalignment creates a cash flow deficit, which hourly workers have historically filled through expensive forms of short-term credit such as payday loans, installment loans, auto title loans, pawn shops, mortgage fees, overdraft and late fees. Earned Wage Access repairs this misalignment, improves worker liquidity, and reduces demand for high cost credit.
Marquis: How do you convince employers to adopt your solution?
Shah: There are three things employers are interested in. Employers care about (a) effective recruitment, (b) retention, and (c) engagement. For example, you don’t want to lose a janitor who knows how to clean hazardous materials from the emergency room. You don’t want to lose this janitor because this janitor can read all those meandering signs on the monitors.
So we had to prove to employers that our product would improve every one of them. It turns out that the benefits of recruiting are easy to demonstrate. Today we have about 1,500 to 1,600 corporate customers, with Walmart being the largest. Others include Wendy’s, hospital systems, senior living centers, and more. According to the academic studies of our product, before that, companies would give 1,000 jobs to hourly workers and maybe 200 would accept – with our service increasing by 80-90%. Plus, we’ve improved retention by 20%, in some cases up to 35-40%. And on engagement, the answer is really, this product saves employees from a degrading experience. Ultimately, a person wants to be treated with respect.
There are also three things that I think the employee cares about. The first, do not be afraid, or financial security. The second thing is not to be ashamed or to have personal dignity. And the third thing is to be ready for tomorrow, that’s where savings come in, and we’ve built a product that meets these three employee needs.
Marquis: How has the coronavirus pandemic affected EWA?
Shah: We have seen a few things. Tens of thousands of people have been turned off from employment systems or have their hours cut. Most companies didn’t fire people, they just didn’t have hours, so they couldn’t earn their wages because the unit of work is time. The first thing we noticed was that a lot of people were not making anything. We immediately investigated, and the survey found that 82% of people were worried about the loss of income – very few were worried about the pandemic itself. We put out a press release about it, and there was an article in Bloomberg about it because we published this data.
So we immediately formed a non-profit organization. It’s called Payactiv Foundation, and very quickly we were able to get pledges of up to $ 5 million. The second thing we did was, from March 16 to May 31, 2020, move $ 70 million to $ 80 million without charging anyone a dime. We made it free. You can imagine going to my board and asking for something like that and having my board not only support me but let the program run for 70 days – it was a momentous occasion.
And we did something else, which was actually amazing. New York City faced an interesting dilemma. They wanted to deliver food and supplies to thousands of people in various shelters, but they did not have a delivery mechanism. Uber said they couldn’t do it because the drivers couldn’t get out of quarantine because they are civilians. But New York’s taxi company, New York Taxi and Limo Commission, has partnered with the city to activate up to 18,000 taxis to make those deliveries. From April to October, Payactiv was the taxi payment mechanism. Drivers would receive $ 15 per hour and $ 54 for delivery of food, supplies and medicine. We did it because we have the technology and they needed it.
We are a B Corp. Because we believe in what we do, it is very easy for us to do these things. The purpose of the business is so clear. We have no reason to be if we are not on the employee’s side when needed.