The rise of an ethical alternative to payday lenders?
Who doesn’t want to have access to their own money as soon as they earn it, rather than wait until the end of the month? This is the bet that more and more European startups are making.
All over Europe, startups are harnessing the potential of creating platforms that give us easy access to our salaries, with little or no cost and no interest. A steady stream of funding announcements over the past few months suggests that investors are also embracing the technology and what it can offer.
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Various referred to as Flexible Earned Wage Access (FEWA) or pay-on-demand, the basic concept is simple: Workers can access their money as soon as they have earned it, often by the hour or minute. No waiting until the end of the month for a paycheck, or struggling in the last days of the month to make ends meet.
“If you look at the prevalence of payday loans, this whole industry exists because people are running out of cash between pay cycles. Overdraft fees, credit card debt, a lot of it is generated by cash-strapped people, ”Peter Briffett, managing director of London-based Wagestream, told Sifted.
Wagestream, which was founded in 2018, instead allows employees to take a percentage of their earned salary, for a lump sum of £ 1.75. The company has so far raised a total of £ 65million (most recently a £ 20million Series B round in July) and has more than 300,000 clients. It aims to double its workforce to 72 people over the next 12 months and achieve 10 times greater growth in terms of revenue and customers.
Briffett says 55% of UK households don’t have £ 250 in savings, meaning that if they have an emergency expense during pay cycles their only recourse is often to get a loan – “and if you depend on your credit rating this loan can have a horrible APR [annual percentage rate]”.
“If you have access to your income, you can take that money interest-free, use it for something you need and then you won’t have to go into debt,” he says. “These are the cycles of debt and payday loans that are very difficult to recover from.”
Playing catch up with the United States
When it comes to access to earned wages, the United States is still considered far ahead of Europe. In a July 2019 study, research and consulting firm Gartner predicted that by 2023, 20% of U.S. companies with predominantly paid by the hour workforce would deploy flexible solutions for accessing the Internet. salary earned in efforts to improve employee experience, engagement and retention. However, adoption to the rest of the world would be less than half of that, he concluded.
“The United States is a few years ahead of us, maybe three to five years, followed by the United Kingdom,” says Janis Putnins, founder of Latvian startup Flipful, founded in March 2019 and which currently focuses on the Baltic States. (Flipful is planning its own funding cycle towards the end of this year or early 2021.)
As elsewhere, those pushing the tech solution in Europe must overcome the caution of employers and employees, who are accustomed to monthly pay cycles and could easily equate pay-on-demand with payday loans.
To gain access to payroll information, startups operating in the industry need to work with employers and convince management of its value. While many pay-on-demand startups see themselves as the direct response to the toxic legacy of Wonga and other payday lenders, who in some cases have charged interest rates that have soared to over 5,000 %, there is a glaring lack of awareness of what they are and offer.
“In my experience, about 30% of the companies we speak with are quite skeptical,” says Putnins. Meanwhile, he says, “10% say they wouldn’t offer it because they’re associated with payday loans or think they shouldn’t interfere with employee finances. “
That leaves around 60-70% who are at least somewhat interested. Still, “they want to see how this will develop and evolve, especially because financial education in some companies is struggling a bit,” he says.
It was only in the last few years that technology and late-breaking access to payroll information reached a level where financial applications of this type were feasible.
“I think that access to earned wages could not have happened five years ago in Europe. You must have precise information on whether or not an employee worked on a given day, and how much, because this is how you reduce the risks of loans, ”explains Benoit Menardo, co-founder of the Spanish startup Payflow, which closed its first funding. in July, for an amount of € 1.6 million, a few months after its creation by two former consultants from Bain & Company and BCG.
“In Spain, even now, some companies still use Excel, large companies, you would be surprised,” he adds.
At the same time, according to Payflow, more than 60% of Spaniards have admitted to having suffered financial stress in recent years, with that number likely to increase due to Covid-19.
In its first three months of operation, Payflow has signed over 30 companies and is already looking to expand into neighboring countries. Nonetheless, when it comes to raising awareness of access to earned wages as a concept, Menardo says that “there is a lot of noise in the investment community, among entrepreneurs in general, but the awareness of the end customer is very weak “.
There are different business models behind accessing earned wages, with some providers charging employers a subscription fee to allow employees free withdrawals, and others working on a model where those who withdraw money are charged a fee. small amount for each transaction. Some companies pay their employees’ first monthly transactions, before they are forced to intervene.
90% of users will not withdraw more than 10% of their income in any given payment cycle, explains Wagestream.
Wagestream data shows that active customers use their service an average of 2.2 times per month, for an average amount of £ 76. 90% of users won’t withdraw more than 10% of their earnings in any given payroll cycle, according to the company, potentially allaying concerns that it could lead to unhealthy spending habits.
At the same time, while the money technically comes out of paychecks, earned wage access companies typically cash in the money, which is then reimbursed by employers at the end of the payroll cycle.
“A lot of companies like to keep their cash,” Briffett says, although he adds that some companies now choose to pay to use their technology, but fund the payroll themselves.
The future of compensation
Going forward, Briffett says there are a lot of emerging startups in the space, but also companies like Cisco and Oracle are now looking at how they can incorporate flexible compensation.
In one report As of July 2019, CB Insights found over 30 companies dedicated to ‘paycheck unbundling’, providing consumers with flexible access to wages, creative solutions to tackle debt, and more choices to improve financial health .
“You’re going to see new technologies emerge from people like us, but you’re also going to see a number of incumbents offering this option to their customers, because it really looks like a huge benefit,” he says. .
On the contrary, the coronavirus pandemic has further proved the value of the model of access to earned wages. “At first we saw that the entire hospitality industry was collapsing in terms of shifts,” says Briffett. “But because of the leave and because we stand between employer and employee, we have been able to allow any of our clients’ staff to access their money on leave as they go. ‘they won it. “
New customer enrollments were particularly strong in the second quarter, the company said, as employers try to make their workforce more financially resilient in the face of the global pandemic.
First step of a trip
Even so, some question the long-term model, seeing it simply as a first step in a larger journey to bring ethical finance to workers and help them take control of their personal finances.
“From my perspective, access to earned wages is just a feature and will be a zero-margin business over the next five years. “
“From my perspective, access to earned wages is just one feature and will be a zero-margin business for the next five years,” says Piotr Smolen, co-founder of Polish startup Symmetrical, which focuses on help employees regain control of their personal finances through pay-on-demand and other financial services. The company signed its first client last September and now has 15 companies, mostly international brands, and access to 70,000 employees, with a few thousand active monthly users. In June, he closed a round of 5.6 million euros.
“I think it’s a good time to offer something cheaper, faster, easier for users, to increase inclusiveness and give them access to a source of cheap cash,” he says. “It’s a great place to start a relationship because right now it’s necessary, but our mind is much more focused on how to create a platform that will be a gateway for our user base. interact properly with the financial markets. »This includes employee loans at zero interest and using an automated financial advisor.
Others are already advancing technology. In June, British startup Hastee launched the world’s first on-demand debit card, with users able to access and spend their money in real time as they earn it. “We are delighted to be spearheading a solution that revolutionizes an outdated process and brings greater financial well-being to those who need it most,” said the founder and CEO at the time. by Hastee, James Herbert.
The startup was also the first in the UK to offer on-demand income through an app, in August 2017, where workers could withdraw up to 50% of their daily pay on the day they received it. In December 2019, Hastee secured £ 208million in equity and debt financing.
No more payday loans
Those who operate in the sector see a bright future.
“I am really confident that it will evolve, grow and that everyone will know and use paid access services,” says Menardo of Payflow. “It doesn’t make sense that you only get paid once a month. Maybe one day you’ll even pay your rent that way, just like now you can rent a car by the minute, ”he adds.
Others suggest that over the next five to seven years, it will have become a well-known and ethical alternative to payday loans. “It’s not a 2.0 payday loan, it’s a much better alternative,” says Putnins of Flipful.