Can Reengineering the Pay Cycle Disrupt Payday Lending?

Originally published at americanbanker.com
by MARY WISNIEWSKI
AUG 14, 2014 1:58pm ET

A couple of young companies are marketing a new employee benefit that serves the same purpose as a payday loan but costs the consumer less.

In so doing, they are shaking up the traditional pay cycle: People can address immediate funding needs by accessing portions of their paychecks they have already earned up to that point, regardless of the day of the week. Unlike a payday loan, the amount advanced is tied closely to wages owed.

The need for ways to solve consumers’ short-term liquidity problems is widely recognized. But a public debate rages over how to address that need. In recent months, several banks have dropped out of the deposit advance loan business following regulatory pressure. And the long-controversial payday lending industry faces heightened government scrutiny.

In the last four weeks, two payroll-related disruptors have closed small financing rounds. Both offer products designed to tide over cash-flow-challenged consumers who need to pay for, say, a flat tire or a new renter’s insurance policy.

“People run into cash flow issues all of the time,” said Frank Dombroski, founder and chief executive of FlexWage, one of the upstarts, and a former executive at JPMorgan Chase. “There’s a huge demand for this kind of product.”

His Mountainside, N.J., company, which formed in 2009 to provide alternatives to high-cost lenders, announced in early August it had raised $3.5 million to fund an expansion. With the financing, it will work to forge partnerships with financial institutions and to sign larger employers or potentially a large bank. To date, it works with 150 employers, whose workers most often request $220.

FlexWage is not a lender; rather, it crunches data on employees’ pay rates and hours worked, which it collects by interfacing with employers’ payroll and time systems. Then, it accesses the payroll accrual funds to provide people with the early disbursement money.

“At the end of the day, we are launching a new benefit,” said Dombroski. “It’s not difficult but it’s a project.”

The offering, called WageBank, integrates with a mobile app and works in conjunction with a payroll card.
FlexWage is one of a number of young companies reimagining short-term credit, including the way to profit from such products. FlexWage charges employers a “small per-active-user fee” in addition to a $3 to $5 flat rate for the employees, Dombroski said.

FlexWage allows its employer partners to set the parameters on how many times their employees can dip into accrued pay, to prevent them from abusing the service.

The company hopes to demonstrate to employers that a benefit like WageBank will help them retain hourly paid workers.

“Employers need to know there is a payoff for them,” said Dombroski.