Originally published at banklesstimes.com
by TONY ZERUCHA
August 30, 2015
We have all been there. The car breaks down. Or the roof leaks. Maybe your teenager does something stupid and costly.
Murphy’s Law being what it is, such pleasant surprises do not often happen on payday or just before. They often come in the middle of the cycle, far away from the next cash infusion.
The lucky among us can dip into savings or ask relatives for help. Many do not have that luxury, leaving them to resort to credit cards or payday loans and their punitive charges. This problem is especially acute for the millions of unbanked and underbanked Americans without overdraft protection.
The sad thing is that for many people this cash crunch is only temporary. Once payday comes around, the need can be easily taken care of with the wages accumulated over the past few weeks.
What if those wages could be accessed as they are accrued?
That was the question posed by Frank Dombrowski, the Founder and CEO of FlexWage, the company behind the WageBank software platform. WageBank allows employees to access their earned wages between pay periods via a payroll card.
Mr. Dombrowski spent 18 years in commercial banking, with the most recent six and a half at JP Morgan Chase, prior to the creation of FlexWage Solutions in 2009.
As a senior vice president and global product executive, Mr. Dombrowski oversaw the commercial card and automated payments businesses, including the use of prepaid cards.
“That was my first deep exposure to an underserved marketplace,” Mr. Dombrowski recalled.
The more he investigated the space, the more Mr. Dombrowski believed he could develop a solution that would have a huge social impact while also being a sustainable business model. Leveraging technology to drive efficiency would be crucial.
And Mr. Dombrowski knew the technology from his experience with JP Morgan Chase.
“There was the perfect opportunity for the underserved and unbanked to leverage technology I was already familiar with,” Mr. Dombrowski said.
The opportunity is also huge. According to FlexWage’s research, 138 million American adults are struggling financially. Three quarters of American workers live paycheck to paycheck, with 61 percent considering an unplanned $400 expense a hardship.
That leads many people to costly options, Mr. Dombrowski said. Those choosing payday loans do so an average of 10 times per year and pay $600 in fees alone. If they choose the bank overdraft route they contribute to an estimated $32 billion in overdraft fees collected each year.
That creates a lot of stressed employees, Mr. Dombrowski said. And stressed employees are less productive employees.
Mr. Dombrowski knew technology could solve the problem, so he began to specifically chart how the technology could be leveraged with an efficient distribution model.
“I knew we would have to address the big cost drivers behind short-term lending options,” he explained.
That led him to what he calls a significantly different model, one that was employer based. The payroll cards from his time with JP Morgan were employer based, plus he knew many companies were trying to get away from paper checks.
“The employer-based distribution is the most efficient for the market,” Mr. Dombrowski said. “Not the easiest, but definitely the most efficient once it was scaled.”
The solution was to design a system which allowed employees to quickly access the share of wages they had earned at any point in the payroll cycle, Mr. Dombrowski said. That means they are not a loan or even an advance, but simply a more efficient method instead of waiting two weeks to access your own money.
Think of it as a daily pay day when you need it.
“We would eliminate risk because it is wages the employee has already earned,” Mr. Dombrowski said.
FlexWage had to develop software that allowed employers to track employee wages as they were earned, including deductions. Those wages are broken down into an average net income per work unit.
Built into that figure is a certain level of cushion set by the employer, a discount of 15-25 percent determined by the employer to protect them in case an employee leaves mid-cycle.
The employer can also determine how many times an individual is allowed to access the system each year so it does not become a habitual process.
There’s also the concern of companies with irregular revenue cycles who could struggle to meet the demand should many employees require early payments at the same time.
Mr. Dombrowski said the WageBank platform minimizes the intracycle cash flow impact to the employer to between three and five percent, with most of that backloaded to the cycle’s latter third.
FlexWage primarily markets WageBank in two ways, Mr. Dombrowski explained. The first is through direct marketing to large employers.
They also use their relationships with existing partners to encourage their sales forces to promote WageBank as a value added service for their clientele.
As with any new concept, Mr. Dombrowski said employer adoption has been slow, as few have heard that allowing employees to access wages already earned before payday is a realistic option.
“It’s a fairly long process of gaining access to the right people and thought leaders through early adopters and then convincing them a small startup has the horsepower to manage their payroll data securely and safely.”
Mr. Dombrowski said he learned a few things as he developed the WageBank platform.
“The biggest surprise was learning the overdraft and NSF fees had grown to three times the size of the payday lending market.”
The need to access accrued wages between paydays also went higher up the earning scale than he originally imagined.
When he looks into the future Mr. Dombrowski envisions being in a unique position to help lenders, manufacturers and others make smart lending decisions for higher value goods, with a core product being the financing of a product costing between $200 and $800 which is paid back over two pay cycles. That can be expanded to larger amounts and longer terms, he added.
Mr. Dombrowski’s commercial banking experience was convenient when he discussed WageBank with regulators like the Consumer Financial Protection Bureau.
“I wanted to lay the foundation with regulators and law makers so they understood what we were doing so we would not be swept up with the payday loan providers,” he explained.