San Diego Union-Tribune (Sunday)
COMPANIES THAT TAKE MONEY STRAIGHT FROM YOUR PAYCHECK
Some lenders and retailers have a pretty neat business model: You pay them before your wages ever hit your bank account, and sometimes they give you no choice
At any given time, millions of workers are overdue on at least one bill. But it is the rare employer that is late in cutting its paychecks or that bounces them altogether.
Therein lies an opportunity for lending companies like Kashable and Oneblinc and for retailers that do business at sites like payrolljewelry.com and purchasingpower.com: Put yourself at the front of the repayment line by drawing directly from those reliable paychecks. Let other billers wait around to see if customers bounce a payment from their bank account or do not bother to make one at all.
This clever maneuver is possible thanks to payroll mechanisms that go by terms like “allotment” and “split deposits.” As long as your employer allows it — and some notable big ones, like the federal government, do — employees can set it up themselves.
The customers who agree to this often lack good or any credit history. Without a better option, they put their paychecks on the line, and with a chunk of their wages every pay period, they pay for goods or repay debt within a few years. Some retailers include the cost of their payment plans in their prices and do not technically charge interest, while the lenders charge up to a 35.99 annual percentage rate.
The pay-via-paycheck mechanisms are not new. Since 1889, members of the U.S. military have been able to pay bills and transfer money via what is known as an allotment system. According to a 1978 report from the Government Accountability Office, the federal government also began allowing civilian federal employees to use the system in the 1960s.
For the military, this made sense. Long before push-one-button online payments , settling a bill while you were serving overseas was complicated. At some point, federal employees must have asked after this convenience.
What is new — and fascinating — about how the pay-via-paycheck process works nowadays is that companies urge or require customers to use it when setting up their accounts. Then, they explicitly cloak their processes in the language of financial empowerment and societal improvement.
“You can be you and own your life with a better way to buy,” sounds the refrain at Purchasing Power.
One way that Kashable finds customers is by persuading human resources people to offer its services as an employee benefit.
Kashable’s mission is to “improve the financial well-being of working America,” according to the company’s website. “We offer socially responsible financing to employees as an employer-sponsored voluntary benefit,” it adds.
Oneblinc echoes this theme. It says that it offers “socially responsible credit” and that its credit is “for people who work hard and need help making ends meet.” This form of inclusion “is the best way to reduce social inequality” and is “a genuine alternative to the vicious cycle of predatory lending,” protecting borrowers from “abusive bank fees.”
Read between those lines, and you get a sense of who the desired customer is and is not. There are tens of millions of people who put all of their expenses onto a single debit card, for budgetary purposes, or onto one credit card to amass loyalty points. They are not the primary targets here.
But many millions more come up short each month and pay fees to their bank when their checking balance cannot cover a charge. Others cannot qualify for credit cards or have lost their banking privileges. They may turn to payday lenders for short-term help, and those lenders may trap them in a cycle of high-interest debt.
Sparing people any of this is, indeed, a noble cause. Hitching repayment to a paycheck is a potentially reliable way to do it.
But to the companies, the payby-paycheck process is secondary. To them, the breakthrough is the proprietary digital tools that allow them to lend to people, based on their employment status and income, whom other companies would ignore. Oneblinc does not even use credit checks, though it does report customer payments to Equifax, Experian and Transunion.
“We don’t believe in credit scores,” Fabio Torelli, the CEO, said in a 2019 news release, a sentiment he reiterated in an interview recently. “It’s the ultimate symbol of an outdated model that we’re determined to disrupt,” the release continued.
The bet here is that the knowledge of someone’s employer, tenure and salary, as well as the still pretty important paycheck tether, should be enough to make a go of it as a business.
Kashable does run credit checks, but it, too, follows an employment-centered underwriting model. Einat Steklov, a co-founder, laid out the logic for me in an interview recently.
Just because someone is employed does not mean that lenders are willing to do business with them at favorable interest rates. Even among people who work, she said, two-thirds are so-called near prime (at a heightened credit risk) or subprime (at a high credit risk).
So how do you service them? A large portion of Kashable’s borrowers are federal employees. They do not get fired often and tend to stay on the job for a while. This should make them less risky to underwrite than their credit scores might suggest.
Steklov added that 64 percent of people who had a credit file when they took out their first Kashable loan saw an improved score later on.
That could be a very good thing. But several matters still concern Nadine Chabrier, a senior policy and litigation counsel for the nonprofit Center for Responsible Lending.
First, what happens when a calamity throws borrowers’ budgets into chaos? Sure, these lenders will let people turn off payvia-paycheck and pay some other way, but customers have to remember that this is possible and then take the steps to turn it off amid whatever emergency they are facing. Will they?