At any given time, millions of workers are past due on at least one bill. But it is the rare employer who is late in cutting the paychecks, or who skips them altogether.
Therein lies an opportunity for loan companies like Kashable and OneBlinc and for retailers who do business on sites like payrolljewelry.com and purchasingpower.com: Put yourself at the front of the payday line by deducting directly from these trusted paychecks. Let other billers wait around to see if customers return a payment from their bank account or don’t bother making one at all.
This clever maneuver is possible thanks to payment mechanisms that go by concepts such as “allocation”[ads1]; and “shared 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 accept this often lack a good or no credit history. Without a better alternative, they put their paychecks on the line, and with a portion of their pay each pay period, they pay for goods or repay debt within a few years. Some dealers include the cost of their payment plans in their prices and technically charge no interest, while lenders charge up to 35.99 APR.
Pay-via-paycheck mechanisms are not new. Since 1889, members of the US military have been able to pay bills and transfer money via what is known as an allotment system. According to a 1978 report by 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 one-button electronic payments and almost free phone calls, settling a bill while serving overseas was complicated. And while the GAO report is not clear on the matter, at some point federal employees must have asked for this convenience.
What’s new—and fascinating—about how the pay-by-paycheck process works today is that companies encourage or require customers to use it when they set up their accounts. They then explicitly cloak their processes in the language of economic empowerment and societal improvement.
“You can be you and own your life with a better way to buy”, is the refrain at Purchasing Power.
One way Kashable finds customers is by persuading human resources to offer its services as an employee benefit.
Kashable’s mission is to “improve the economic prosperity 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 reflects this theme. It says it offers “socially responsible credit” and that the 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 circle of predatory lending,” protecting borrowers from “abusive bank fees.”
Read between these lines and you’ll get a sense of who the desired customer is and isn’t. There are tens of millions of people who put all their spending on a single debit card, for budgeting purposes, or on one credit card to collect loyalty points. They are not the main goals here.
But many millions more fall short each month and pay fees to their bank when their checking balance can’t 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 these lenders may trap them in a cycle of high-interest debt.
Saving people some of this is truly a noble cause. Linking repayment to a paycheck is a potentially reliable way to do it.
But for the companies, the paycheck-to-paycheck process is secondary. For them, the breakthrough is the proprietary digital tools that allow them to lend to people, based on their employment status and income, that other companies would ignore. OneBlinc doesn’t even use a credit check, although it reports customer payments to Equifax, Experian and TransUnion.
“We don’t believe in credit scores,” CEO Fabio Torelli said in a 2019 press release, a sentiment he echoed in an interview this week. “It is the ultimate symbol of an outdated model that we are determined to disrupt,” the release continued.
The bet here is that the knowledge of someone’s employer, employment and salary, as well as the still quite important paycheck, should be enough to give it a shot as a business.
Kashable runs credit checks, but it also follows an employment-centric insurance model. Einat Steklov, a co-founder, laid out the logic for me in an interview this week.
Just because someone is employed doesn’t mean 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 (with increased credit risk) or subprime (with high credit risk).
So how do you serve them? A large portion of Kashable’s borrowers are federal employees. They don’t 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 made another point: People often end up with bad credit because they are late on their payments, not because they never pay back their debt. This is where the pay-via-payslip system comes in.
“We were looking for a better mechanism to help them become successful borrowers,” she said of allocation and similar repayment systems. “Who benefits from it? We believe the customer is the primary benefit.”
She added that 64 percent of people who had a credit file when they took out their first Kashable loan saw an improved score later.
That can be a very good thing. But several cases still concern Nadine Chabrier, senior advisor for policy and litigation for the non-profit organization Center for Responsible Lending.
First, what happens when a disaster throws borrowers’ budgets into chaos? Sure, these lenders will let people turn off paychecks and pay another way, but customers need to remember that this is possible and then take the steps to turn it off no matter what emergency they’re facing. Will they?
Speaking of budgets, if you’ve never been in a huge financial bind, you may not be familiar with the juggling act that results. Chabrier referred to it as “robbing Peter to pay Paul”.
You can prioritize car payments (repossession means you can’t get to work) and rent or a mortgage (to avoid eviction or foreclosure) over a personal loan. But if the personal loan is the only liability that comes out of your salary before the money even hits your bank account, then that lender has an advantage as long as the salary linkage persists.
And then there’s this: If a lender doesn’t check your credit, how does it know if the loan could suddenly make other obligations unaffordable?
Mr. Torelli of OneBlinc said the guarantee included a look into people’s bank statements, which gave it insight into whether a new loan payment would be reasonable.
Meanwhile, Chabrier ticked off a list of questions that anyone considering a payday loan or dealership should ask.
“How does the underwriting work?” she said. “What are the fees and how are they disclosed? Do they comply with state and federal debt collection regulations? Do they investigate credit report inaccuracies? Are there deceptive practices in marketing? And what are the interest rates?”
Human resources officials with the power to offer access to loans can serve as gatekeepers, and they can ask the questions as well.
Is a loan like this actually a benefit, Chabrier wondered aloud, or something that drives employees deeper into debt? Then she caught herself.
“By definition, it drives your employees deeper into debt,” she said, although it’s possible they could use the loan proceeds to pay back even higher-interest debt and get better terms in the process. “But are there unexpected problems that you, as the HR director, were not informed about at the beginning?”