Employer banking new norm

An increasing number of businesses in the US are offering access to money in recognition that workers are doing it tough.

Walmart has recently introduced payroll advances and loans services

A growing number of companies are helping workers gain access to payroll advances and loans, reflecting concern over the impact money problems are having on productivity levels and employee retention.

Employers including Walmart and Pima County have recently added these services. The aim is to help cash-strapped employees, many with damaged credit, cover unexpected expenses without ­resorting to high-cost debt.

“Employers have woken up to the fact that a majority of workers are having a lot of trouble simply getting by, never mind getting ahead,” says Sophie Raseman, head of financial solutions at Brightside, a company Comcast co-founded that provides financial guidance to workers and is testing payroll loans with some corporate clients.

Workers typically access the services online. The payroll-advance programs give employees the option to accelerate a portion of their next pay cheque for a fee that often amounts to a few dollars. The loans are typically a couple thousand dollars, and are repaid through automatic payroll deductions over a few months to a year or longer.

Approval and interest rates, generally 6 per cent to 36 per cent, often depend on factors including a borrower’s credit score.

Because the services deduct repayments from workers’ pay cheques before the money goes to their bank accounts, default rates tend to be low.

According to an Employee Benefit Research Institute survey of 250 employers last year, 12 per cent offer accelerated pay. The same percentage offer short-term loans repaid through payroll deductions. Another 4 per cent and 6 per cent plan to add the services, respectively.

Lauren Saunders, associate ­director of the National Consumer Law Centre, said payroll-advance services may create “a cycle of chronic early spending”.

Companies, meanwhile, are responding to data that indicate American workers are financially stressed. While incomes have been stagnant for many, expenses for items including healthcare and education have risen. ­Employers are concerned about the impact on productivity and turnover.

Mary Haynes, chief executive of Nazareth Home, which runs long-term care facilities in Louisville, Kentucky, says the company began offering accelerated pay through PayActiv two years ago after realising many of its staff were incurring late fees and using payday loans. PayActiv works with 500 employers, including Walmart. Of Nazareth’s 400 employees, 338 are enrolled in PayActiv and 280 use it regularly, Haynes says. The benefit attracts workers and saves Nazareth money, she says, by “practically eliminating” its use of a staffing agency some workers preferred because the agency provided access to pay ­advances.

Typically, payday loans charge $US15 ($22) for every $US100 borrowed. Bank overdraft fees often cost about $US35. In contrast, PayActiv charges $US5 per pay period when an employee uses the service, which also includes financial counselling and online bill payments. Some point out that a $US5 fee can equate to a high annualised percentage rate on a small short-term loan.

State officials also have concerns. Regulators in 10 states, including New York, are investigating whether the payroll-advance services are violating state banking laws. The companies that provide this service maintain they give employees access to money they have already earned and aren’t lenders.

Robyn McGuffin, a medication technician at Nazareth Home, says PayActiv has helped her avoid late and overdraft fees of as much as $US80 a month.

McGuffin, 36, says she typically uses PayActiv once or twice per pay period, generally for bills due before her next pay cheque arrives. The Louisville resident also used it to buy a new car battery and cover her fiance’s share of the household expenses when he was temporarily out of work due to a medical emergency. By avoiding late fees, McGuffin, who earns about $US16 an hour, says she has been able to splurge on the occasional restaurant meal or toy for her daughter. “I don’t freak out as much about bills because I know I have the option to access money if I need to.”

Some employers pair loans or accelerated pay with online tools to help workers budget, reduce debt and amass emergency ­savings.

Walmart introduced salary ­advances in late 2017. It has seen employees rely less on payday loans and bank overdrafts, says David Hoke, who oversees health and wellbeing. Employees pay $US6 a month to use PayActiv.

It is embedded in an app called Even, which also includes a budgeting service that nudges users to save surpluses. Walmart covers the cost for one month per quarter and caps the amount workers can accelerate at 50 per cent of pay. Of the company’s 1.4 million workers, 380,000 are frequent app users, Hoke says.

For those in need of larger sums, some employers offer loan services that typically advance as much as $5000, with repayments deducted from workers’ pay over four months to a couple years.

Lender Kashable approves “more than 60 per cent” of applicants, says co-chief executive Einat Steklov. It considers factors including job tenure and credit scores. The ­average user has a subprime credit score and pays an annual interest rate of about 20 per cent, Steklov says.

Kashable’s default rate is 5 per cent. Borrowers who leave their jobs before repaying in full generally switch to automated bank transfers.

Pima County, Arizona, has ­offered its 7000 employees Kashable loans since 2016. Nearly 500 workers, many with credit scores below 650, have borrowed an ­average of $2000 each, says county supervisor Richard Elias.

Elias says nearly half reported using the loan to pay off higher-cost debt, and many purchased or repaired cars.

“Anything we can do to make the economic lives of our workers more stable benefits us in the form of higher productivity.”

The WALL STREET JOURNAL