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 don’t 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 don’t 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 United States military have been able to pay bills and transfer money via what’s 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 and near-free phone calls, settling a bill while you were serving overseas was complicated. And, while the G.A.O. report isn’t clear on the matter, 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 can’t cover a charge. Others can’t 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 pay-by-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 doesn’t 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 chief executive, said in a 2019 news release, a sentiment he reiterated in an interview this week. “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 this week.
Just because someone is employed doesn’t 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 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.
Ms. Steklov made another point: Often, people end up with bad credit because they’re late making payments, not because they never repay their debts. That’s where the pay-via-paycheck system comes in.
“We were looking for a better mechanism to help them become successful borrowers,” she said of allotment and similar repayment systems. “Who is benefiting from that? We believe the customer is the primary beneficiary.”
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 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 pay-via-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're facing. Will they?
Speaking of budgets, if you’ve never been in an enormous financial bind, you might not be familiar with the juggling act that results. Ms. Chabrier referred to it as “robbing Peter to pay Paul.”
You might 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 that personal loan is the only obligation coming out of your wages before the money even gets to your bank account, then that lender has an advantage for as long as the paycheck link persists.
And then there’s this: If a lender doesn’t check your credit, how does it know whether its loan could suddenly make other obligations unaffordable?
Mr. Torelli of OneBlinc said that its underwriting included a peek into people’s checking account statements, which gave it visibility on whether any new loan payment would be reasonable.
Meanwhile, Ms. Chabrier ticked off a list of questions that anyone considering pay-by-paycheck loans or retailers should ask.
“How does the underwriting work?” she said. “What are the fees, and how are they disclosed? Are they complying with state and federal debt collection rules? Are they investigating credit report inaccuracies? Are there deceptive practices in the marketing? And what are the interest rates?”
Human resources officials with the power to offer access to loans like these can serve as gatekeepers, and they can ask the questions, too.
Is a loan like this actually a benefit, Ms. Chabrier wondered aloud, or something driving employees deeper into debt? Then she caught herself.
“By definition, it’s driving your employees deeper into debt,” she said, though it’s possible that they could use the loan proceeds to repay even higher interest debt and get better terms in the process. “But is it coming with unexpected problems that you, as an H.R. director, weren’t advised of at the outset?”