You know the story. Critics say that short-term, small-dollar loans push consumers into the hamster wheel of a never-ending debt cycle – one that turns a two-day bridge to cover a shortfall into a six-month mosh pit of fees that can become hard to dig out from under.
“I think it is pretty obvious when you read stories about the payday lending industry – and how it goes wrong for customers – that consumers need a better alternative,” Onward Financial Founder Ronnie Washington said.
Simply banning these lending products doesn’t solve the problem, either – instead, it just shifts the parameters of the problem. Instead of potentially paying higher fees over a longer period of time, consumers just have bills they can’t pay. Regulators can ban payday loans – but no one can ban cars that break down, heating systems that drop dead in the middle of the winter, medical crises or any of the myriad unexpected financial events that send consumers running to the embrace of short-term lenders.
Further, 59 percent of households don’t have enough liquid cash to pay for an unexpected $2,000 expense, according to research from Pew, and 40 percent don’t have enough savings to cover a $400 expense. And smoothing with plastic is not always an option, Washington noted, because roughly 108 million Americans don’t have access to traditional credit cards, according to Experian.
In an effort to innovate a solution to these cash flow challenges, Washington founded Onward Financial. The firm offers a lending product that makes employers their employees’ partners in financial wellness, with a program that helps workers start a savings plan, learn about managing personal finance and – if needed – secure a low interest rate loan to fill in income gaps.
In other words, a payday loan from the source of the paycheck.
Founded in 2016, the firm ended 2018 as one of 10 firms nationwide to be awarded $1 million grants from the Rockefeller Foundation and the Chan Zuckerberg Initiative Communities Thrive Challenge.
Washington said the grant came at a time when Onward Financial was having its own cash crunch.
“Being an entrepreneur is a very tough journey,” he noted in an interview. “About a year ago, we actually thought we would have to close our doors due to lack of funding. Fast forward and we’re collecting a $1 million grant that means everything to us. It means as a nonprofit, we can continue pursuing our mission of providing the most vulnerable — the people who would otherwise have very few options — with an alternative to predatory loans and financial insecurity.”
Onward chose to focus on the employer as a natural partner in financial wellness for three main reasons. The first is practicality – the vast majority of the financially unstable derive their income from work, and the source of that income is an ideal point to start managing money.
Secondly, a worker who is worried about how they are going to buy food, commute to work in their broken-down car or afford their medication will almost certainly not be functioning at their optimal level on the job.
And thirdly working with employers helps Onward build a product with maximum levers to help consumers along their financial journey. That includes the ability to create and manage an in-app savings plan, complete with recommendations, predictions and tips, as well as access to financial literacy tools and loans to cover emergency expenses.
As Washington noted, a customer can be doing all the right things and saving money, but then get hit with something really expensive out of the blue. The goal for Onward was to build the 401K equivalent for life emergencies, and then to convince firms that this was exactly the type of employee benefit their workers want and need.
It has not been easy work for Onward, but true to its name it has been moving forward, slowly but surely, over the last two years. And the effort is about to get a major adrenaline boost, thanks to the latest grant funding the company has received. Today the firm is only working with employers in Kansas City, as the payday lending capital of America seemed an ideal place for the service’s test run. But now, they are ready to think about expanding.
“This is the most sizable grant that we’ve received,” Washington said. “It allows us to hire a full-time team to invest further in the product itself, and also expand [in 2019] to more employers throughout the country, so we’re extremely grateful and excited about the opportunity."