The payday lending market is at a bit of a crossroads as regulators flex their regulatory muscles and look to establish new rules for the payday lending industry.
While much has been written — on these pages and beyond — about that debate, there are three universal truths about these short-term, small dollar lending products.
First, consumers need them and use them. It’s well documented that in the U.S. nearly 60 percent of Americans are ill-prepared to cover an unexpected expense and nearly half do not have ready access to even $400 to cover an emergency expense.
Second, the typical borrower is a banked, middle class, middle income person. The stigma of the payday lending industry is that the providers of these services prey on unbanked, financially illiterate consumers. They are more likely the person who’s standing in line in front of you at the grocery store.
And third, the demand won’t go away. While debates swirl about how these loans should be structured, priced and offered, consumers still need them. Shrink the options for those consumers to get those types of lending products, and they will be forced to seek other, less attractive and more expensive alternatives such as overdraft fees, late fees on bills, or the services of unsavory lenders who are not regulated by anyone.
FlexWage CEO Frank Dombroski has been standing at the crossroads of this industry for the last five years. He entered it with a solution that acknowledges the need and that the best solutions provider is actually the employer who funds their paycheck. FlexWage is an on-demand wage payments solution that allows employees to get advances on what they’ve earned – but in advance of the normal pay cycle – and at a cost that is more or less what a consumer would pay to get money out of an ATM.
“From a scalable, sustainable perspective the only way to solve the payday lending problem is through an employer’s benefits-based solution and at the price point that we’re doing it,” Dombroski told Karen Webster in a recent conversation. “I don’t think other models are sustainable – each of those players is a lender with a balance sheet requirement. They have loss and collection issues because they are putting capital in people’s hands and have to collect it – we don’t,” he added.
Dombroski explains that the liquidity angle associated with the employer-benefits model was the real genesis of the business, in large part because the majority of those who need payday lending services have a bank account that is the repository of employer wages.
“We call it an ‘findemic.’ It’s literally a shortage of short-term liquidity. And a massive number of people living on the very thin line of the balance, paycheck to paycheck. It doesn’t take much to create the need for a short-term bridge,” he said.
What FlexWage offers is access to earned, but unpaid wages that are paid to the employee without interest or a payback period. Through its main service WageBank, employer payroll systems can be enabled to deliver these payday advances. Real time/Same Day ACH, Dombroski says, can be a game changer – giving FlexWage even more of an ability to fund a consumer’s bank account in “real-time, or nearly real-time.”
Dombroski says that FlexWage customers map the profile of the typical payday borrower: a banked middle class consumer. Dombroski says that about 30 percent of the workforce for the clients he works with – call centers, retailers, QSRs, to name but a few — take advantage of its solution as regular users, with regular defined as three or more payday loan advances a year.
“We obviously have a very tactical, immediate solution to this short-term lending clearly for the small bridge need,” Dombroski said.
So, if the need is there, the solution exists at a price point that’s comfortable for the borrower and it’s easy to get set up, why aren’t all employers doing this, Webster asked? Are there concerns about creating too much employee dependency on these “advances” and even changing the fundamental nature of the employer/employee relationship?
‘It’s really just the challenge of getting the employer to take action,” Dombroski noted. “We need to emphasize on how this improves employee productivity,” he said, noting that the solution is entirely customizable to the employer in terms of how they want to enable employees to interact with the option.
He also pointed out that given the press on the magnitude of the problem, employers have a difficult time turning “a blind eye.” The more press and more data on the problem, Dombroksi said, the easier it is for them to recognize that their employees are candidates for these products.
FlexWage can be set so that an employee can only request an advance once a pay cycle, or twice a month, 24 times a year and only up to a specific percent of wages, which are totally at the discretion of the employer. The average number of “advances” is 12 transactions a year.
“From our perspective, this is the only sustainable way to skin this cat and give a very low cost, low stress means for the employee to gracefully manage the small bumps. We’re not talking $2,000 bumps, these are the $200-$300 bumps that put this employee base into a tailspin because of the costs of managing it,” Dombroski said.
While FlexWage’s model is young in the marketplace, and works on a ATM-like fee structure (collecting $3-$5 fees for an employee that pays to access money early), Dombroski said that what’s really driving the demand for this payday loan alternative is the demand in the marketplace of consumers who don’t have the means to always meet their needs when unexpected expenses arise.
“You can’t regulate demand,” he said. “You can squish supply in a certain mode. And unless there is a viable, good alternative, that demand is going to go to other bad alternatives and they will pop up as they always do.”