Installment Plans Help ‘COVID-Poor’ Consumers Tackle ‘Government Debt’

It’s getting harder to pay the rent, the mortgage and the bills, such as water and energy services, that are so critical for day-to-day life. That means that the debt owed to local governments — for a range of services that can span electric bills, wastewater, court fees, traffic fines and parking tickets — is mounting.

PYMNTS’ own research has determined that 61% of Americans are living paycheck to paycheck. The most vulnerable among us — the 77% of people who make less than $50,000 annually — also live paycheck to paycheck, with less than $800 in savings on hand.

Cash cushions are dwindling and inflation is on the rise, which is making the struggle to make ends meet all that much more of a struggle.

As Phaedra Ellis-Lamkins, CEO of payment platform Promise, told PYMNTS’ Karen Webster, “Government debt needs to be made attainable. We’re seeing a huge number of people who are being left behind, struggling to pay water bills, child support bills and parking tickets — and they need help.”

To get a sense of just how widespread the problem is, consider the fact that, as Ellis-Lamkins estimated, in the current environment and in the recent past, we’ve seen two segments of the population struggle with government debt.

Related: PYMNTS Intelligence: 61% of the US Population Living Paycheck to Paycheck

There are those affected directly by the pandemic, where many service agencies might see 40% of people falling behind on payments (where, pre-pandemic, the rate might have been below 10%). These are people who were just one paycheck behind on payments — who suddenly lost the paycheck, and then began struggling in earnest. We might term these folks “COVID poor.”

Then, there are those consumers who belong to the segment known as the “structurally poor,” according to Ellis-Lamkins, who have no real ways and means to tackle mounting services debt. They’ve been shut out of the traditional financial system and often don’t have bank accounts, instead tapping prepaid cards or payday loans to make their payments.

As for the impact to the agencies themselves, utilities and parking authorities simply don’t know how to manage the debt load. They’ve never experienced this volume of missed payments before, and simply don’t have the technical infrastructure needed to grapple with the burden.

Most utilities, she remarked, run on legacy business software. That software assumes that if, hypothetically speaking, a payment is not made on the due date by 5 p.m., then there’s been a failure on the consumer’s part, and the cycle of debt begins.

Yet, as Ellis-Lamkins said, two-thirds of those who miss payments make them within 14 days — which then means that on the agency side, people are navigating spreadsheets and paper checks. Along the way, due to legacy tech and inefficient manual processes, that $40 parking ticket can quickly become $120 in a month’s time, swollen by fees and penalties.

Many utilities and government agencies using their own systems, she said, won’t even entertain the notion of a payment plan until a balance reaches $500 — which then is out of reach for a significant percentage of the population. The debt goes into collections, and the agency has to pay for enforcement.

Ellis-Lamkins said the more palatable solution is to incentivize people and governments to tackle the debt earlier, over time, with no penalties, while avoiding a service interruption.

See also: 70% of Millennials Live Paycheck to Paycheck

The Friction in the System

The friction in the system, she told Webster, lies with the outdated assumption that everyone has a paycheck that comes in every two weeks or once a month. Income, she said, is actually variable and inconsistent — and payment cycles may stretch out as long as six weeks.

Platforms such as Promise’s can increase revenues for those governments and utilities by helping consumers set up payments through installment plans. The platform model and flexible payment methods, she said, can ensure that critical services are not shut off — while consumers avoid penalties and interest charges.

Promise, which recently announced a $25 million Series B funding round, makes money through transaction and integration fees levied on the client agencies and organizations.

The firm works with governments in the same way that one might buy a Peloton, with predictability for both the government and the consumer. It also has a “relief portal” that helps government entities distribute financial assistance funds, such as the Low-Income Household Water Assistance Program or CARES Act funding. Those funds can be instantly applied to consumers’ outstanding balances.

Promise also increases payments on uncollected parking citations and toll debt. Payment rates on obligations, she said, are significant — in the high 90% range.

The incentive is there, of course, for people not to have their water shut off, to keep their driver’s license so they can get where they need to go. As to disseminating aid more quickly, she said Promise can work with the parties in order to set up immediate debt relief, in streamlined fashion.

In the past, an aid recipient might have to go to a nonprofit and bring a copy of their tax returns. But by linking with Promise, she said, outreach is possible, where the company can send am individual a message alerting them to the fact that they were pre-qualified and the debt has been forgiven.

“We’re not just bringing money in to the governments — we’re also helping push the money out to qualified recipients,” she said.

Looking ahead, the company is experimenting with its prepaid card pilots to track how and where people spend their money. Promise is also seeking to build a “safe and trusted brand” for low-income customers, including seniors living on fixed income.

Ellis-Lamkins said that in 2022 and beyond, individuals in the paycheck to paycheck economy will face additional challenges, in part due to inflation. We may see a perfect storm where government resources are lessened, as well. Forbearance periods are ending across mortgages and student loans, which means household cash flows will face pressure — and installment plans for essential services will be, well, essential.

“When these businesses succeed,” she told Webster, “the people who rely on the services succeed, too.”

Read more: Paycheck-to-Paycheck Report: Gen Z Consumers Would Struggle Most to Pay $400 Emergency Expense