How Earned Wage Access Can Upend Predatory Lending and Build Employee Financial Wellness
B Corp Helps Employers Connect Workers with Income When They Need It Most
Could you handle a $500 emergency? According to BankRate, only 37% of Americans can cover an expected $500 expense, highlighting that the majority of U.S. workers are essentially living paycheck to paycheck. To make ends meet between paychecks, many workers have had to turn to notoriously predatory payday lending, which can result in dramatically high-interest repayment rates and push people into an ever-deepening cycle of debt. Recently, however, there have been companies cropping up that enable employees to access their wages without the threat of a costly loan and with the added benefit of building savings and getting out of the risky financial cycle all together. This payment method has recently been termed Earned Wage Access (EWA).
Payactiv, a pioneer in EWA, works with thousands of employers to deliver its “employee financial wellness” solution to more than a million employees. Payactiv’s app is plugged into an employer’s time- and attendance-tracking system and enables employees to access a percentage of their wages as they earn them, rather than having to wait until a regularly scheduled payday or turn to a predatory lending service in times of need.
“I had a very strong conviction that, for this service to be delivered correctly, the employer has to be part of the solution. And I firmly believe that employers care,” said Safwan Shah, founder and CEO of Payactiv. “I operate from this underlying assumption that employers care based on the conception of capitalism: Employers care because it’s in their best interest. At the end of the day, they live and die on the altar of their paying customers, and they care about the employees because they are part of that success.”
Payactiv is also a Certified B Corporation surpassing certain social and environmental impact thresholds established by the nonprofit B Lab. As part of my research of purpose-driven companies, I spoke with Shah to learn more about EWA and to discuss how the coronavirus pandemic has affected it.
On your website, it says Payactiv invented Earned Wage Access in 2012. Can you explain Earned Wage Access, how it works, and describe the problem it is solving?
Safwan Shah: We were very conscious of each word in the term Earned Wage Access. It’s for wages earned, so it’s not early, which connotes impatience; it’s wage, not income, because income can be commission or something like that; and it’s access, not an advance, which implies as if someone did you a favor. The reason for each word was very specific.
Now eight to nine years later we have welcomed many competitors into the space and also recognition of our model by the U.S. Consumer Financial Protection Bureau (CFPB). During this time I have met with the CFPB dozens of times, and earlier this year our product was the first EWA approved by the CFPB — they recognized EWA was not “credit” and so is exempt from federal lending law.
The key insight of EWA is that timing of when you are paid is entirely in the control of your employer. It’s a technology decision. So that was the beginning of this idea about 10 years ago. I said that if technology drives the timing of pay, then we could create technology and a product in which people could access their money as they earn it. I had a very strong conviction that, for this service to be delivered correctly, the employer has to be part of the solution. Payactiv has even produced a documentary on the importance of Timing of Pay.
I operate from the underlying assumption that employers care about their employees and want to do right by them. This is simply based on self-interest. At the end of the day, businesses live and die on the altar of their paying customers, and they care about the employees because they are part of how products and services are delivered to customers.
The Payactiv model was designed to be B2B. We go to businesses and we say, “Let us be the provider to give your employees early access to their wages, even if they need it every day or every second day. We give them the money, then you reimburse us.” That was done in the very beginning for a fundamental reason: An employee should not be encumbered by the stress of debt.
Does Payactiv feel that payday lending should be replaced?
I have never been against products that help people make ends meet between paychecks. The payday loan was just an early phase of this process because payday lenders did not, I think, take the trouble to engage the employers. It was probably very hard to do that, so they sat on street corners near big employers to access individual employees.
So I don’t blame them at all. I don’t criticize them. I’m not the judge of the payday lending industry. I’ve put a product out there, and I say, “If you still want to use payday loans, I can’t stop you.” It’s like you want to drive a car which does 9 miles to a gallon, it’s up to you, but there are cars which will do 50 miles to a gallon.
People use payday loans, but nobody ever asked why. There is a misalignment between the biweekly receipt of wages and the multiple days in between during which bills and other expenses must be met. Bills and expenses do not wait for payday. This misalignment creates a cash flow shortfall, which hourly workers have historically filled via expensive forms of short-term credit such as payday loans, installment loans, auto title loans, pawn loans, overdraft fees, and late fees. Earned Wage Access repairs that misalignment, enhancing worker liquidity and reducing demand for high-cost credit.
How do you convince employers to adopt your solution?
There are three things that employers care about: efficiency in recruitment, retention, and engagement. For example, you don’t want to lose a janitor who knows how to clean hazardous materials from the emergency room. You don’t want to lose that janitor because that janitor knows how to read all those squiggly signs from the monitors.
So we had to prove to employers that our product will improve each one of these. It turned out that recruitment benefits are easy to show. Today, we have about 1,500 to 1,600 companies that are clients, Walmart being the largest. Others include Wendy’s, hospital systems, senior living centers. From academic studies of our product, before it, companies would give 1,000 job offers to hourly workers and maybe 200 will accept — with our service that grows by 80% to 90%. Additionally, we improved retention by 20%, in some cases all the way to 35% to 40%. And on engagement, the answer really is, this product is saving employees from a degrading experience. At the end of the day, a person wants to be treated with respect.
There are also three things that I believe the employee cares about. The first, not being afraid, or financial security. The second thing is not being ashamed, or having personal dignity. And the third thing is being ready for tomorrow, which is where savings comes in, and we built a product which answers these three needs of the employee.
How has the coronavirus pandemic affected EWA?
We saw a few things. Tens of thousands of people were deactivated from the employment systems or their hours were halted. Most companies didn’t fire people, they just didn’t have hours so they couldn’t earn their wage because the unit of work is time. The first thing that we noticed was a lot of people were not earning anything. We immediately ran a survey, and the survey said that 82% of people were worried about loss of income — very few were worried about the pandemic itself. We published a press release on that, and there was an article in Bloomberg on it because we put that data out there.
So we immediately formed a nonprofit organization. It’s called Payactiv Foundation, and very quickly we were able to get pledges of up to $5 million. The second thing we did was, from March 16 to May 31, 2020, we moved $70 million to $80 million without charging a penny to anybody. We made it free. You can imagine going to my board and asking for something like this, and for my board to not only support me but to let the program go for 70 days — it was a momentous occasion.
And we did another thing, which was actually amazing. New York City had an interesting dilemma. They wanted to deliver food and supplies to thousands of people in various shelters, but they didn’t have a delivery mechanism. Uber said that they couldn’t do it because drivers couldn’t come out from quarantine because they’re civilians. But the taxi company In New York, New York Taxi and Limo Commission, partnered with the city to activate up to 18,000 cabs to run these deliveries. From April to October, Payactiv was the mechanism to pay the cabs. Drivers would get $15 an hour and $54 a delivery for food, supplies, and medicine. We did that because we have the technology, and they had the need.
We are a B Corp. Because we believe in what we do, it is very easy for us to do these things. The purpose of the company is so clear. We have no purpose if we are not on the side of the employee in their time of need.
This article was originally published at https://www.forbes.com. B The Change gathers and shares the voices from within the movement of people using business as a force for good and the community of Certified B Corporations. The opinions expressed do not necessarily reflect those of the nonprofit B Lab.
