Companies that take money directly from your salary

At any given time, millions of workers are late on at least one bill. But it is the rare employer who is late in cutting his paychecks or who returns them at all.

Herein lies an opportunity for payday loan companies like Kashable and OneBlinc and for retailers doing business on sites like payrolljewelry.com and purchasingpower.com: Put yourself at the top of the payoff line by pulling directly from those reliable payments. Let other billers wait to see if customers receive a payment from their bank account or don’t bother making one at all.

This clever maneuver is possible thanks to payroll mechanisms that go by terms like “allocation” and “deposit allocation.” As long as your employer allows it—and some notable big ones, like the federal government, do—employees can set it themselves.

Customers who agree to this often lack a good or any credit history. With no better alternative, they deposit their paychecks and, with a portion of their paychecks each pay period, pay for the goods or pay off the debt within a few years. Some retailers include the cost of their payment plans in their prices and technically charge no interest, while lenders charge up to an annual percentage rate of 35.99.

Payment mechanisms through salaries are not new. Since 1889, members of the United States military have been able to pay bills and transfer money through what is known as an allowance system. According to a 1978 report by the Government Accountability Office, the federal government also began allowing federal civilian employees to use the system in the 1960s.

For the military, this made sense. Long before one-button online payments and virtually free phone calls, settling a bill while serving overseas was complicated. And, while the GAO report is not clear on the matter, at some point federal employees must have requested this facility.

What’s new – and fascinating – about how the payroll process works these days is that companies encourage or require customers to use it when they set up their accounts.. Then, they explicitly cloak their processes in the language of financial empowerment and social improvement.

“You can be you and own your life with a better way to shop,” goes the refrain at Buying Power.

One way Kashable finds customers is by convincing HR 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 a voluntary employer-sponsored benefit,” he adds.

OneBlinc echoes this theme. It says it offers “socially responsible lending” and that its loan is “for people who work hard and need help to make ends meet”. This form of inclusion “is the best way to reduce social inequality” and is “a real alternative to the vicious cycle of predatory lending”, protecting borrowers from “abusive bank fees”.

Read between those lines and you will understand who is and who is not the desired customer. There are tens of millions of people who put all their spending on a single debit card, for budgeting purposes, or on a credit card to accumulate loyalty points. They are not the main 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 fee. 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.

Saving people from this is, indeed, a noble cause. Paying off in a paycheck is a potentially reliable way to do it.

But for companies, the pay-to-pay process is secondary. For them, the breakthrough is the proprietary digital tools that allow them to lend to people, based on their employment status and income, which other companies would ignore. OneBlinc doesn’t even use credit checks, although 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 press release, a sentiment he reiterated in an interview this week. “It is the ultimate symbol of an outdated model that we are determined to disrupt,” the release continued.

The bet here is that knowledge of one’s employer, one’s tenure and salary, as well as the still very important salary link, should be enough to make it as a business.

Kashable performs credit checks, but also follows an employment-focused insurance model. Einat Steklov, a co-founder, laid out the logic for me in an interview this week.

Just because someone is employed does not mean that lenders are willing to do business with them at favorable interest rates. Even among working people, she said, two-thirds are so-called near prime (with an increased credit risk) or subprime (with a high credit risk).

So how do you serve 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 secure than their credit scores might suggest.

Ms. Steklov also made another point: often, people end up with bad credit because they make late payments, not because they never pay back their debts. This is where the payroll system comes in.

“We were looking for a better mechanism to help them become successful borrowers,” she said of installment and similar repayment systems. “Who benefits from this? We believe that the customer is the main beneficiary.”

She added that 64 percent of people who had a credit file when they got their first loan on Kashable saw an improved score later.

This can be a very good thing. But some issues still concern Nadine Chabrier, a senior policy and litigation adviser for the nonprofit Center for Responsible Lending.

First, what happens when a disaster throws borrowers’ budgets into chaos? Of course, these lenders will allow people to turn off paying by check and pay another way, but customers should remember that this is possible and then take the steps to turn it off in any emergency with it. which they are facing. Will they do it?

Speaking of budgets, if you’ve never been in a major financial bind, you may not be familiar with the act of fraud that results. Ms. Chabrier referred to it as “robbing Peter to pay Paul.”

You can prioritize car payments (repossession means you can’t go to work) and rent or mortgage (to avoid eviction or debt) over a personal loan. But if that personal loan is the only liability that comes out of your paycheck before the money hits your bank account, then that lender has an advantage as long as the paycheck continues.

And then there’s this: If a lender doesn’t check your credit, how does it know if its credit could suddenly make other obligations unaffordable?

OneBlinc’s Mr. Torelli said his signature included a look at people’s checking account statements, which gave her visibility into whether any new loan payments would be reasonable.

Meanwhile, Mrs. Chabrier ticked off a list of questions that anyone considering payday loans or retailers should ask.

“How does signing work?” she said. “What are the fees and how are they discovered? Are they in compliance with state and federal debt collection regulations? Are they investigating credit report inaccuracies? Are there deceptive marketing practices? And what are the interest rates?”

Human resources officials with the power to provide access to loans like these can serve as watchdogs, and they can also ask questions.

Is a loan like this actually a benefit, Ms. Chabrier wondered aloud, or something that pushes employees deeper into debt? Then she caught herself.

“By definition, it’s pushing your employees deeper into debt,” she said, although it’s possible they could use the proceeds of the loan to pay off even higher-interest debt and get better terms. in process. “But does it come with unexpected problems that you, as the HR director, were not advised of from the start?”

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