A father’s reluctance and reliance on a predator
The father of four started his shift in deep but nervous prayer that the paycheck coming in three weeks could miraculously arrive today. He needed money now and paying for the schooling of two children was the least of his problems. The heat and angst growing in his chest came from the fact that two emergency situations of child dental care and car repair demanded that he promptly needed at least some of the proceeds of his hard work.
Immediately after his shift ended came confirmation that he would have to make a decision that he promised his wife he would never make again: He would get another Payday Loan. At least this time he would not pawn any treasured property for quick cash. His time-tested car sputtered to one of eight payday lenders in his neighborhood so he could acquire the advance loan of $400 for three weeks at an interest rate of 250%.
Breaking the promise to his wife was necessary to take care of the emergencies. Still, he grew more despondent knowing that he would sacrifice much more later in order to receive the money now. With a shrinking savings, no bank account, monthly bills and other pressures, the payday loan repayment on the $400 dollars would put him in another position of paying it back for a year. The outlandish interest rate would ultimately put him in an even deeper and longer financial hole since he would likely have to get additional loans to ‘float himself between checks.’
FlexWage to the rescue?
If this father-----an amalgamation of a few real-life stories----worked for an employer using FlexWage, he could face a financial reality of economic security that may help him avoid the payday loan debt trap. He could represent a clean break from the nearly 60 percent of Americans who are not prepared to cover an unexpected expense, and the 50 percent who do not have access to $400 to cover emergency expenses.
I learned about FlexWage through my allies at the Stanford Social Innovation Review and CitiFoundation of CitiGroup who shared the “Hidden Financial Lives of America’s Poor and Middle Class” with me and other family economic security leaders in business and non-profits. We received more than an overview of the new financial pressures facing families. We have been introduced to how a socially responsible market is creating innovative products to help unbanked workers----especially the 68 million Americans who use alternative financial services.
How it works for the worker
Here is FlexWage at a glance:
· It is not a lender to the disinvested individual. However, it is a good approach and product to provide workers with an early pay alternative to check advance and payday lenders.
· FlexWage analyzes data on employees' pay rates and hours that they have worked via their interface with an employer’s payroll and time management systems to determine that worker’s current--but unpaid-- paycheck prior to the official pay period.
· After that determination FlexWage accesses their client employer’s payroll accrual funds and puts them on the FlexWage Payroll Card to provide the worker with the early disbursement money. Again, this is money from the hours that the employee has already worked. Instead of a worker needing to rely on high-cost lending alternatives, this process helps them avoid debt while providing them low cost access to cash.
· The system can be arranged so that employees may also request advances for limited times during a pay period or year, and only up to a specific percent of wages (which is based on the permission and discretion of the employer). This is important because many workers do not have direct deposit.
· It is a product that brings social consciousness to capitalism. So, of course it is not free----but it is not predatory. They make money through a structure similar to our visits to some ATMs where the collection fee is $3-$5 for any employee accessing their paycheck money early. A far cry from 300% (or more) interest rates and other fees from the bad actors in the alternative lending industry.
Potential to eliminate the Payday Lenders?
From supermarkets and schools to governments and grocery stores, many U.S. employees live paycheck to paycheck. They are poor and/or middle class who have no bank accounts. Such unbanked or underbanked circumstances create more volatility when the aforementioned financial emergencies arise. Therefore, they often find perceived security in getting much needed cash through spending a large part of earned income on high interests at check cashing stores, money order centers or payday lenders.
As principal and president of a socially responsible oriented company who is also entering into the new work of Community Development Finance Institutions to provide alternative lending to vulnerable communities, I like what I am learning about FlexWage. More Free-market approaches to our nation’s challenges of financial security are needed every day.
A group called Neighborhood Trust agrees and they are partnering with FlexWage in offering new solutions to the cash flow challenge facing U.S. workers. The partnership is identifying 10 employers who are interested in testing the system. Companies with at least 250 employees (who are hourly or moderate income workers) can be eligible to take advantage of this partnership that can help give employees more control over their pay. For a limited time the partners are offering this service at no cost to the employer.
Such a partnership or contractual services with FlexWage may undoubtedly be appropriate for established medium-to-large businesses and companies who do not face cash flow problems themselves or are beyond startup. In addition, small businesses who have the same stability so as to not experience their own disruptions from early/advance payments may also be great candidates.
I hope that many companies who fit the bill of doing well and doing good will explore such a product. If companies with 250 or more employees who have workers facing economic insecurity examine this product, they can possibly help enhance worker productivity, health, financial security and join taking on the market of payday lenders who produce close to $8 billion in fees off the backs of workers who have no other financial option.
Eric K. Foster is principal and president of Progress Strategies+, a project management firm serving corporations, businesses and organizations. Progress Strategies+ also specializes in four social responsibility client project areas----Diversity & Inclusion, Corporate Social Responsibility, Public Policy and Advocacy and Grant Writing/Grant Management. As a W.K. Kellogg Foundation Fellow, Eric is completing Community Finance Development Institution (CDFI) learning and management for his new work in development and administration of a CDFI to provide access to capital to excluded entrepreneurs.