OBSERVATIONS FROM THE FINTECH SNARK TANK
It's a Digital World, My Foot
Have you ever thought about why we receive a paycheck every month (or maybe twice a month)?
The answer is simple: Because, back in the day, it wasn't economical for employers to print and send a check out everyday.
An employer like Walmart, with 2.2 million employees, would spend roughly $800k per day--or $290 million per year--just to mail out paychecks if they were cut every day.
But thanks to technology, we have direct deposit so employers don't have to cut and mail checks to a large percentage of their workforce.
Then why don't we get our money every day, right after we put in a hard day of work?
You Can Get Your Paycheck Early
Speaking of Walmart, the retailer has partnerships with two fintech startups--Even Responsible Finance and PayActiv--that enable its US workers get part of their salary paid before payday.
Employees can get up to eight drawdowns (called Instapays) on their salary ahead of scheduled payouts. The first eight drawdowns are free to the employees, and then in subsequent use, fees are levied across a personal finance app available through Even. The app links Walmart’s payroll system to the individual’s prepaid cards or bank accounts.
In essence, PayActiv enables employees to get a payday loan--but from the employer, and for a fixed fee (not a usurious interest rate), which the employer can waive (as Walmart does).
A Forbes article titled Early Access To Wages, A Prized Benefit, Costs Employers Little Or Nothing mentions similar services from startups like:
- ZayZoon. This Canadian firm, which lists Tim Hortons and Subway as customers, just raised $15 million from a consortium of institutional and private capital providers, including Prairie Merchant Corporation and Bluesky Equities Ltd.
- Branch. According to TechCrunch, Branch started off as a scheduling and shift management tool for large retailers, restaurants and other firms with hourly workers before branching off into wage-tracking and access (pun intended).
Intended Benefits and Unintended Consequences
There's huge potential here for these firms to not just disrupt payday lending, but the paycheck process itself. While that promises big benefits to employees and to employers (higher employee retention and attendance), there are potential downsides for:
- Employers. For small businesses with unpredictable cash flow, the unpredictable nature of employees' pay advances could impact their ability to pay their own suppliers and bills.
- Financial institutions. As accrued salaries are siphoned off from the paycheck itself, that could mean less deposits going into banks and credit unions thru the payroll process--an example of deposit displacement.
Fixing the Root Cause: The Billing Process
The same logic regarding why we get paid monthly is the same for why we have monthly bills: It’s not economical for billers like utilities to send us a bill every day. Not that they wouldn’t want to.
The monthly bill concept is rooted in the mindset that a biller needs to send a “bill”—a paper document, or an electronic document that looks like a paper document—to inform customers of what they owe.
Billers don’t send bills annually because they don’t want to provide a service for a whole year without collecting the payment for those services. Completely understandable. Some do, of course, but the ones that do typically provide a fixed amount of services over the course of the year. And they generally collect their money up front.
The monthly bill concept dates back to a time when most people's monthly income was stable and predictable. That stability and predictability has changed—but the monthly bill concept hasn't.
Pundits love to talk about how personalization is going to distinguish winners from losers in financial services, but why can't the amount, timing, and frequency of our bills be personalized?
Continuous Billing
There’s no reason why billers can’t provide continuous information about what a customer owes, in real time, online or through mobile apps.
Every day I use electricity in my house. The utility knows how much I use at any point in time. Providing me with that information, and what the resulting cost is, isn’t rocket science. Many utilities already provide mobile apps that give customers the ability to monitor (and just as importantly, to model) their usage.
If utilities want their money more frequently than every month, all they need to do is provide discounts or incentives to consumers to pay what they owe more frequently (note that I didn’t say “pay their bill”).
If I use $10 of electricity today, the utility could give me a 10% discount if I pay daily, 5% if I pay weekly, and no discount for paying monthly.
All I have to do is push the button to make the payment. Done.
Or maybe the utility will agree that I can pay them when the amount owed hits $100. That $100 might take a week to get to, four weeks to get to, or three months to get to. Billers don’t like to wait too long to get their money, but it’s a lot more important to get their payment from a customer whose monthly usage runs to $10k than one whose total runs to $10.
The point here is that fixing the paycheck timing problem can be addressed not just by early wage access but by changes in the billing process.
Shouldn't be that difficult. After all, we are living in the Digital Age, right?
