An app that could deal a fresh blow to payday lenders

A blossoming employee perk has the promise to make biweekly paychecks obsolete — by letting workers control when they get paid.

But for that to happen, banks will have to use new technology to overcome an antiquated model mired in bureaucracy. Doing so can help solve short-term liquidity issues for hundreds of thousands of Americans, one of the thorniest problems in consumer finance.

“There is a gap between when people need their money and when they actually get paid,” said Steve Barha, chief executive of Instant Financial, a tech company that formed in Vancouver in 2015 to rethink the timing of payroll. “It’s due for disruption.”

Earlier this year, Instant Financial partnered with the $480 million-asset Sutton Bank in Attica, Ohio, to expand into the U.S. Together, they are offering Instant Pay, a mobile app that lets employees in the service industries unlock portions of their already earned pay, including tips, onto a companion prepaid card as soon as the employer approves it.

Employee users pay no monthly fees for the app and employers pay $1 per month per opted-in Instant Pay user. Sutton Bank, meanwhile, says it bases its revenue on interchange dollars that are generated from cardholders using the cards at merchants.

Since launching, Instant Pay claims 50 employer customers in the U.S. and Canada, and it is working to woo others. Instant Pay’s planned growth represents a small but growing niche in fintech: Even, Activehours, PayActiv and FlexWage are among the upstarts also hoping to disrupt payroll.

While their approaches vary, the big idea is to help someone who needs to pay immediate expenses like groceries or gas but lacks the funds — if only his employer paid up quicker.

It’s a dilemma that doesn’t always hinge on income level. In a 2017 Center for Financial Services Innovation report, Rob Levy and Sohrab Kohli write:

“Income alone does not say anything about regularity of pay, debt burden, or planning and savings habits, which are all important factors that influence one’s financial health. A key symptom of poor financial health can be limited liquidity. Individuals with constrained cash flows often do not have much room for error in financial decision-making.”

Go, go paychecks
Jeff Lewis, a senior vice president of Sutton Bank’s prepaid services division, sees the name-your-payday perk as inevitable at a time when the nature of work is changing with the rise of the on-demand economy. “It’s where payroll is going,” Lewis said.

Already, large tech companies such as Uber and Lyft have been letting drivers withdraw money they have already earned on demand. BankMobile, a mobile-first brand from Customers Bancorp, recently expressed an interest in white-labeling its app to employers, and potentially fast-tracking users’ payday cycles.

Tony DeSanctis, a senior director of payments at Cornerstone Advisors, says he could see other banks mimicking the Instant Pay idea — depending on their niche and customer base — as the payroll processing costs continue to decline.

As DeSanctis sees it, the longer-term question is whether a payroll processing company makes the perk just part of its package. While only time will tell, he sees Instant Pay as something that illustrates how Sutton Bank is distinguishing itself from the banking herd. “It’s a logical extension of consumers increasingly calling the shots of getting what they want, when they want it,” DeSanctis said.

To be sure, selling employers on a new perk is a challenging business model for any startup wishing to scale up. On the other hand, the need for some kind of financial help for employees, especially those who work erratic hours, is acutely there. According to a 2017 study by the Center for Financial Services Information, about 85% of Americans are anxious about their financial lives and that anxiety is directly afffecting their work.

So perhaps the biggest concern related to something like Instant Pay is the possibility of employees abusing the perk; even 49% of Mint.com’s users spend more than they make and payday loans are known to trap customers in debt cycles.

But Barha at Instant Pay is the first one to bring up such concerns. To prevent what he calls “obsessive use” behavior, Instant’s offer to unlock already earned pay expires within an hour, and only for up to 50% of a day’s base pay — with practical caveats.

Instant Pay, for instance, won’t pitch someone a 45 cents payday if he only worked half an hour. So far, Barha says, $27 is the average payout — while users tend to only use the perk two or three times in between official paydays.

“People aren’t stupid,” he said. “They just need options.”

‘No silver bullet’
Lisa Servon, professor of city planning at the University of Pennsylvania and author of “The Unbanking of America: How the New Middle Class Survives,” says it’s not about when cash comes in for some; it’s for how much.

“People are just jammed,” said Servon. “I think there is no silver bullet.”

That said, she believes a name-your-payday option could help solve a problem for a portion of people who are struggling to balance timing of bills with paydays. “We need to be doing this experimentation,” Servon said. “People need flexibility.”

For Sutton Bank, the partnership not only helps it get more deposits in new geographies, but it also exposes the bank to technology that enables what Lewis says will become the norm: faster payroll payments that put the employee in charge.

The partnership also exposes the bank to mobile onboarding technology — Instant Pay lets people input identity data by snapping photos of their driver’s license, if desired.

As he sees it, the partnership is one way the Midwest community bank is living up to its motto of “old-fashioned innovation.”

“We are not afraid of the technology,” Lewis said. "We embrace it.”