Disrupting Payday Lending (And The Paycheck)

Walmart announced that it is partnering with two fintech startups--Even Responsible Finance and PayActiv--to let U.S. workers get part of their salary paid before payday. Employees at the retailer will be able to get up to eight drawdowns (called Instapays--get it?) on their salary ahead of the 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.

According to PYMNTS.com:

"Walmart said that the overarching theme is to promote financial well-being, ostensibly helping workers avoid cash crunches."

sowhat logoWhat Walmart didn't say is that this is a way for it to make money on the money it has to payout to its employees. Seriously, though, this really is a benefit to Walmart employees, and a sign of how payday lending (and the paycheck itself) can and will be disrupted.

Why do we get paid just once or twice a month? Because before the digital age, it was too expensive to pay us everyday. Now that we're in the digital age, why don't we get paid every day? Because our employers need that money to pay all the other suppliers they owe money to.

Now there's a happy medium.

Fundamentally, PayActiv enables an employer's employees to get a payday loan--from the employer, and for a fixed fee (not a usurious interest rate), which the employer can have waived (as Walmart is doing).

I first learned about the startup about a year ago, and I've kicked myself a number of times for not writing about them before this. Community banks and credit unions should look into what the startup has to offer--first, for their own employees, and second, as something they can introduce to their commercial clients.

When I spoke to them a year ago, they were live with one credit union, underway with a pilot with a credit union service organization, and in discussions with about a dozen banks.

There's huge potential here for PayActiv to disrupt payday lending, and the paycheck process itself. While that promises big benefits to employees and even to employers (higher employee retention and attendance), there is, ironically, a slight downside for financial institutions: As accrued salaries are siphoned off from the paycheck itself, that means less deposits going into FIs thru the payroll process--yet another example of deposit displacement.

Ron Shevlin
Director of Research
Cornerstone Advisors