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When Kendra Beasley and her husband separated last spring, her bank account was empty and she needed cash for a deposit on a new rental home. Instead of going to a payday lender as she had done once before, Beasley got a $500 loan through her employer, a Sonic Drive-In (SONC) in Globe, Ariz. When her next paycheck came, the money, plus a $24 fee, was deducted. “If something comes up and I need it, I know it’s there,” she says of the program.
The Sonic franchisee offers the service through Symbius Financial, one of several startups trying to capture a piece of the $40 billion Americans borrow each year from payday lenders. These companies deliver small loans directly through employers with lots of low-wage workers, such as fast-food chains, big-box stores, and hospitals. The hard part is recruiting businesses, which often are reluctant to get involved in employees’ money troubles.
If Symbius and its rivals clear that hurdle, they see a vast market of borrowers. Payday lenders typically charge 15 percent for a two-week advance, a fee equivalent to an annual interest rate approaching 400 percent—and that quickly escalates when borrowers roll over loans and pile up new fees. Symbius and other companies say they can offer a cheaper alternative because they don’t have to operate storefronts; borrowers apply online or over the phone. And the lenders can tap into payroll systems to see how much workers earn and collect repayment automatically. “It’s a lower-risk loan, so we can drop our fees,” says Duke Fonner, chief executive officer of Scottsdale (Ariz.)-based Symbius. Through partnerships with companies that offer payroll services, Symbius reaches dozens of employers, with more than 4 million workers, Fonner says. The company has made more than 1,200 loans since opening its doors in January.
Where Symbius funds the loans itself, competitor FlexWage makes advances out of employers’ payroll accounts, based on hours workers have already put in. Clients get Visa (V) cash cards to pay salaries, which FlexWage says cost half as much as paper checks. Workers pay $5 or less for each cash advance, and employers pay $1 to $2 monthly per employee for the cards. Companies can limit how much workers take in advances, because the goal “is to eliminate the need for an employee to go to a payday lender, not to give them daily pay,” says CEO Frank Dombroski, a former credit-card executive at JPMorgan Chase. FlexWage says it has signed up five employers since it started offering loans in July.
Emerge Workplace Solutions helps employers offer longer-term loans of up to $2,500 at annual interest rates from 9 percent to 18 percent. When loan payments are taken out of paychecks, workers have the option of diverting extra money into a savings account. The company, majority-owned by the nonprofit investment group New Foundry Ventures, aims to help people build long-term savings and avoid the need for future payday loans, says CEO Jonathan Harrison. Emerge offers its loans and financial counseling as a benefit to hundreds of companies through payroll services and unions, targeting borrowers with annual salaries of $20,000 to $75,000 a year. “There’s a lot of folks who may not be considered poor but are broke,” Harrison says. The company has made about 150 loans since starting in July.
For all three startups, the trick will be getting managers at big companies to buy into the idea. “The CFO’s going to say, ‘I’m an employer. I don’t want to be a lender,’ ” says Arjan Schütte, managing partner of Core Innovation Capital, a venture fund that invests in financial services for low-income people. The idea “has tremendous potential,” he says, though he hasn’t yet invested. Making it work is difficult because in most cases, he says, “the employer just doesn’t care enough.”
One that did: 1-800 Contacts, a 750-employee contact lens retailer based in Draper, Utah, that began using FlexWage in July. The company didn’t expect any financial benefits from the switch. HR Director Rod Lacey says he recognizes that “financial struggles are a significant cause of workplace and personal stress” on employees. A few dozen workers have borrowed $50 to $700, Lacey said in an e-mail. The company wanted to let them tap emergency cash, Lacey says, without resorting to “less prudent and high-cost options.”
The bottom line: Startups want to replace payday loans, which have interest rates of about 400 percent a year, with money delivered through employers.