Smart Answers

Persuading Small Employers to Advance Wages


A recent survey of business owners that employ up-to-100 workers revealed that nearly half (48 percent) do not use direct deposit for payroll. A new company, FlexWage Solutions, offers payroll cards as an alternative payment method, particularly for employees who lack bank accounts. The service also lets employers advance wages, giving workers a low-cost alternative to predatory loans. FlexWage, a 14-employee company based in Mountainside, N.J., was founded in 2009 by Frank Dombroski, a former JPMorgan Chase (JPM) vice-president. It began acquiring customers this year. Dombroski, who projects $250,000 in revenue for 2011, spoke recently to Smart Answers columnist Karen E. Klein about how small business owners can advance wages to their employees—and why they might want to. Edited excerpts of their conversation follow.

Karen E. Klein: Why would employers want to hand out employees’ wages early?

Frank Dombroski: It’s a boost for employers because they are being proactive in improving employee satisfaction, productivity, and retention. Employees who are stressed out over financial matters are not interacting at their best with customers and co-workers.

Our main product is the payroll card, which functions like a debit card for employees that don’t have bank accounts or access to direct deposit. A key advantage of that product is the cost savings realized by replacing paper checks. And for employees, they don’t have to pay checking fees or bounced check fees; the payroll card authorizations are real-time, so they can’t overdraw their accounts.

What is the demographic of the employees you’re targeting?

They are the about-40-million U.S. households that have average income from $25,000 to $50,000—many of them working minimum-wage, hourly jobs. They are generally families with children. They either have minimum-balance bank accounts that they are paying fees for and bouncing checks on, or they don’t have bank accounts at all.

How do small business owners fit into this picture?

Entrepreneurs face [prepayment requests] far more than executives [at large corporations] do, and it’s stressful for the employee to admit they’re in financial trouble.

For the employer, it’s stressful to have to consider a lot of these requests. If they grant them, it’s a time-consuming process to do it manually. Our product institutionalizes the process—and because they can set up reasonable parameters for how often wages are advanced, it takes the burden off the employer if they need to say no.

Are many small businesses really in a position to lend money to their employees?

There is no loan involved and no risk to the employer. The employer is simply letting workers access a portion of their earned but as-yet-unpaid wages, prior to the end of the pay cycle. For example, let’s say Joe has worked three days and earned $450 in total. After taxes and other deductions, that comes to a net of $350.

FlexWage enables Joe to access a predetermined percentage of that net amount—generally 80 percent to 85 percent—that allows him to pay his bills and avoid going to a payday lender at a high cost.

But if wages are trickling out over the pay period, doesn’t that hurt cash flow, especially for low-margin small businesses?

We get that question fairly regularly. Our policies allow the employer to throttle how many transactions can occur during a pay cycle, with the net impact being that 5 percent to 10 percent of payroll might be accessed during any one pay cycle. That typically becomes very insignificant from a cash flow perspective, because most company’s payroll accounts sit in overnight funds that are effectively zero-interest accounts. So the real financial impact of doing this is minimal.

How does the system work?

Our products capture employees’ time and attendance records and calculate the amount of money being earned day by day, net of costs like taxes, withholding, benefits, and other deductions. If they are making $12.50 an hour, they net about $10 an hour.

When they have an emergency cash flow crisis—like say, they need to fix a car that breaks down—they can electronically access a portion of the wages they’ve already earned but wouldn’t normally get until the end of the pay cycle.

What alternatives do those employees typically have?

Right now, they have very few alternatives to get access to short-term capital. They can ask their boss for a salary advance, which is scary and embarrassing, or they can go to pawn shops and payday lenders. On average, if they need $300 for a week, they’ll pay $60 in interest to a payday lender, due to the high-risk nature of that loan.

How does your company charge for that short-term capital?

We function not as a lender but as a transaction processor, so we make a flat fee off these transactions. We eliminate the risk because we’re not making a loan. We’ve calculated how much time they have put in at work and how much they’d get paid if they [were to leave] their job that day.

So instead of paying $60 for a $300 short-term loan, employees pay $3 to $5 each time they request advance wages. Some of the employers cover that cost up to a certain number of times a year—say once a month—and others pass it on to their employees.

Won’t the system get tapped all the time, particularly by employees who run into frequent financial problems and have no emergency savings?

We thought about that, so we structured it so employers can put controls on how many times employees can do this. That way, they don’t get swamped with requests every month.

What do banks and consumer groups think about your product?

I think eventually we’ll beat the banks up pretty good, but they won’t be too concerned with us for a few years yet. We’ve had several discussions with consumer financial protection groups and they’re informally very supportive of our efforts. Core Innovation Capital named us among the four finalists in their “Core Underbanked Innovation Challenge” last month and we presented at a conference in New Orleans.

The only ones unhappy with us are the payday lenders and pawn shops who are preying on people who can least afford it.

Karen_klein
Klein is a Los Angeles-based writer who covers entrepreneurship and small-business issues.

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