Fintech gives employers a new advantage: reduced personal loan costs

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High-interest debt from employees who live from paycheck to paycheck is a problem that human resources departments can solve in almost every workplace, large or small, through a combination of technology and the already-functioning payroll system. write Nick Frankland, Managing Director of Fintech at Legal & General, and Nigel Wilson, Group Chief Executive of Legal & General.

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The reason why fintech apps have been able to scale quickly and usurp deeply rooted legacy financial services providers is because they simplify everyday tasks, turn them almost into a game, and at the same time bring benefits to society as a whole.

This can easily be seen in the proliferation of consumer-friendly mobile apps that have started to make a real difference in the way people save, invest, and plan their retirement. Saver apps got younger generations the idea to put away for a rainy day – and they make it easy, seamless, and fun.

But which apps solve the problems of those workers whose financial situation is so tight that they cannot save the change from their purchases, let alone invest money for retirement because they live from paycheck to paycheck? According to a recent Salary Finance study that examined the financial health of over 10,000 employees, 67 percent of employees say they are stressed about their financial situation. Fintech is also finding ways to help this population. Better still, this help can be provided by your own employer via the HR function.

As we discussed in the first article in this series, about 12 million Americans take out payday loans annually because they can’t stretch their income enough between payment cycles. The typical interest rates on these loans are often in the triple digits, which starts a debt cycle that is almost impossible to break. And even as regulators are slowly disappearing these loans, there is a new breed of online installment loan that has seen soaring use by the middle class, even as payday loans and the storefronts that operated these lenders are disappearing.

And the problem doesn’t stop there. Credit card debt is also rampant – a 2018 survey found that 40% of all US households have credit card debt, with the average American household having $ 5,700 in credit on their cards. Additionally, the average US credit card interest rate is 21.44 percent. All in all, high interest debt is a galloping topic.

Here we would like to talk about some of the ways that a combination of technology and something so conventional could solve this problem that it might not be mistaken for a new and creative use. This conventional something is what is already functioning Payroll system at almost all workplaces, large and small. Combined with fintech, this data-rich payroll becomes a powerful tool that enables short-term loans to be issued at a much cheaper rate than payday or online installment lenders.

How does this work?

The latest technology brings financial products and services, such as low-interest personal loans, straight to the workplace. Some of these products are provided free of charge to employers and do not create liability for them. From the employee’s point of view, these new fintech products offer a fast, data-driven, digital way to apply for a loan and get an immediate response without having to submit the application directly through the employer. All of the cumbersome security and verification processes, all of the paperwork, go a lot faster. And the employee never has to leave their office or smartphone to apply for and qualify for a loan … that means no more daunting trips to the bank just to say “no”.

By combining credit report data with employer data that is already available in the workplace’s payroll system, these financial products can be conveniently paid back through payroll deductions and can help employees regardless of income or job description.

Here is a snapshot of how it works:

Rather than using an approval system based solely on FICO standards, payroll loans rate those who can afford a repayment based on their hours of work and income along with FICO. Payroll is the magic key for employees who qualify for credit quickly, even potentially those with low or no creditworthiness. An application connected to the payroll system can deduct directly from your paycheck at the end of the pay cycle. Under these controlled conditions, a loan product can be offered significantly cheaper than almost any credit card, bank loan or payday loan. Since the repayments are made directly from the salary, the risk of fraud or payment default is much lower – and the application processing time is much shorter with just two days. Traditional bank branch, marketing, and general overhead costs become savings that are passed on to the customer.

These data aggregation and processing technologies can also offer much lower interest rates than payday loans, starting in the mid single digits. In the situations we’ve seen, wage lending from microcredit can range from hundreds of dollars to larger loans at lower interest rates that can help the customer consolidate other more expensive debts.

Employees and employers alike benefit from these loans. As documented in this Harvard Business School case study, employees using this payroll-based technology can save hundreds to thousands of dollars – an average of $ 1,083 saved in interest payments per employee. They also help employees build their credit, resulting in an average increase of 30 points. The figures also prove advantages for employers: potential savings of 11 to 14 percent of annual wage costs due to increased presentability, productivity and loyalty. Harvard’s The Power of the Salary Link (Todd Baker and Snigdha Kumar, 2018) suggests that wage loans can lead to a 28 percent improvement in employee loyalty. From the quantitative to the human level, from employer to employee, these loans job.

While this may sound too good to be true, there are financial services companies that are already doing this in the UK and are starting to gain ground in the US fintech space can Making life better, one job at a time, one employee at a time, eliminating the expensive channel employees that employees currently have to turn to in order to survive until the next paycheck. One way to do this is to use the purchasing power of many people and the efficiency of a single system to make this amazing opportunity a reality in the workplace.

Next time, we’ll look at how to put in place a financial education program to improve the relationship between employees and their finances.

Nigel WilsonCo-author

Nigel Wilson was named Group Chief Executive of Legal & General in 2012, having joined Group Chief Financial Officer in 2009. He won the “Most Admired Leader” award at Britain’s Most Admired Companies Awards 2017 for Management Today. From 2015 to 2016, Nigel was a member of the Prime Minister’s Business Advisory Group. He was also named City AM Business Personality of the Year in 2014. Qualifications include a PhD from the Massachusetts Institute of Technology, where he was a Kennedy Scholar and recipient of the Alfred P Sloan Research Fellowship. Nigel also worked at the National Bureau of Economic Research (NBER).

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