Stagnant wages, a rising cost of living, and increasingly irregular expenses force many working employees into financial stress. They’re able to pay their usual bills but lack a buffer to handle even small financial shocks. Part of the problem is that most Indian workers are paid monthly.
And it sometimes gets delayed by 2–3 days due to public holidays or bank holidays, which leads to waiting for compensation even longer. In addition, many workers lack good credit scores to qualify for standard market-rate loans. So to make ends meet or cover unexpected bills, they often rely on payday loans and bank overdrafts — high-cost instruments that may push them further toward financial ruin.
Many fintech start-ups understand this problem and came out with products that can disrupt the damaging payment cycle.
Two business models have evolved to tackle this problem:
- Earned Wage Access (EWA) ~ Giving access to wages that workers have accrued but haven’t received.
- Salary finances ~ Offering employees low-cost loans that are automatically repaid through salary deduction.
Both business models are salary-linked ~ the platform has to manage direct access to wages to ensure repayment of the advance or loan.
How does the platform work?
The EWA platform applies the algorithm to time and attendance data supplied by the employer to determine how much the employee has earned at any given point in time.
A platform offering EWA essentially takes zero risk as it’s only advancing the earned wages.
Monetization?
The EWA platform charges money from the employee when they redeem the amount.
In the case of salary finances, they charge a small interest on the salary finances.
User Evaluation
These platforms, instead of applying third-party credit scores, use their own estimation of repayment probability to measure an employee’s ability to afford the requested loan.
What if the employee leaves the company? In this case, loan payments are drawn from the borrower’s personal bank account designated during the application process.
Salary finance risk is lowered as they use an auto-debit function from employees’ salary which acts as collateral. The default rate drastically reduces due to this.
Stickiness towards the platform
The stickiness of users to the platform completely depends on the difference the platform makes to the worker’s life.
The advantage of the EWA platform is straightforward ~ charging very minimum fees which might be as low as INR 10 – INR 50 for the withdrawal of INR 2,000 – INR 5,000 per day compared to a bank overdraft/cash withdrawal via credit card which charges 3% per month of the transaction value + minimum withdrawal fees. On top of it, these kinds of transactions also impact your CIBIL score.
If we talk about the evaluation of salary finance, the interest charge in this case is considerably lower ~ an average of 11% vs. 30%–60% among conventional lenders assessed. It is also interesting to know that researchers found that salary finance borrowers have a very bad credit score. People with such a poor rating don’t qualify for personal loans; they often have to resort to payday types of loans whose annualised interest rates generally exceed 200%.
It is interesting to know that many people use salary finance to fix their credit scores.
As salary finance reports the payment history on its loans to credit agencies, it enables credit-damaged employees using these credit facilities to eventually fix their credit score so they can utilize mainstream financial instruments in the future.
EWA platforms or salary financing platforms claim that their offerings would raise employee productivity by reducing distractions caused by financial worries, and lower employer costs by stemming the healthcare expenses associated with stress-related illnesses.
What’s the reality?
Companies partnering with Salary Finance shared the retention data ~ employee turnover was 28% lower compared to previous years.
Companies that partnered with the EWA platform claim that employee turnover was 19% lower compared to last year.
High employee turnover is an unending challenge for many large retail companies that employ low-wage workers, so if any platform can reduce their employee turnover, it can save millions of dollars for them.
As per a recent USA research publication on the “cost of retention” ~ Let’s say a retailer with 340,000 employees has a turnover rate of 50%. The researchers estimated that this would cost the company some $567 million annually. A 28% reduction in turnover could thus save it close to $160 million a year, and even a 5% reduction in turnover would be worth about $28 million.
The analysis found that there is a strong correlation between fintech offerings and heightened retention.
One day, all payments will be instant. It has started with gig economy companies, which offer instant payment to their contractors, hence it is changing worker expectations in mainstream employment.
These fintech tools won’t solve income disparity, but they can help people on the margins who are currently being exploited by the existing financial system.
Credit: HBR
