As regulators continue to scrutinize payday loans and related products, a California startup believes it has found a unique alternative to offer credit to those with lower credit scores ?? and some financial institutions are already signing up.
SimpleFi, based in Palo Alto, sells a service to banks and other businesses through which they provide low-rate online loans and financial education to company employees.
Although service has been limited to California and Oregon so far, SimpleFi is set to expand nationwide on February 1 due to a licensing partnership with a non-commercial bank. disclosed from New Jersey.
“We try to make quality financing available to everyone,” said Adam Potter, president of SimpleFi.
The expansion comes as regulators prepare rules for payday lending and crack down on deposit advances made available by banks. It’s part of the upstarts trend of working on payroll data to disrupt payday loans and overdraft fees.
These include Even, a startup from Oakland, Calif., That is piloting technology that will allow consumers to get advances on their paychecks when they are having cash flow problems, among other things. ActiveHours, which was formed in 2014, also strives to allow employees to name their paydays and charge a tip of the user’s choice. and its user list includes employees of banks like Chase and Bank of America.
This is in addition to the work of more established companies like FlexWage, Emerge Financial Wellness, and workplace banking programs.
The approaches vary. Some, like ActiveHours, advance payroll and ask for a tip. SimpleFi, on the other hand, takes out loans and charges fees to employers.
Patrick Reily, co-founder and CEO of Verde Advisors, said there are many factors that could reduce the risk of default in the employee model. On the one hand, the borrower is employed (and should continue to be) at the time the loan is initiated. Second, some form of direct debit is taken and the payment is almost always the first in a series of non-government payroll deductions. Third, the employee generally has an affinity for the employer.
The potential to help develop a viable alternative to payday lending clearly encourages the creation of a cottage industry.
“We need revenue smoothing,” said Arjan Schutte, founder and managing partner of Core Innovation Capital, a venture capital firm. “Our revenues come in increments that are at odds with the costs.”
Entrepreneurs’ products all have different flavors, but many face an uphill battle: they must convince employers to come up with what some would see as a benefit but others see as unnecessary hassle.
Resistance could include everything from employers fearing that such partnerships could plunge them into the lending industry to the ever-thorny issue of making sure employees even know the benefit exists.
The disruptors are also attacking an area of finance that has taken a hit. The scrutiny has pushed non-banks and banks out of the payday lending industry.
“The regulatory environment makes everyone run for the hills,” Schutte said.
But SimpleFi, which formed two and a half years ago, thinks it has something appealing. It offers loans at single-digit rates, one-on-one coaching to improve financial education, and a low default rate for its product, for which the borrower’s average credit score is 583. Low default rates and income from partner employers allows the startup to charge lower rates.
The company aims to provide loans to people who are more creditworthy than their credit rating suggests and to ask their employers to sponsor the benefit.
“We’re trying to get the least risky part of the underbanked,” Potter said of SimpleFi.
Thanks to SimpleFi’s program, 95% of people who applied for a loan were approved. (It also offers a direct-to-consumer sale option for the military.) For its employee product, it said it generated $ 1.5 million in loans with a default rate of less than 2%. Most clients pay off their loans by direct debit from their payroll accounts. She plans to lend up to $ 100 million in 2015.
And SimpleFi said it is finding ground in financial services. It provides services to regional banks with more than 100 branches and credit unions.
The Technology Credit Union in California is one of them. According to Jeannine Jacobsen, senior vice president of human resources and enterprise risk management at Technology Credit Union, the institution felt that the partnership with SimpleFi was in line with its 2015 initiative: to intensify the financial education of its employees. .
Beyond loan promotion, the SimpleFi team visits the facility quarterly to cover topics such as improving credit scores for people working for the credit union who are interested in investing. education. Jacobsen said the startup’s program could help employees recovering from the recession or potentially millennials who need training on how to build their credit. It might also appeal to employees who wish to keep their financial situation private from their employer.
The general idea is to find ways to help employees improve their financial well-being so that they can focus on their jobs rather than worrying about money issues, she said.
The inspiration for SimpleFi came from the Navy-Marine Corp Relief Society’s financial aid program, which allows people to get interest-free loans, among other things.
Imitating the idea, Potter ?? a former naval officer ?? forms partnerships with employers willing to sponsor their employees. SimpleFi may impose a waiting period on employers with higher turnover rates. He already avoids partnering with retailers and restaurants, as industries tend to have high turnover. Overall, Potter said employers have warmed to the idea in recent months.
Overall, more than 90% of employers say they are stepping up efforts to help workers improve their financial well-being, according to an Aon Hewitt survey.
In employee benefit programs, Potter said, “finance is the next frontier.”