In my former life as a financial analyst I examined financial stress intellectually.
Before my current tenure with Silicon Valley FinTech company PayActiv, I spent 20 years in a different world. I was a credit analyst on Wall Street, analyzing the financial stress of sub-investment grade companies including investigating investment strategies in companies I believed could provide an attractive return. Trafficking in this business made me feel powerful and successful. It’s what paid my bills.
Back in those days, I was learning the meaning of financial stress. I made bets on companies that had sufficient cash flow to manage the debt on their balance sheet so that they could pay off their debtors on time. Hence they could avoid any dilution in the value of their business.
Very often these companies had multiple alternatives to access the cheapest source of financing. I often made a long term investment in these companies because I believed in them. An added bonus was that some of these companies paid me a dividend while I waited to get my principal back at maturity. I was paid to take the risk. It was a sweet deal!
Then the crash, and financial stress hit home among my friends and family. My Rude Awakening: It hurts!
When the financial markets imploded in 2008, I learned quickly that there was more to financial stress than I had once known on Wall Street.
People I had worked with in the high echelons of Wall Street were now living paycheck to paycheck. Some couldn’t deal with the newfound hardship. Many had now lost their jobs and the security of a consistent income. After spending two decades looking at financially stressed companies, I was beginning to understand that the notion of financial stress had become more prevalent than I could have imagined. Financial stress traveled down the entirety of a business, from the owners down to the employees.
One day, the real fear hit me. It was just another day in the summer of 2008 when I walked home and I saw an envelope stuck to my door. “Was my rent late? Was it some kind of legal notice for a late payment or no payment?” My building management company would charge me $60 as late fee and $10 for each day until I paid the entire rent for the month. Under the circumstances it was a scary thought that might become a reality. I felt small as I bundled up on my couch. Was I targeted by the management company for some reason?
It hurt my dignity and I immediately became fearful of not being able to provide for myself. As I slowly peeled myself off the couch I realized that the most expensive piece of my paycheck was rent. Am I the only one who felt this pain? I peeked outside to see if there were more envelopes visible on my floor. There was an envelope stuck on everybody’s door. There was a sense of relief of some sort. I wasn’t alone!
It turned out the envelope was good news, not bad news, but the fear and insecurity I felt was an experience that I have not forgotten. This experience was followed in the next year by observations of similar things happening around me. I saw my friends exhaust their credit cards, access their 401K’s, move in with their parents, get roommates, sell their cars, and I could go on. Essentially people drained their savings while waiting for that paycheck every two weeks. I quickly realized that payday can feel like it is a year away when creditors are relentlessly calling. I felt I had lost my security overnight.
I wondered, what must be happening in the rest of the country where people always lived paycheck to paycheck? What role could a wall street credit analyst play in this meltdown? I realized that I could bring my knowledge of businesses, and industries to a different component of the economy, and maybe the most important one: People.
I became curious about what is the state of the remaining U.S. workforce?
Over 70% of the US workforce earns less than $50,000 dollars per year. With a 140M person workforce this translates into 100M individuals (source BLS), which is also the number that is cited as living paycheck to paycheck without $500 in emergency savings. It is therefore not surprising that this group pays a disproportionate amount of their earnings in fees caused by cash-flow misalignment, but what is most stunning is that the funds usually needed to avoid most of these fees are less than $500. It is indeed expensive to be financially stressed.
As per the CFSI (Center of Financial Services Innovation) the debt and fee epidemic looks something like this…
Is this what makes it expensive to be poor? You are a minute late in paying your bill or a penny short and it becomes a “Get Rich opportunity” for the financial sector. Today 60 million families living paycheck to paycheck are paying billions to meet the obligations that arise between-paychecks. A $100 billion financial services sector exists to exploit their between-paychecks problem. I knew this was a practice and I wanted to put a stop to it once I saw the detrimental effect it was having on people and communities.
Employers are often like I used to be – just unaware of the financial stresses in their employee base.
Very often, the people managing these companies looked down on their workers. They had no experience living in the shoes of their employees. These people had started at the top and stayed there for their entire careers. Management lived too far from ground to understand the life of an employee living paycheck to paycheck. The fact is that low to moderate income employees have high rates of turnover and lower engagement due to delayed access to their income. Employers bear the cost of this financial stress in terms of high turnover, low engagement and low productivity, namely expenses without an invoice.
I still hear misguided and misinformed opinions on worker welfare. Employers say these workers don’t know how to save, they live beyond their means, or, simply, that it is not their responsibility to provide their employees with anything more than a job. “They just don’t know how to manage their finances,” is as derogatory and misrepresentative a statement as I have ever heard.
The cost of waiting to be paid means a debt and fee trap for the employees leading to high levels of daily financial stress.
And then I found a startup founded to fix this problem: PayActiv
When I was looking for a new opportunity, I was searching for a company that understood these solutions and were compassionate to the needs of employees. PayActiv has found the source of the problem of 60 million families living paycheck to paycheck; a misalignment of cash inflow and cash outflow. A concept that made sense to me having looked at financially stressed companies with the same dilemma.
I realized that companies, by comparison, have more options available to them when in need of liquidity. They have access to traditional financial services. Consumers do not have that luxury. Consumers are forced to consider predatory financial services such as payday loans, title loans etc.
Our solution at PayActiv is to give employees access to what is rightfully theirs: they are now able to take care of those expenses that arrive between paychecks. There are over $100 billion in unpaid wages every week in America. By opening the gates and funding the income between paychecks, PayActiv puts money back in the pockets of working people to meet their basic needs. It circulates income expeditiously through communities, instead of being recorded as liability on a balance sheet, or worse, being siphoned off in interest, or penalties, what we call FinTaxes.
In my past career on Wall Street, I collaborated with several companies to help design a profitable capital structure, one that will help them survive through the worst economic times. The solution is simple for individuals, give them access to what is rightfully theirs: hours they’ve already worked. This helps improve their financial well-being of individuals so to eventually have access to traditional financial services.
PayActiv’s FinTech platform means we can measure results.
We can see employee behavior, survey their improvements, and measure the
impact on employers. We know we can help employers improve their bottom line by doing well by their employees – we measure it every day. I go to work every day to end the injustice of billions of dollars collected in overdraft and late fees, armed with the certain knowledge that it is actually to the benefit of the employer. Our partnerships with employers, using studies of Payroll Data from their own operations, shows an average 28% reduction in turnover among the staff who use PayActiv services. Additionally, corporations save $1m for every 200 employees that are retained. Each employee retained saves an employer up to 10 weeks of salary in replacement costs. With over 25% or more improvement in retention, just one factor, the replacement cost of an employee translates to positive employer return.
We relentlessly innovate everyday to bring a change in the lives of employees that are unbanked and under banked.
Today, I hear the echo of multiple PayActiv users “I earned it, I need it, and now thanks to PayActiv I can access it.”
A feeling of joy, freedom and empowerment.
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