Fintech as a high-tech Band-Aid

Financial and social problems are mounting, and technology is being used to mitigate these issues.

There are problems that existed and are simply spreading to a wider part of the society — like reduced purchasing power even for the employed. And there are other problems that are new — like there is no one that has the complete picture of my finances, my burn rate, my behavioral blind spots.

I honestly feel sometimes that we are in the high-tech band-aid business. Fintechs like Buy now pay later (BNPL) and Earned wage access (EWA) providers, are increasingly used to fix cash flow problems for basic necessities, but the core problems persists.

A recent US Credit Karma survey, reports that 13% of BNPL users are relying on BNPL service to pay at the supermarket, 18% are using it at warehouse stores, and 17% are using it at discount stores. We are moving away from a delightful payment experience that offers additional optionality to consumers for items like travel, entertainment, Peleton, Uggs, and the likes, to dealing with financial challenges one day at a time.

As indicative of challenging financial times, 20% of consumers are using their credit cards to cover their BNPL payments. “That’s troubling when you consider 40% of BNPL users currently have an outstanding balance of $665, on average,” said Colleen McCreary, Credit Karma Chief People Officer and Consumer Financial Advocate.

excerpt from ‘Buy Now, Pay Later’ vs. Inflation: Surprising Number of Users Rely on BNPL for Necessities`

Another recent survey by PYMNTS and LendingClub (New Reality Check: The Paycheck-To-Paycheck Report) shows that a large percentage of people are experiencing reduced purchasing power at dangerous levels. Even those that manage to cover the bills, are `living on the edge`.

64% of U.S. consumers are living paycheck to paycheck as of January 2022

• 48% of consumers earning more than $100,000 annually, live paycheck to paycheck

• 42% of the consumers living paycheck to paycheck, manage to pay their bill

Earned Wage Access is increasingly becoming a recruitment tool for employers to attract and retain employees, especially in manufacturing.

Earned wage access enhances this feeling of security by giving people more control over their finances. A 2021 study revealed that four in five U.S. workers believe they should have access to their earned wages at the end of each workday.

excerpt from: Adding value to the employee experience with earned wage access

The frequency of pay is a choice that every employer can make (there are laws in each state that employers have to comply with). Payroll companies look at these state laws, the employer's working capital issues, and the employee needs or what they would appreciate in terms of pay frequency.

Currently, in the US the predominant pay frequency is biweekly.

Source: Current employment statistics

This of course will change as the US payment system gets an upgrade and moves away from the dinosaur batch processing through the ACH system. VISA and Block are just two examples of how this is changing as they have developed infrastructure to circumvent the legacy systems. VISA avoids ACH batch processing and moves funds via VISA Fast funds (VISA direct) nearly instantly. Block processes up to $10k real-time through its Instant Deposit service.

These functionalities allow employees like Lyft to offer their employees earned wages on demand (for every $50 earned).

Let’s not forget that not long ago the standard was not bi-weekly or monthly salaries but end-of-the-day payments. Once we started increasingly digitizing and industrializing businesses, it became more about the cost and the budgeting needs of the employer not the cash flow management needs of the employee.

Culturally, we are now in an era of empowering and retaining the client and more recently the employee.

Fortune 500 companies are increasingly offering EWA benefits as part of their employee wellness offerings. The companies largely cover the costs whether using in-house tech capabilities or Fintech Saas providers (see examples below).

The market is indicating that this is not enough, so there is a rich variety of EWA offerings and providers out there.

In this week`s Fintech Data Insights, I looked at which incumbent banks and neobanks offer EWA services to their customers. Nearly all neobanks include this functionality which shows that it was an unmet need. EWA adoption is on the rise by other incumbent large banks, like Citizens Bank, PNC bank.

The fact that there are so many different EWA offers out there, is telling of the need for an increased sense of security to manage cash flows and that employers are not doing enough or not doing it the right way (Walmart is a good example of this — Why Bloomberg is Saying that Walmart’s Earned Wage Access Program Fell Flat).

Flavors of EWAs

Large corporates offering EWA employee benefits
Banks and neobanks offering EWA (shows that getting paid just 2 days earlier means a lot these days)
Neobanks starting to offer EWA for a fee (access to up to 50% of the earned monthly wages — Revolut UK, the king of functionalities is bragging about this offering)
EWA Fintechs direct to consumer
EWA Fintech B2B
Payroll and Human resource companies offering on-demand pay

Here are some of the Fintechs in this business

Payflow is a Barcelona-based Fintech Saas for EWA. Just 2yrs old and it is experiencing strong growth. In January, this year Barcelona-based Payflow nabs €8 million for its solution that’s improving employee financial wellbeing.
Zayzoon is a seasoned (launched in 2014)US-based EWA provider that has a Saas offering (addon to payroll) for small to medium size businesses.
Clair is a 3yr US EWA Fintech with a B2B and B2C offering. Their Saas offering targets hourly workers, human resources platforms and the gig economy. They also offer banking services to their customers.
Wagestream is a 4yr old UK EWA Saas provider that is well funded. They work with employers to offer EWA and banking services to their employees. A recent large raise Wagestream raises $175M to expand its financial app for frontline workers

Cash flow management is still not solved neither at the business level nor at the individual level. Streaming money has to become the standard and then we can focus on higher value-add Fintech solutions of cash flow management for the growing creator economy. For now, we are still at the level of band-aids and not well-being treatments.

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