As regulators continue to scrutinize payday lending and associated products, a California startup thinks it has come up with a unique alternative for offering credit to those with lower credit scores — and some financial institutions are already signing up.
Palo Alto-based SimpleFi is selling a service to credit unions, banks and other firms through which they offer low-rate, online loans and financial education to companies' employees.
Though the service has been limited to California and Oregon until now, SimpleFi, which counts Tech CU in San Jose, Calif., among its partners, is poised to expand nationwide Feb. 1 due to a licensing partnership with an undisclosed commercial bank in New Jersey.
"We are trying to make quality financing available to everybody," said Adam Potter, president of SimpleFi.
The expansion comes as regulators have been preparing rules concerning payday lending and cracking down on deposit advances made available by banks. It represents part of the trend of upstarts working to crunch payroll data to disrupt payday loans and overdraft fees.
Those include Even, a startup in Oakland, Calif, which is piloting technology that will, among other things, let consumers get advances on their paychecks when they are struggling with cash flow. ActiveHours, which formed in 2014, is also working to let employees name their paydays and charges a tip of the user's choice — and its user list includes employees at banks like Chase and Bank of America.
That comes on top of work by more established companies like FlexWage, Emerge Financial Wellness, and bank-at-work programs.
The approaches vary. Some, like ActiveHours, are advancing payroll and asking for a tip. SimpleFi, meanwhile, is underwriting loans and charging employers a fee.
Patrick Reily, co-founder and chief executive at Verde Advisors, said numerous factors could decrease the risk of default in the employee model. For one thing, the borrower is employed (and is expected to continue to be) at the time the loan is initiated. Second, some form of automatic debit is taken, and the payment is almost always first in a lineup of any nongovernment deduction from payroll. Third, the employee typically has an affinity for the employer.
The potential to help develop a viable alternative to payday lending is clearly encouraging the creation of a cottage industry.
"We have a need for income smoothing," said Arjan Schutte, founder and managing partner at Core Innovation Capital, a venture capitalist firm. "Our income comes in increments that are at odds with costs."
The entrepreneurs' products all have different flavors but many face a similar uphill battle: they need to sell employers on the idea of offering what some would consider a perk but others see as an unnecessary hassle.
Resistance could include everything from employers fearing such partnerships would plunge them into the lending business to the always thorny issue of making sure employees even know the benefit exists.
The disrupters are also addressing an area of finance that has been taking a beating. The heightened scrutiny has been driving nonbanks and banks out of the payday lending business.
"The regulatory environment has everyone running for the hills," said Schutte.
But SimpleFi, which formed two and a half years ago, thinks it has something that is attractive. 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 average borrower credit score is 583. The low default rates and revenue coming from employer partners allows the startup to charge lower rates.
The company aims to make loans to individuals who are more creditworthy than their credit score implies and have their employers sponsor the perk.
"We are trying to get the less risky part of the underbanked," said SimpleFi's Potter.
Through SimpleFi's program, 95% of individuals who have applied for a loan have been approved. (It also makes available a direct-to-consumer option for individuals in the military.) For its employee product, it said it has generated $1.5 million in loans with a default rate of less than 2%. Most customers pay back loans via direct debit from their payroll bank accounts. It is expecting to lend up to $100 million in 2015.
And SimpleFi said it is finding traction within financial services. It provides services to regional banks with more than 100 branches and to credit unions.
Technology Credit Union in California is one. The institution believed partnering with SimpleFi fit its 2015 initiative: stepping up its financial education for employees, according to Jeannine Jacobsen, senior vice president of human resources and enterprise risk management at Technology Credit Union.
Beyond promoting the loans, the SimpleFi team comes into the institution quarterly to cover topics like how to improve credit scores for those working for the credit union and interested in the education. Jacobson said the startup's program could help employees who are recovering from the recession or potentially millennials who need education on how to build their credit. It could also appeal to employees who would like to keep their financial situations private from their employer.
The broad idea is to find ways to help employees with financial wellness so they can focus on work rather than worry about money woes, she said.
The inspiration for SimpleFi came from the Navy-Marine Corp Relief Society's financial assistance program, which lets people get interest-free loans, among other things.
Emulating the idea, Potter — a former Marine officer — is forging partnerships with employers who are willing to sponsor their employees. SimpleFi may impose a waiting period on employers with higher turnover rates. It already avoids partnering with retailers and restaurants as the industries tend to have high turnover. By and large, Potter said employers have been warming up to the idea in recent months.
Broadly, more than 90% of employers say they are strengthening their efforts to help workers with their financial wellness, according to an Aon Hewitt survey.
In employee benefit packages, Potter said "finance is the next frontier."