Almost 74% of people in the UK are worried about unexpected expenses on a daily basis. That’s huge - whether we think of this number as a social problem or a promising target group.
Let’s take another number - 83% of payday loan customers have already taken out a loan online, and this stat is growing day by day.
It’s a travesty that the payday loan industry is as large as it is - CEO of the leading payday company in the UK told us.
In a nutshell, that is how the demand side of the market looks today. What about its supply side?
On the one hand, the number of payday lenders shrank (following the price cap regulation by the Financial Conduct Authority). On the other, the very same regulation opened a market for payday startups.
Ready for even more numbers, trends and challenges? Want to know more about what’s to come? We decided to explore how we can enhance the experience and make payday loans better.
So, here’s “The State of Payday Startups” by Netguru - the free report includes:
All you need to do is to fill out the form and download https://www.netguru.com/payday-startups-report
On top of the report, we’ve reached out to three CEOs of leading payday startups - DailyPay, Wagestream, and Branch. We asked them two things:
And here’s what they told us.
The future of pay is where employees can control the timing of their pay. There are a couple of root causes for this, but the main thing is that employees that have access to it will come to expect it as the norm, not the exception. They will want to choose how they get paid, based on their needs, and they will want control over their earned wages to reduce financial stress and increase financial security.
Jason Lee divides employees into two major groups:
1. ERINs (Employees Requiring Income Now). ERINs are employees that require their earned wages today. Not tomorrow, not next week, not on payday - but now.
Many of the employees in this group are among the 78% of Americans who live paycheck to paycheck; this means that almost 8 out of 10 people in your workforce are ERINs. They are financially unprepared for unexpected medical expenses and they can’t get to work if their car breaks down. A large number of ERINs are hard-working, hourly employees in service-based industries, such as healthcare, hospitality, quick service restaurants, retail, and nursing.
2.MAGGIEs (Millennials And Gen Z who Get Instant Everything). They are puzzled by the fact that they don’t have instant access to money they’ve already earned.
These are the generations in the workforce who grew up as digital natives. MAGGIEs expect full transparency in order to see the big picture — this is what they need to make informed decisions. They way they receive this information is through instant access to everything. As adults, they appreciate apps and technology that give them control and provide instant value. MAGGIEs are puzzled by the fact that they don’t have instant access to money they’ve already earned. Not that they would use it, but the mere fact that they don’t have access is contrary to every other aspect of their lives.
You’ll see the payday loan businesses suffer because of the rise of the daily pay benefit offered through employers. This model is far safer and more cost effective than the direct to consumer products that will debit an employees bank account and market directly to the consumer. I think we’ll find more market entrants who do both, but again, employees will drive this demand for a daily pay benefit and will force companies to offer it to stay competitive. This in our mind is the future of pay. Companies will be seeking solutions that are compliant everywhere, pose the least amount of risk, use the least internal resources, and finally are simple to use.
Payday advance applications have become an increasingly popular alternative to payday loans, and we anticipate that they’ll become more popular. Especially as the Consumer Financial Protection Bureau has rolled back regulations on payday loans that protect vulnerable borrowers, users are turning to pay advance apps to prevent overdrafting, late fees, and exorbitant interest from traditional payday loans.
More employers are beginning to offer payday advance options as a way to attract and retain employees, so we anticipate that payday startups will continue to grow and create greater competition for payday loans.
Unlike traditional payday loan options, most payday startups want to do more than advance earnings -- they’re interested in helping their customers build greater financial wellness and stability.
While payday startups’ initial offerings focus on advance access to earned wages, you’ll likely see the expansion of product offerings to include those that help their customers save more, ranging from budgeting tools to discounts. At Branch, we not only enable hourly workers to get instant access to earned wages, but also offer opportunities for users to pick up more shifts and boost savings. We also provide ways for users to get a better sense of their overall financial picture by providing tools to anticipate bills, earnings, and budget.
Jason Lee, CEO and Co-founder at DailyPay
The biggest issue with payday loans is that they require a person’s bank account information in order to debit for repayment of a loan. This can cause a person to overdraft their bank account and cause further financial stress for that individual. The much safer thing to do is to offer access to earned wages through employers so that employees can safely repay advances on payday without being put in a bind.
Branch CEO Atif Siddiqi
Payday loans have a problematic history associated with predatory targeting of low-income consumers and lack of transparency, causing consumers to sign up for more than they can handle.
They’re focused on lending to desperate users who tend to spiral into greater debt because they’re paying back both the loan and the high interest rate they’ve been charged, which can sometimes lead users to paying more than double the original loan amount.
Consumers who have to rely on a payday loan are often just trying to meet daily needs and expenses but have turned to payday loans as a last resort. We found that among users who needed instant access to money, nearly 67% just used it for groceries and 58% used it to address emergencies.
There are typically more safeguards in place for consumers using payday advance applications, but not all applications are created equal. Consumers should look for applications that offer transparency in how much it costs to take out an advance and provide other services that help improve their financial outcomes versus just relying on early pay access. Companies whose sole focus is on advanced pay access tend to rely on users withdrawing regularly.
Branch helps users by offering both a flat fee instant option and a free advance wage access alternative, which also won’t cause users to overdraft when using the service. Since we’re focused on the needs of the user, we give them the option to access earned wages, but have additional ways to increase financial stability so that they’re not dependent on it.
The UK is currently facing a huge amount of economic uncertainty because of Brexit turmoil, which unfortunately means that the current trend of low wages and rock bottom inflation will continue. This in turn will unfortunately push UK workers towards high cost credit options in order to make it through the month. As a result, I expect that the payday loan market will keep growing unless the government does something drastic to tackle these issues.
It’s a travesty that the payday loan industry is as large as it is. High cost credit is used by over 3 million UK consumers. The average payday loan amount is £250, and when fees are applied the amount repayable shoots up to £413 - that’s 1.65 times the average amount borrowed. This creates a vicious cycle where people take out a loan to last the month but are then hit with astronomical fees which push them deep into a black hole of debt.
Thankfully, there are now alternatives that can prevent workers from having to fall back on these predatory options. Income streaming technology like Wagestream enables businesses to pay their employees flexibly.
This means they can access a portion of their earned income rather than having to fall back on a loan. This is actively helping people out of debt. The next evolution of our tech - Savestream - will also allow workers to stream their earned income directly into an in-app savings account, forming lifelong smart financial habits.
It’s important that consumers are always wary of any company that is loaning money - there are now a new generation of payday lenders masquerading as financial wellness solutions but which are in fact just increasing the debt burden on UK workers.
We should be clear that any business which offers debt as a financial wellness solution is part of the problem. Debt prevention if the solution.