A former Citigroup executive has raised about $9 million in a new round of seed funding for Paywallet, which allows the extension of credit to borrowers whose refunds come from their paychecks.
Paywallet, of Jacksonville, Florida, has been testing the concept for the past several years and plans to formally launch its product this year using a new portion of funding from Pasaca Capital, a private equity firm based in Pasadena, California. Total Paywallet funding to date is $14 million.
The concept sits somewhere between payday loans, though Paywallet maintains its terms are less onerous, and access to earned wages, a newer product that gives workers a portion of their paycheck sooner. of the typical two-week cycle. Both models have drawn the attention of regulators who worry that consumers are entering a cycle of debt.
Paywallet describes its product as one that allows borrowers with low credit scores to access loans they couldn’t get from mainstream sources.
“Using a completely consent-based approach where consumers can direct a portion of their paycheck to any deposit account, our technology makes it easy to lend to people with little or no credit at much better rates than they could get. otherwise,” said Paywallet CEO DK Sharma. he said.
Paywallet operates as a middleman that connects lenders with borrowers using digital income verification tools to make installment loans that are repaid through deductions from each paycheck, according to Sharma, who was previously chief information officer for the business. of international consumption of Citi.
Paywallet’s technology enables private lenders to finance bad credit borrowers taking out loans likely to be in the $300 to $10,000 range with interest rates of around 30% to 36% paid over months in installments. through paychecks, according to Sharma. Paywallet has not disclosed the names of the lenders it has partnered with during the pilot.
interest rates on payday loanson the contrary, they usually reach 400% or more for a two-week advance.
“Because loans facilitated through Paywallet are repaid directly from paychecks, lenders are willing to take risks with people with little or no other credit options,” Sharma said.
Participants begin by giving Paywallet permission to verify their income and employment through a third party. Argyle, a global employment data verification provider, is one of the companies that works with Paywallet, Sharma said. If the loan is approved, the lender disburses the funds directly to the borrower by ACH within 24 hours.
The borrower also authorizes the lender to receive funds equal to the installment amount of the loan with each paycheck through a virtual account managed by Paywallet. Paywallet passes each loan payment to the lender, who sends a receipt to the borrower. Paywallet refused to reveal its banking partner.
Lenders who work with Paywallet bear the risk that the borrower changes jobs or simply decides to end the deal and stop financing loan payments, but Sharma said borrowers during the pilot phase are more interested in creating a line of credit with Paywallet than in default.
“If the borrower is in trouble, they can work out a different payment arrangement with the lender,” Sharma said.
The Paywallet concept uses several modern digital tools, but the basic concept of deducting installment loans directly from paychecks isn’t entirely new, according to Brian Riley, director of credit counseling at Mercator Advisory Group.
Based in Atlanta Purchasing power for several years it has been using a similar strategy to extend credit for specific purchases like electronics and furniture through participating employers.
“One drawback to this type of model is high customer turnover,” Riley said.
Another risk could be tightening regulations on paycheck services and loans targeted at vulnerable borrowers.
Paywallet’s service is leaning in a direction that has already drawn the attention of regulators: the rapid expansion of “access to earned wages” companies like Earnin and PayActiv in which workers agree to have their prepaid wages deducted from their next paychecks. regular payment.
In response to growing concern about unregulated earned wage access programs, also called early wage access or EWA, last year California regulators reached settlements oversee the operations of five EWA companies through regular reviews of their business practices.
About two months ago, the Consumer Financial Protection Bureau launched an investigation in business practices of fintechs offering buy now/pay later loans that tend to target borrowers with little or no credit history.
The push for payroll-leveraging services comes as half of working Americans say they have no money left over after paying expenses after each payday, according to a survey last month by MagnifyMoney. More than one in three workers have money left over after paying bills, and 15% said it varies.
Workers making less than $35,000 a year are more likely to live paycheck to paycheck, but increasingly workers making more than $100,000 also report having little money left over after paying the bills.
Qualtrics conducted the online survey between January 19 and 21, 2022 among 2,100 US adults.