A former Citigroup executive has raised about $9 million in a new round of seed funding for Paywallet, which extends installment loans to cash-strapped borrowers whose repayments come directly from their paychecks .
Jacksonville, Florida-based Paywallet has piloted the concept for the past two years and plans to officially launch its product this year using a new round of funds from Pasaca Capital, a Pasadena, Calif.-based private equity firm. . Paywallet’s total funding to date is $14 million.
The concept falls somewhere between payday loans — although Paywallet claims its terms are less onerous — and Earned Wage Access, a newer product that gives workers a portion of their wages before the typical cycle of two weeks. Both of these models have caught the attention of regulators who are concerned that consumers are entering a cycle of indebtedness.
Paywallet describes its product as one that gives borrowers with low credit ratings access to loans they couldn’t get from traditional sources.
“Using an entirely consent-based approach in which consumers can direct a portion of their paycheck to any deposit account, our technology facilitates lending to people with little or no credit at well-priced rates. better than they could get otherwise,” said Paywallet CEO DK Sharma. noted.
Paywallet operates as an intermediary connecting lenders to borrowers using digital income verification tools to extend installment loans that are repaid through deductions from each paycheck, according to Sharma, who was previously director of the information for Citi’s international consumer business.
Paywallet’s technology enables private lenders to find borrowers with impaired credit who take out loans of $300 to $10,000 with interest rates of 30% to 36% that are repaid over months in installments via checks payroll, according to Sharma. Paywallet did not disclose the names of the lenders it partnered with during the pilot.
Interest rate on payday loansin contrast, often reach 400% or more for a two-week lead.
“Because the loans facilitated by Paywallet are repaid directly from paychecks, lenders are willing to take a risk on people with very few or no other credit options,” Sharma said.
Participants begin by allowing lenders to verify their income and employment through a third party. Argyle, a global employment data verification provider, is one of the companies working with Paywallet, Sharma said. If the loan is approved, the lender disburses the funds directly to the borrower via ACH within 24 hours.
The borrower also authorizes the lender to receive funds equal to the installment payment amount of the loan with each paycheck through a virtual account managed by Paywallet. Paywallet forwards each loan payment to the lender, who sends a receipt to the borrower. Regions Bank is Paywallet’s banking partner.
Lenders working with Paywallet assume the risk of the borrower changing jobs or simply deciding to terminate the agreement and stop funding loan repayments, but Sharma said borrowers in the pilot phase are more interested in building a line of credit with Paywallet as default.
“If the borrower has any problems, they can make a different repayment agreement with the lender,” Sharma said.
The Paywallet concept uses a variety of modern digital tools, but the basic concept of deducting installment loans directly from paychecks isn’t completely new, according to Brian Riley, director of credit counseling at Mercator Advisory Group.
Based in Atlanta purchasing power has used a similar strategy for several years to provide credit for specific purchases like electronics and furniture through participating employers.
“One of the downsides to this type of model is the high customer turnover rate,” Riley said.
Another risk could be tougher regulations around paycheck services and loans targeting vulnerable borrowers.
Paywallet’s service is leaning in a direction that has already caught the attention of regulators: the rapid expansion of “earned wage access” companies like Earnin and PayActiv in which workers agree to have their prepaid wages deducted from their next regular paychecks.
In response to growing concern over unregulated Earned Wage Access programs – also known as Early Wage Access or EWA – last year California regulators have reached agreements overseeing 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 the business practices of fintechs offering buy-now/pay-later loans that tend to target borrowers with little or no credit history.
According to a survey last month by MagnifyMoney, the push for payroll services comes as half of American workers say they have no money left after paying their expenses after each payday. More than one in three workers still have money after paying their bills and 15% said it varies.
Workers earning less than $35,000 a year are most likely to live paycheck to paycheck, but more workers earning more than $100,000 are also reporting little money left after paying their bills.
Qualtrics conducted the survey online between January 19 and January 21, 2022 among 2,100 American adults.