Have you ever thought about why is it that you get paid every couple of weeks or worse yet maybe only once a month? I mean the reality is as soon as you finish working an hour you should have access to the money you just earned.
And yet due to institutional practices and a lack of technological capability millions of Americans are left trying to live in between paychecks with no money in their wallets. This leads to a reality of financial struggle for millions of workers despite having earned wages just sitting there in thin air inaccessible to them.
Thus an industry has arisen to service this time between paychecks. Payday loans and overdraft fees are now an industry that surpasses over $100 billion a year in fees targeted at increasing the struggle experienced especially by low income individuals.
A new solution is needed badly. Safwan Shah and his team at PayActiv just may have a simplistic but powerful answer to solving this problem. Check out our discussion below to learn more…
CL: You have a very unique background coming from working at NASA, as a rocket scientist to founding Infonox. Can you tell us a bit about your background and what led you to found PayActiv?
SS: By training I am an aerospace engineer that worked as a research scientist. But all you are doing as an engineer is identifying and solving problems around you. The reason I got into financial services was accidental.
About 18 years ago, I had an opportunity to work in the technology space. The internet had already happened though an opportunity presented itself to bring interesting financial services to the cloud and I’ve been in this world ever since.
CL: For those who don’t know can you explain exactly what PayActiv does and how it can help working Americans?
SS: PayActiv as the name suggest is about your money being active. It’s the underlying theme of the company which is this concept that people work every day but only get paid biweekly or monthly. The question we asked ourselves is why are we waiting to get paid the whole time between paychecks.
The market that emerged across the US and the world for those times between paychecks while waiting to get paid have flourished on very high cost to consumers. Think about the fact that industries like payday loans and overdraft fees are dependent upon the cost of waiting for ones own paycheck, because millions of people are living paycheck to paycheck. This market flourishes and makes money on those who need $200 to $300 to cover living expenses.
This is a tough market to be a consumer because most of the offerings are debt traps and fee traps that keep making you dig yourself into a deeper hole. Payactiv is for people earning money every day that can now have access to a portion of that money between paychecks. The aim is to reduce stress for tens of millions of people going through the stress of paying bills between paychecks. We act as an income smoothing function and give them access to a portion of that income when they need it.
CL: Though we are still in the early days of PayActiv, do you have a sense of the type of impact your service is having on working class Americans in terms of economic benefit?
SS: Yes, prior to going into this model we answered three to four questions that would be tested out as we deployed the product. The first couple of questions we asked ourselves was when people have access to their earned money does it reduce their dependence on payday loans, and does it help individuals to minimize overdraft and late fees? The goal of our service is to provide users with their earned money between paychecks to act as a guardrail to their financial lives.
When we went live and had the opportunity to work with employees earning less than $25 an hour and observe their actions to these questions, it turned out to be very positive. With access to just $100 to $300 between paychecks we were able to provide the guardrails we envisioned these people needing to avoid the stress and need to go obtain a payday loan.
We also checked with their employers to verify that they were seeing changes in the workplace and the results were immediate. Some early observation were that employers were receiving less calls from payday lenders to verify employment, and the employees were no longer asking for paycheck advances. Hearing this combined with the fact that employers are seeing an uptick in people applying for these jobs and employees showing far more interested in this benefit than any other benefit the company offers is proving the model works.
The reality is our users are only accessing a small sum of money from their paycheck. This is not a large amount of money we are talking about. The small things like I can’t bring milk home or put some gas in the car are what end up causing the big amounts of debt with payday lenders and overdraft fees. These are the kinds of things we measured and we also performed longitudinal studies that have produced spectacular results.
There is a whole swath of employer user stories on our website about how people modified and adapted their life in a better way. The impact is enormous at multiple levels for both the employee and employer.
CL: How are you selling prospective companies on the idea of implementing PayActiv?
SS: When we present PayActiv to companies we emphasize that we are a partner. In fact there is no monetary or financial outlay for the employer. We look to help employers understand that we can help to reduce financial stress for employees, which has been proven to hinder work productivity and lead to increased turnover. Employers are intrigued by our employee benefit that dramatically impacts the ability to attract, retain, and engage employees.
For instance, replacing an individual who leaves a firm can cost upwards of $3,000 to $5,000 to the company. By improving retention we help reduce these significant HR costs and enable employers to build a quality workforce.
CL: What type of company profile do you define as your core consumer, as in where do you think this service can have the largest impact?
SS: The greatest impact we can have is in servicing employers that have a large base of low wage employees (typically making between $10-$20 / hour), that often are living paycheck to paycheck. However, we have also seen that the level of convenience associated with being able to access ones earned funds between paychecks is also attractive to individuals earning between $25-$40 / hour.
National data suggests that of the 146 million people employed in the United States workforce, about 100 million of these workers are living paycheck to paycheck, meaning they do not even have a $400 to $500 emergency fund to withstand a small financial shock. Additionally, 25% to 40% of the population is living on less than $3,600 a month, which can be challenging for a family. Thus, our service is truly relevant and needed for a majority of companies in the United States.
CL: How is your team utilizing big data to deliver a better consumer product and one that provides the most benefit for both sides of the equation?
SS: At the macro level we are the first team to actually define and size the fee industry tied to payday loans and overdraft fees. In total this is a $120 billion industry that is built on trapping people in a cycle of debt. Do you know that there are at least 30 to 50 million Americans that are currently underserved and underbanked by the present financial system?
These are individuals that have been squeezed out of the banking system and have been left without a credit history or an ability to build their credit easily. We call these individuals a “Zero File” because we have no data on them. At PayActiv we are dedicated to collecting data on these individuals so that we can understand their characteristics as potential banking customers.
We collect this data by offering a multitude of services to our customers including the ability to access a portion of the money they have already earned, which changes the velocity of money for them. We also offer the ability to pay bills right within the PayActiv app simplifying the payment experience. And we also provide childcare and medical services right within our suite of services since this has been identified as a pain point by our typical customer.
By offering these services we are able to learn about who the person is, how much they make, the skills they have, how many hours they work, where they work, where they live, who they pay bills to and so on.
This will enable us to actually create a bureau level profile of every individual utilizing the PayActiv program. Day-by-day we are building a database of fine granular data on the lives and conditions of millions of Americans that have been left out of the system and we are using it extensively to learn from it and drive real change.
CL: Is that to say that from the PayActiv platform an individual can now build a credit profile?
SS: That is exactly right. To put it simply, if you have no history of your transactions you are a “Zero File.” Now you join the PayActiv program and you complete about twenty transactions a year with PayActiv in which everything settles perfectly. You’ve not only saved a few hundred dollars but you have proven that you can consistently, reliably, and honestly pay back whatever you have taken from your next paycheck.
This extensive payment history allows us and other service providers to work with individuals to identify the right people and the right credit sized products for them. We are collecting data on the invisibles that enables us to take people out of the quicksand first, and then help ramp them up to get on the credit ladder.
CL: If we think about more macro issues at play here, the millennial generation seems turned off by credit cards. Do you think PayActiv benefits from this trend and would you like to see consumers become more comfortable with credit once again?
SS: That’s a loaded question for a couple of reasons. I think credit is essential and very good but credit is also a subjective thing and every person’s unique condition in life is something that mathematical formulas cannot capture perfectly.
Most credit decisions are made with algorithms that are built on the notion that a large enough portion of individuals obtaining credit are worthy as the math would suggest and for those with unique conditions not calculated by the formula the loss rate will be low enough to be solved. In the last decade the number of new credit card accounts has for the first time started declining because the younger generation has realized that a credit card has all these pluses, but if you get past the sheer power of its advertising there is a fee and debt trap built into it.
To give an analogy, if you take a child near a swimming pool without a guardrail they can end up falling in and getting very hurt so you need to put a guardrail in place first. A credit card is a product without the guardrail, which means you can get into a fee and debt trap very fast. There are several hundreds of millions of credit cards out there with most folks having seven to nine cards. On average these individuals are paying $90 to $100 per month just on interest.
I applaud the millennial generation for being more cautious. They are acting very smart. I think credit at a certain level is very useful, but in order to use that credit well it requires cash flow management. That is where PayActiv comes into play. We are focused on helping working Americans better understand cash flow management.
CL: PayActiv offers more than just the ability to obtain needed funds prior to obtaining a paycheck of up to $500, such as savings tools. Is PayActiv partnering with other financial services to offer this?
SS: We are building partnerships that are at a couple of levels. One level is we work with banks and Credit Unions who then offer our service to their customers. Some of our partners will also resell or co-brand our offering to employers in their network because we can’t reach all of the employers who need this benefit.
We also partner with companies that we think have good services. We are not trying to give points to people that spend more. We want people to have more money in their hands at the right time. In that sense many of the services we bring to them is meant to do three things.
We call them Security, Dignity and Savings.
Security, as in we don’t want you to be afraid you will run out of money. The second pillar is Dignity. No person should have to experience shame in accessing the money they already earned. If you have already earned the $100 you shouldn’t be embarrassed to ask for that money. That money is not paid to you on the day you earned it because we have a technology problem. That’s it. So many people are embarrassed to ask for money they own. Nobody’s dignity should be hurt in asking for something they already own.
Number three, we can’t propel people forward until we help them build a $400 to $500 pool of money. Ninety million people in the United States today don’t even have $500 in savings.
We have invented a savings tool to help people avoid $35 overdraft charges, but we have also helped employers to reposition saving money as an allocation of time in the day. Instead of asking people to save a percent of their paycheck, we are asking them to dedicate five to ten minutes a day to savings.
The idea that credit cards tell you if you spend we will give you money back they are positioning it as spend then save. Even the banks don’t allocate the source because they don’t want you to allocate at the source. They want you to spend more to get points back. You are being manipulated.
Where are the economists today? There is a famous book called Phishing for Phools written by a Nobel Laureate. In it, he discussed the manipulation and deception of economics. Credit cards are highlighted as playing a strong role in this manipulation.
At PayActiv, we think that’s all wrong. Instead you should allocate at the source of savings, which is the minutes and hours you work. If you allocate 15 minutes a day to savings, then you can save five dollars a day. We want to change how people think about saving.
CL: How do you get paid back on the money provided to employees and do you have a 100% success rate in collecting the distributed funds?
SS: Since we are simply solving an engineering problem in how people get paid and we are not an actual loan that needs to collect we get the balance directly from the employer when the employees get paid on their schedule. Essentially, it’s like if you have a lunch plan at work. If you spend the money in the cafeteria, it will be deducted at the end of the day from your payroll.
That’s the benefit of not being a loan provider. To be a loan provider you have to do three things. One, you have to underwrite the person, we don’t do that. That means with PayActiv 100% of employees are eligible from day one for this benefit because they are employed and have already earned the funds.
Second, in order to be a loan the fee needs to be related to the principal. Our fee is a flat fee for the service. It is not tied to the principal.
The third thing needed to be a loan is you need to collect money or chase the person down if they don’t pay you back. We don’t chase anyone down because it comes directly from the employer and the employees payroll. We are in a bit of a category of our own, which I don’t even think has a name for itself just yet.
CL: Right now PayActiv is positioned as an institutional tool. Is that for scaling purposes?
SS: The only way we could ever go direct to the consumer would be to give out a loan and then that means you are collecting, which means you have to build in a collection risk factor into the pricing. For instance, when you buy a product at any Target, Nordstrom, or Walmart the fees the store pays to process the credit card use is already built into the price of the product. The guy paying in cash is essentially paying two percent more.
If you think of it in that way, everyone is paying a little extra because the credit card buyer is causing problems in the world. In that sense if we go to direct to the consumer then the risk of some people not paying back the provided funds needs to be built into the pricing of our product. Thus far we have not chosen to go that path. We have to solve this bigger problem that people are becoming lenders like there is no tomorrow but no one is solving the real problem.
Everybody wants to be a lender for the obvious reason that who is more naïve the business or the individual? Obviously, the individual. It is easy to con the consumers, not the businesses. That’s why we go to the employers because you can’t con a business. If they offer the service it has to be a good service. I can get someone at a retail store needing $100 to pay $10 in fees on a small loan. In this case they are thinking on the margin and need to decide quickly.
The real problem is that our money is stuck at the source forcing us to use credit. We are bringing efficiency into the marketplace. It’s like we have the water supply with water in the pipe but we can’t use that water and the supply is stuck because someone decided that’s how it would be. That’s not okay and PayActiv is solving that issue of the water being held up.
As we evolve, one market we are looking at and will soon announce is we will be able to service 1099 self-employed individuals as well. Think of the Uber or DoorDash drivers of the world that can now access their earned money that has yet to be paid to them by the contract company. This is a better solution than just being another loan provider.
CL: What do you think needs to happen in order for services like PayActiv to become ubiquitous with employer benefits?
SS: I think we are already seeing this happen. The fact that we are talking and you are aware of this is one sign. Even the media is tuned in to the fact that the paycheck industry has flourished while millions of working Americans have struggled at the hands of this system. Awareness that there is a problem is already in focus.
Every day millions of Americans leave home with just $2 in their pocket. At two in the afternoon they may be thirsty and buy a soda. Now they are left asking for money to ride the bus home and are mentally stressed. That’s why payday lenders thrive, because individuals will go and obtain a $200 to $400 loan to have funds in their pocket to manage until their next paycheck.
This is an example of thinking at the margin. The classic example of thinking at the margin is if a person is in the desert or is very parched and in need of water. This individual will pay a very high price for the first glass of water and pay less for the second. That’s what we are doing to millions of people in this country.
We are charging them for the first glass of water because when an individual is running low on funds he or she is willing to pay exorbitant interest for the immediate peace of mind. That’s wrong and we know that.
Now we need good solutions and good products. Current inefficiencies in our payment technology system can be improved to give employees the control of their finances they need and diminish the need for credit cards. That’s what we are all about.
CL: Softbank was recently noted for its commitment to investing billions in American born startups. What do you think Softbank saw in PayActiv to provide a meaningful seed round?
SS: I think investors like Softbank get intrigued by the inventiveness and potential for disruption that PayActiv can create in the financial markets. Softbank is a global company and when you look at a company like PayActiv this is not just a company to service the United States. This paycheck problem is pervasive across the globe.
When we succeed on this journey that started with an idea and a PowerPoint we will have the very ability to change the lives of hundreds of millions of people. The visionary set of people at SoftBank invest in ideas that they believe can grow and become spectacular.
The Minute Rundown with Safwan Shah
CL: If you could provide one piece of advice to someone considering starting up what would it be?
SS: Believe in the idea and make sure it is unique and different. In order to succeed you have to believe in the idea and stand behind it so you don’t have to start wavering when you do begin building it out.
CL: Since you are in the business of serving lower income individuals, what is your view on universal income?
SS: I think it’s very interesting and that it can work under a certain set of considerations that should be put around it. I am for it, however it has to be thought through more. Pilot programs on universal basic income have already been done with good results so it is possible. Although I wouldn’t say America needs to have it.
CL: What do you miss most about working at NASA?
SS: Nothing. To put it this way, what I and my team are doing is bigger than even putting a man on Pluto. It is an incredible opportunity to be able to make the difference in millions of people’s lives. We are building technology and utilizing data to really help people. Meeting people that we help is heartening and the feeling is that our work is real and inventive.
CL: If you could model yourself after one founder who would it be and why?
SS: There is only one great one, Steve Jobs. I think he is someone who had the ingenuity and ability to not only build something great, but he was able to take it out to the world and make a real difference, so I would model myself on him.
Growing up in a family of engineers I am always excited by individuals like Safwan Shah who take the pragmatic and thoughtful approach of engineering and apply it to a space that has rarely been touched by engineering science. That being the financial services world.
Day-by-day we live within these constructs of institutions because it’s what we know. But along comes a brilliant engineer like Safwan who challenges this notion that we should only get paid every two weeks for money we earned by the hour. Why should we have to wait for that money that we already worked for? Solving problems is what he does for a living.
And now he is likely solving one of the most fundamentally broken systems in financial services. He is serving the underbanked and repairing a paycheck system that does not cater to the financially stressed low income community. Safwan isn’t taking the status quo as an okay answer for a broken system.
He is doing something about it and in the end I strongly believe he has the ability to make a sincere difference in the financial lives of millions of Americans.
Thank you Safwan and the PayActiv team for tackling this challenging issue.