Can Fintech set payroll data to work for workers?

Low-wage workers often have trouble getting credit because they either have poor credit scores or, as is the case for many immigrant workers, no credit scores at all. Many turn to payday lenders who offer short term loans to those who are excluded from the regular credit system at a high price. Payday loans are considered predators with the potential to trap borrowers in an endless cycle of ever-growing debt. In recent years, an industry has emerged with a computerized solution to this problem: instead of relying on traditional credit ratings that lack low-wage workers, fintech companies are accessing payroll data and sending it to lenders to inform them of their decisions. The result is faster access to money at a lower cost to workers, but critics argue that users can pay a high price when it comes to privacy, and that these products ultimately help employers avoid paying higher wages.

Connect workers with low-cost credit

The most common use case for payroll data in lending hardly seems like lending at all (in fact, providers insist that it is not). Many workers across the United States rely on cash advance apps to access income they have already earned between pay periods. The majority of workers in the United States are paid every two weeks, or even less frequently. Apps such as DailyPay, Payactiv, B9 and Earnit offer workers the opportunity to access part of their earned salary for a small fee. Some companies go beyond income advances and offer larger loans. Payday lenders justify their high interest rates with the fact that they do not require a credit history, making the loans theoretically risky. Cash advance apps avoid this problem by gaining access to workers’ payroll information and other work information to ensure that the amount of cash in advance really arrives. The data they collect about workers works effectively as an alternative credit score.

Making money available on demand for a relatively low fee has significant benefits for the low paid. A Harvard study from 2019 found that the fixed fees of $ 5-10 from many fintech companies that offer payday loans have a clear advantage over the typical $ 35 overdraft fees that workers who live paycheck to paycheck often face, not to mention the interest rate test of 400% APR. of wage lenders.

Get access to salary data

Alternative credit providers are dependent on a new and growing ecosystem of employment data aggregators. Argyle, a major player and self-written first mover in the workforce data room, offers an Application Program Interface (API) that retrieves data about workers and makes it readable for fintech companies. Argyle’s primary niche is in the gig economy, where revenue is erratic and data is rich but spread across apps. Argyle collects and organizes this data in one place, creating comprehensive worker profiles. In 2021, Argyle drew negative attention to paying workers to share their payroll login information so that it could access data and build the product. Without explicitly referring to this practice, Argyle presents his approach as centering workers’ consent on data collection, as opposed to traditional actors such as Equifax, which retrieve data from employers.

Estimates indicate the potential value of the growing workforce data industry to $ 10 billion, although Argyle himself predicts that it may be worth much more, as insurance, lending and banking use matters. As it is, Argyle makes money by charging a fee to fintech companies, including a continuous fee for consistent monitoring. Fintech apps are notified every time a user’s salary or employment data changes, so they can adjust their credit offers accordingly.

Privacy concerns

Critics argue that this new system comes with significant privacy costs and opens up opportunities for discrimination. Argyle’s CEO sees great value in the granularity of the data it collects, including reputation data. Inclusion of reputation data raises serious red flags for workers’ advocates because of their tendency to incorporate racist bias. Reputation data includes a worker’s customer star rating, deadline, and deactivation frequency from gig work apps, all of which rely on potentially biased customers. Uber has been sued because of its customer rating system, which has led to non-white drivers being kicked out of the app due to low customer ratings at significantly higher prices than white drivers. Including the same data in financial products maintains and magnifies this damage.

Earnin, one of the largest cash advance apps with millions of users, does not actually use payroll data to verify income. Instead, it requires users to share their work address and GPS position to confirm physical attendance at work. As one worker told The cablehe protests against the invasiveness of GPS tracking, but “they kind of got you at the ball when they’re running out of money and you’re trying to scratch past.”

Unregulated space

At that point, critics also claim that the financial products offered by cash advance apps are not that different from traditional payday loans. As with payday loans, many workers are stuck by taking out one advance payment after another. While some apps charge a flat fee, Earnin does not claim to charge users anything at all, and instead suggests that workers leave an optional “tip” in the app to pay for the service. Although optional, workers have reported that their funding ceiling went down after refusing to provide tips. Jill Schupp, a Democratic state senator from Missouri, has said that Earnin and apps like it are really just ways to evade payday lending rules. She has argued for government regulations to address apps with cash.

“Financial well-being” instead of higher wages

Sometimes employers actively collaborate with cash advance apps to offer employees the option of daily payments. Some argue that these products ultimately benefit employers by distracting from the deeper problem: wages that are too low to provide workers with financial stability. Focus on wage frequency transforms an income problem into a cash flow and personal financial management problem. Walmart, the largest private employer in the country, combines two apps, PayActiv and Even, which give workers access to cash advances, and also provide tools to “push” them toward better financial management practices. Regarding the second function, former Walmart senior vice president Daniel Eckhert said: “Honestly, most of America lives paycheck to paycheck, and it’s not a socioeconomic problem, it’s an American problem that spans multiple socioeconomic classes whether you are an hourly employee or a management employee. ” Walmart is notorious for having many employees who have to rely on food stamps to make ends meet. Like SNAP benefits, cash advances are certainly a lifeline for workers. However, there is reason to question the kind of employer that leaves so many workers who need both.

With improved paperless technology, there is no legitimate reason for every other week’s salary to remain in the status quo. Fintech companies have come up with a solution, but there is a remarkable absence of legislative effort to solve the problem, even though most states already regulate pay rates in one way or another. It may be that apps and data collectors with cash like Argyle are uniquely positioned to help workers, especially in the fragmented gaming economy. However, many of the cash flow problems that these technologies claim to solve can be solved with public efforts to demand more frequent wages, and, most importantly, higher wages, without compromising workers’ privacy or exposing workers to potential discrimination.