Fintech Startup Rain Raises $116 Million to Speed Up Hourly Pay Cycles for Workers
An employee turns in their time card
getty
Rain is a four-year-old company that uses technology to advance employees, usually hourly workers, their pay shortly after a shift ends, so they don’t have to wait for payday to have cash on hand. The Los Angeles-based business says it secured a $250 million valuation through a $116 million funding round consisting of $66 million in equity and $50 million in debt.
The increase was led by fintech-focused venture capital firm QEDQED Investors and Invus Opportunities. Wndrco, TribeTRIBE2 Capital and Dreamers VC, which was co-founded by actor Will Smith, also invested.
While waiting for their next paycheck to arrive, people with low cash savings are vulnerable to overdraft fees, low balance fees and high interest rates if they choose to take out a payday loan or carry a balance on a credit card. Two out of three Americans doubt they have enough emergency savings to cover a month’s worth of living expenses if they lose their jobs, according to Bankrate’s annual emergency savings report.
“If you don’t have access to credit and find yourself in a very short-term pickle before you can get your paycheck, you could be unwittingly drawn into the arms of payday lenders,” says Nigel Morris, co-founder of QED Investors.
The first earned wage access service was patented in 2010 by FlexWage. The fintech category promises a credit-free alternative to payday loans and has grown over the past 13 years as players like 11-year-old PayActiv and 8-year-old DailyPay have launched products. The aim is to give workers with cash immediate access to wages to cover necessary expenses.
As the number of startups pitching the service grows, regulators are beginning to look more closely at how various earned income access products are structured to determine whether there is consumer credit involved. Earned services are offered either through employers, as is the case with Rain, or directly to employees. When offering employees, a provider reviews the consumer’s banking history and uses that information to advance funds based on estimates of future income. When the salary is paid, the advances are deducted. Earlier this month, the US Government Accountability Office recommended that the Consumer Financial Protection Bureau clarify when earned income counts as credit under the Truth in Lending Act, which would make the service subject to closer supervision and existing lending rules.
Alex Bradford, CEO and co-founder of Rain, is adamant that the company does not offer a credit product, but instead operates under the Payroll Act. When employees sign up for the service, they assign their salary to Rain, meaning the company is compensated for the advances automatically by the employer through their regular payroll system. Regn does not allow employees to advance more than half of their earned salary in each pay period. “We view—and our employers and HR software partners view—our product architecture as significantly more compliant or less outside the gray area than our competitors,” says Bradford.
The financing for Rain’s short-term advances comes from a debt facility arranged by South Point Capital Management, a New York-based hedge fund. Regn is free for employers and makes money by charging employees a fee each time they access earned wages, which averages around $3 and is akin to an ATM fee. Employees can avoid the fee by waiting for next day delivery.
Rain’s main competitor is DailyPay, a service that also integrates directly with employers’ payroll systems. In addition to charging an ATM-like fee to employees, DailyPay has a debit card that allows the company to earn interchange, the fees merchants pay when consumers swipe their debit and credit cards. When employees transfer earned salary to the Friday card, they pay no fees. Rain plans to launch its own card product, says Bradford. DailyPay does not limit how often employees can use the service. Digital bank Chime reportedly offered as much as $2 billion to buy DailyPay last year, but the company rejected the offer. DailyPay declined to comment and Chime did not respond by the time of publication.
Bradford says Rain can improve employee retention and help businesses attract more applicants to open positions. It is currently used by McDonalds, Taco Bell, Applebee’s, Marriott and Hilton. Since launching in March 2020, Rain has distributed over $150 million in salary advances.
Bradford notes that employees open the Rain app several times a day to check how much they’ve earned in near real time. While Rain currently focuses on access to earned wages, Rain plans to use this high level of engagement and integrations with employers’ human resources, timekeeping and payroll systems to expand into other financial products such as health savings accounts.
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