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Payday loans are an expensive last resort for workers who run out of money before the end of the month. Despite increased regulatory scrutiny of the sector, borrowers still face short-term interest rates of 1,000 per cent or more. The payday loan may solve the immediate need for cash, but interest means the worker will start the next month in deficit, and is more likely to run out of money — and so the cycle begins again.
In one attempt to tackle the problem, employers in the US and UK are offering a range of financial products, delivered via salary, that can help avoid the payday loan trap in the first place.
Salary Finance is a digital platform that works with employers on both sides of the Atlantic to provide workers with an advance on their salary, a low-cost loan or the ability to save, all using the company’s payroll.
Employers decide what percentage of a worker’s pay packet can be accessed flexibly — typically, between 25 and 50 per cent — and how frequently an advance can be granted. Although the worker pays a small fee, this is a fraction of the amount a payday lender would charge.
“I truly believe we can eradicate the payday lenders,” says Jason Butler, head of education for Salary Finance. “This way, workers avoid the frictional costs of borrowing — the late payment fees, missed direct debits, overdraft costs and interest charges that are sucking money out of UK households.”
Mr Butler knows only too well what misery this can cause. As a child growing up in south London in the 1970s, he says his home received more visits from debt collectors than from family and friends.
This early experience was a powerful catalyst — perhaps accounting for the 50-year-old’s long career as a chartered financial planner. In 2015, he sold his business, Bloomsbury Wealth Management, after the untimely death of a longstanding client caused him to evaluate what was important to him. Since then, he has been on a mission to educate people about the benefits of financial wellbeing.
As well as his role at Salary Finance, he has authored or co-authored five books, delivered countless talks about money and writes a regular column in the Financial Times. “When it comes to financial wellbeing, my biggest concern is the number of people who are suffering in silence,” he says.
According to the UK’s Money & Pensions Service, which offers advice on personal finances, more than 17m workers in Britain have less than £100 in savings, and more than 12m regularly run out of money before payday.
Salary Finance research found that 36 per cent of UK workers and 48 per cent of US workers have impaired finances. There is growing evidence that lower financial wellbeing leads to worse mental wellbeing, affecting relationships and performance at work.
Mr Butler recounts the story of a National Health Service (NHS) employee whose persistent lateness meant that he was on his final warning before losing his job.
“It turned out that his wife had lost her job, so they had money problems that were getting worse with the cost of short-term borrowing. He was arriving late every day as he was waiting . . . to buy a cheaper, off-peak ticket.”
Financial problems can carry a stigma in the workplace, with some people ashamed to ask their employer for help. Salary Finance is working with hundreds of companies in the UK and the US, including household names such as Tesco, BT, Dunelm, EY, local authorities and NHS Trusts to change this.
The business launched its core loan product in the US in June 2018, and plans to develop and launch a similar suite of products to those in the UK. It is already working in the US with organisations such as Legal & General America, the insurer, and United Way, a non-profit focused on health, education and financial stability.
The platform discreetly handles requests for advances and employee loans. Outside of HR and payroll teams, employers are not told which staff use the service — just how many. If employees ask it for a loan, Salary Finance asks what the money is for and assesses whether applicants can afford it.
“We’re not in the business of aspirational lending — this is for clearing off existing expensive debt, dealing with an emergency or unplanned extra expenditure,” Mr Butler says.
A popular myth among senior management, particularly in the financial sector, is that staff are too well paid to have money problems. “They think they don’t have a problem, but they do,” Mr Butler says, adding that many employers who use Salary Finance are surprised about the level of take-up.
A Salary Finance loan of £250-£1,000 repayable over 12 months would attract an average interest rate of 9.9 per cent — more expensive than a UK bank loan, assuming the borrower has an unblemished credit rating, but significantly cheaper than borrowing on a credit card (18-50 per cent interest) or via a payday lender.
Salary Finance can undercut traditional unsecured lenders because it is a fully digital business, and operating costs are low as it promotes its platform via employers and repayments are collected directly from the payroll.
Defining itself as a “social purpose company”, Salary Finance is not a non-profit but targets “a fair return”. A private company, its biggest shareholders are Legal & General and Blenheim Chalcot, the tech investor, and it is regulated by the UK’s Financial Conduct Authority.
When the loan repayments come to an end, Mr Butler says the goal is to get workers to divert similar sums into a savings account. “The next step is to become a saver, and even to become an investor,” he says. Salary Finance will “nudge” UK workers into monthly savings plans in conjunction with Yorkshire Building Society, where they get 1 per cent interest.
Workers who qualify for the UK government’s Help to Save scheme can use the app to channel regular savings of between £1 and £50 per month, getting a bonus of 50p per £1 saved over four years.
Although more than 3m UK workers qualify for Help to Save, very few have signed up. The easier you make it for workers to do so, Mr Butler argues, the more people will. “Someone earning almost £40,000 a year can still qualify for Help to Save. We say ‘this is free money from the government.’”
The platform will soon offer access to life insurance, critical illness and income protection cover on group rates, and other financial wellbeing products are in the pipeline. All are designed to make it easy to develop good financial habits — but the most important step is getting workers to engage with their finances.
“The US has led the way in financial education, and it is much less of a taboo to talk about money partly because of bigger cost pressures from student loans and healthcare deductions,” Mr Butler says.
By working with UK employers, his organisation can target information to those likely to need it most, such as workers starting their first job, or those who are about to receive a pay rise. “What you haven’t had, you won’t miss,” says Mr Butler. “You can either increase your spending and succumb to lifestyle creep, or you can start saving for the future you. We are helping people to help themselves.”
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