Welcome back to our series looking at employee financial well-being and how to improve it. In part one, we discussed the effects of financial stress on U.S. employees, and how during this pandemic, that stress is compounded by uncertainty, mass furloughs, and layoffs. This stress manifests itself in ways ranging from lost sleep to lost productivity at work. We also covered the cycle of debt behind that stress, in which, due to rising costs of living, workers are often forced to take out high-interest loans to make ends meet. Employers lose here too, with costs related to employee financial stress growing year after year. We have been tracking this data using an annual survey by our partner, Salary Finance, this year titled Inside the Wallets of Working Americans: the 2nd Annual Salary Finance Report. As we hinted last time, there’s a simple, workplace-based solution to alleviating this cycle of debt and stress.
Fintech apps are often hailed as the solution to entrenched and uneven economic structures, offering access to financial tools to an ever-growing audience that may not otherwise have access. While these consumer-friendly apps offer an easy, intuitive way to save, invest and plan, people with little extra funds with which to do so in the first place are still going to be at an impasse. And, as we discussed last time, this applies to a significant number of people. The Salary Finance survey found that 9% of working Americans had used a payday loan in the last year and that increases to 15% for those under the age of 34, and 12% for those making more than $200,000. And the average interest rate paid for a payday loan? An astounding 391%.
Although this form of lending is gradually being regulated out of existence, we’re seeing a corresponding growth in new forms of online installment loans. Paired with high rates of credit card debt, survey results further show that 38% of employees carried over credit card debt to the next month, while 33% of polled employees had withdrawn more than $500 from their 401(k)s in the past 12 months. These forms of borrowing, some of which are high interest, combined with a lack of financial literacy, keep working Americans across almost every income bracket imprisoned in cycles of debt.
Salary Finance created a financial fitness score to help rank different types of financial behaviors, on a spectrum: strugglers, copers, builders, planners, and prosperers. Looking at these scores, it’s clear that salary and income alone are not the sole predictors of financial worries. Our research showed a bifurcation of behaviors, with peaks in both copers and planners, suggesting natural inclinations toward either behavior pattern. Where employers come in is that they are in a unique position to help shortcut unhealthy if natural financial instincts — let’s discuss not only why and how they can, but why they should.
The workplace, where salaries are earned, is a natural place to start building healthy habits with that income. Employees are open to this possibility: despite their reported financial stress, they also have a high level of trust in their employers’ ability and desire to help them. Survey results found that for those with stress, 79% still feel that their employers will keep their financial situations private, and 73% feel that their employers care about them. Those numbers increase slightly for those without financial stress — 82% and 75%, respectively. When asked about what benefits they’d like to receive from their work, employees consistently rated salary-linked savings and earned income access tools among the highest — not counting health insurance, which is already a benefit provided at many U.S. companies, and to which is attributed a reported decrease in employee financial stress. Employers are in a unique position — their employees trust them and want them to implement financial tools, those tools already implemented have been shown to increase financial well-being, and this well-being is tied not only to the individual but widespread benefits for both employees and employers.
We’re seeing a new benefit, one already popular in the U.K. and increasingly so in the United States: salary-linked loans. This approach harnesses information already existing in the payroll system, so in short, it doesn’t need to be invented. And this ubiquitous information becomes the means by which low-interest loans can be offered to employees. Since the underwriting is based on already existing data, they process much faster — often in just two days — saving money on the overhead in a traditional banking system as well as time for the employee, who might otherwise have to go to a physical banking location (often just to be told “no”). Rather than being based solely on FICO scores, they’re also predicated on an employee’s time on the job and income level — a more accurate assessment of creditworthiness — so loans are accessible even to those with low or no credit score and with much less risk.
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By counting on payroll-deducted repayments, these loans can be offered at a much lower interest rate — starting as low as the single digits — than nearly every other credit product, because of the massive decrease in the risk of fraud or default. We’re looking at rates that are fixed at between 5.9% and 19.9% tops, versus the much higher cost of credit cards, installment loans, and payday loans.
Payroll loans aren’t just a better way to borrow money, helping to avoid high-cost loans — they can also help lift employees out of once-entrenched cycles of debt. These loans, which range from micro-loans of just a few hundred dollars to larger amounts, can help employees consolidate and pay off more expensive debt. With regularly deducted repayments coming out of employee salaries, employee credit scores increase, and financial stress goes down, saving employees and employers both money and time. Data collected by Salary Finance showed an average credit score increase of 30 points from this system.
Unsurprisingly, we can already see quantitative benefits for employers, as well. Looking at a Harvard study, The Power of the Salary Link, we find that payroll loans are tied to a 28% improvement in employee retention. By basing financial tools on an already-in-place distribution system linked to their real, earned income, natural “copers” can begin to act like “planners.” Coupled with the facts we discussed last time around the loss of employee time and productivity due to financial stress, which is reduced when financial well-being grows, it’s clear that employers can only thrive when their workers do. Thus, the once-negative cycle of debt becomes a positive one, in which employees build healthier financial habits and start saving for the future.
Next time we’ll discuss how employers can implement financial literacy programs alongside new payroll-backed benefit systems to help improve overall employee financial well-being.