Financial Well-Being, Part 4: Beyond Popular Fintech Apps — New Avenues for Financial Inclusion

Previously in this multi-part series on financial well-being, we discussed the deleterious effect of financial stress on American workers, as well as some possible ways to alleviate it. We talked about whether access to financial literacy can help course-correct employees’ finances, and we started to look at ways in which technology powered by payroll data could assist in situations where financial literacy has not succeeded in bringing about real change.

Technology has its own multifaceted advantages. Financial products that are based on new, exciting, and consumer-friendly technologies have a broader appeal and are more likely to be received positively by employees, especially those who are more digitally savvy.  Visual interfaces like dashboards facilitate easy understanding of aggregated financial data at a glance. And, of course, the operating cost for fintech utilizing employee data is far lower than that of a traditional bank, which has to cover costs from physical location to customer acquisition.

We’re aware that the workplace might seem like an unusual place to get an individual’s financial well-being on track. However, it’s the place where wages are earned, where a trove of data exists on employee capacity to repay a loan that can help reverse the tide of high-interest personal borrowing. Thus it seems like a natural place to start, not only from our vantage point but from the oft-cited Edelman Trust Barometer showing that 76% of people trust their employers, vs. 56% who trust their financial services institutions.

As we learned more specifically in Salary Finance’s 2020 survey, Inside the Wallets of Working Americans: the 2nd Annual Salary Finance Report, employees have a high level of trust in their employers’ good intentions and their ability to keep personal financial information private. It also behooves employers to play an active role in alleviating employees’ financial stress. When employees are worried about their finances, the report noted, there is a knock-on effect for employers. All players in the equation have great incentive to proactively reduce these stresses.

While the cost of living in America is only going up, wages aren’t seeing a commensurate increase. This has left many Americans in financial straits, as reflected in the 2020 survey. Now more than ever, it’s critical for both employees and employers to address the situation. As COVID-19 wracks the economy, leaving many people out of work, furloughed indefinitely, or with reduced pay, there comes a corresponding increase in stress and anxiety, resulting in lost sleep, decreased productivity, and an increased likelihood of negative coworker relationships. In Salary Finance’s recent survey, which specifically looked at mid-pandemic worker sentiment, most employees (79%) reported that their current stress level about money has worsened since the pandemic began.

With few other options, people of all backgrounds and income levels are turning to high-cost consumer debt to make it to the next paycheck. Even among those making $200,000 or more a year, a surprising 12% still took out payday loans with an average interest rate of 391%—and this was before the coronavirus crisis. More than a third of Americans hold over $5,000 in credit card debt, and 35% have depleted their 401(k) plans for emergencies—for millennials, this rate nearly doubles, with 66% having no remaining 401(k) plan balance. With such depletion of personal capital, people end up in a cycle of debt in which earned money is funneled into paying off interest rather than paying back principal so that more and more money needs to be borrowed.

These problems exist across education and wage levels, in part due to the dearth of practical financial literacy and education. To start with, people are simply unaware of their financial situations, let alone how to fix them. Even among those who thought they knew their credit store — 92% of respondents to the Salary Finance survey — 62% were actually off by 50 or more points. For those with scores under 620, considered sub-prime, 77% were off by that 50-point metric, versus only 46% of those with “prime” scores. Current credit score, more than education, seems to be a determining factor in financial awareness, as those with or without a college degree were equally likely to miss their actual scores by 20 points or more.

However, it seems that efforts to improve financial literacy through education, commendable as they are, haven’t resulted in reversing these conditions.  According to one meta-analysis of 201 prior studies on financial education tactics, from group workshops to one-on-one counseling, all of these measures only accounted for a 0.1% shift in financial behavior. For low-income groups, that variance was even smaller. The issues facing financial education endeavors are similar to those for learning any other new skill, like a new language: if not implemented and cemented soon after learning it, the knowledge is likely to fade. It’s imperative to practice new skills in a real-life context… easier said than done.

If neither financial education nor wage increases result in a meaningful lift in financial wellness, it’s time to try another approach. New financial technologies have the potential to upend old and entrenched approaches that have previously failed. And a recent study showed that people are open to alternatives — especially people undergoing financial stress, which indicates an active willingness to take matters into their own hands. Of those with financial stress, 55% have tried to use an app or website targeting budgeting, and 27% report using one regularly. And responding to the same question, those not in financial stress weighed in at 41% and 19%, respectively. This data could indicate, however, that despite being open to and seeking out new solutions, people still find it hard to form new habits.

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In the short term, low-interest loans can help mitigate these entrenched problems by offering in-the-moment cash. However, there’s also a more significant benefit: if it’s less costly for employees to pay off loans, it becomes easier for them to build credit. With the tools available on their laptop or smartphone, employees can rebuild their finances and keep themselves out of deeper debt. To illustrate this, let’s look at one employee and his journey: Jorge in El Paso, Texas. A senior technician, Jorge took out a salary- and technology-based low-interest loan. He received the loan money just three days after applying, and within seven days of making his first payment, his credit score increased by 18 points. Jorge will now be able to pay off his higher-interest credit card debt, in turn improving his credit score further and eventually allowing him to refinance his mortgage.

We believe that digital solutions brought into the workplace have the potential to improve access to financial information and tools. Employees are already asking for these benefits to be brought into the workplace, so chances are good that they will be receptive to integrating their financial lives into their work lives. Looking again at findings from the most recent Salary Finance employee survey, the top three benefits employees across all age groups want from their employers are salary-linked savings, earned income access, and paid leave for caregiving. When asked about specific workplace financial tools, nearly two-thirds of employees agreed that they would benefit from salary-linked savings accounts, and almost half felt similarly positive about salary-linked low-cost loans.

Here’s an opportunity for employers to listen to what employees actually want and need—they know themselves best. To start implementing these new tools, employers should consider measures to better understand their workforce and where they lie along the financial fitness spectrum — consider, for example, floating an anonymous survey alongside already existing data. Having transparent, accessible, and clear data is key. Benefits to offer will differ based on these results — from easing student loan debt to offering low-interest salary-linked loans, payroll-deducted savings deposits, or various kinds of financial literacy coaching.

We’ve seen how payroll and other employee data can help: instead of determining creditworthiness based on FICO scores, giving low-interest rates only to good scorers, employer-based loan algorithms can look at payroll as well to offer low-interest rates to a broader population. By directly deducting loan payments from payroll, there is little to no risk of default or fraud — an important factor supporting lower interest rates. Additionally, since employers already have all of the necessary data at hand, applications can be processed in a matter of days, getting people the money they need faster and, again, lowering overhead costs that help lower interest rates. We have found that by bringing technology-based financial tools into the workplace, individuals can save as much as $1,000 in interest payments over the term of a loan.

There are clear benefits to implementing payroll data-based technological solutions in the workplace, both in the short and long term, for employees and employers. These applications currently benefit most from economies of scale, which is to say that employers with over 1,000 employees are currently best set to undertake this approach.  But as is the nature of technology and the internet, more tools are entering the market that have the ability to aggregate more and more groups of people into their networks while simultaneously offering bespoke solutions to smaller companies. According to our survey, personal debt is a huge burden on employees — one in which 30% of respondents would trade five years of vacations to alleviate, and 51% of those making under $25,000 a year would work an extra two hours per day to erase. Why not offer employees a better solution?

Nigel Wilson is Group Chief Executive of Legal & General. He won the ‘Most Admired Leader’ award at Britain's Most Admired Companies Awards 2017, for Management Today. In 2015 - 2016 Nigel was a member of the Prime Minister’s Business Advisory Group.  He can be reached at Nigel.Wilson@group.landg.com.

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