M-RCBG Associate Working Paper No. 88
The Power of the Salary Link: Assessing the Benefits of Employer-Sponsored FinTech Liquidity and Credit Solutions for Low-Wage Working Americans and their Employers
Todd Baker and Snigdha Kumar
America has a problem. More than 50 million Americans in low-income working families are financially stressed. Study after study has demonstrated that low-wage working people are struggling to manage their personal finances as incomes and household wealth have stagnated at the bottom of the economic ladder and both income and expense volatility have increased. The most pressing everyday issue for these Americans is managing cash flow—they usually have the resources to pay their regular monthly bills but can’t handle small financial shocks or timing mismatches because they lack the savings buffer the more affluent take for granted. Many low-wage workers also can’t access reasonably priced and structured small loans to stretch out larger, non-discretionary outflows—like medical, home & auto expenses--over time. The result is a damaging cycle of repeated reliance on payday loans, auto title loans, bank overdrafts and other costly financial products for liquidity and credit support. These products may fill today’s urgent financial need, but only at the cost of making tomorrow’s financial gap much bigger.
Although there is wide agreement that financial stress is a big problem for much of the U.S. working population, there’s no consensus on what to do about it. Because the issue implicates the questions of personal responsibility, income distribution and fairness that are the most politically divisive, the policy discussion has become polarized. Consumer advocates insist that lenders could make reasonably-priced loans to the broad spectrum of consumers with mixed or poor credit histories if they worked harder to help their customers succeed. Lenders counter that the only way they can broaden the spectrum of borrowers and make a decent capital return is to charge very high prices, even if those high prices cause more defaults. So far neither approach has delivered much help for working people.
This paper focuses on one new and different approach to managing financial stress among low-income working Americans: employer-sponsored FinTech benefits. Our research shows that employer-sponsored "Fintech"-based benefits that take advantage of the powerful "salary link"—automatic repayment through salary deduction-- can provide more efficient, less costly and more inclusive liquidity and credit solutions for working American families. These FinTech products also show tantalizing potential for significantly reducing employee turnover and savings millions of expense dollars annually at large employers. Importantly, deployment of employer-sponsored FinTech benefits does not require changes in law or government intervention to be successful.