Fintech services offering advance access to salaries are gaining popularity in Latin America, delivering data-fueled loans to cover emergency cash needs for workers.
The basis of this new fintech business model is the immediate availability of part of a forthcoming paycheck, allowing employees to cover unforeseen expenses. Applicants pay a commission to the fintech lender, which pays out the funds quickly and with little paperwork.
The model is growing in the US, where more than half of employees struggle to cover their expenses between pay periods, according to a 2020 study released by Ceridian, a company that offers such a service in North America.
The trend is similar in Latin America. In Peru, for example, 81% of full-time workers say their salary is not enough to make ends meet, according to data shared by Anticípate 24/7, a new Peruvian “on-demand” salary fintech.
“The C and D sectors -which are our target market-, struggle to make ends meet and have no one to turn to,” says Matías Espejo, founder and CEO of the newly-launched startup. “They go to independent lenders and not financial institutions such as banks, since they do not give them credit because they have no history.”
A similar pattern is seen in Mexico. Quincelana, for example, points out that the sector they target – middle and lower middle class – does not have many financing options in a country where half of the population is unbanked, often depending on moneylenders.
The cash flow and savings problems experienced by Latin Americans also present an opportunity for fintech growth in this credit niche. However, players warn that if solutions are not supported by tools to ensure the financial health of workers, its growth could be stunted.
Financial health promise
When companies such as Walmart began offering on-demand wages a few years ago, employees quickly adopted the benefit.
However, the retail chain recently explained that those employees who opted for advance pay but did not combine it with savings and budgeting tools, stayed with the company for less time compared to those who did use the coaching solutions included in the app.
Bontu, a Mexican fintech that offers payroll advances through its application, takes a similar perspective. The use of these solutions must come in tandem with feedback for the employee in terms of financial education, so that the tool does not become a revolving door of advances and debt, says a company representative.
The Mexican platform plans to incorporate savings and investment products next year, depending on regulatory approval.
“Many customized savings plans can be added, to use goals as an incentive and see the status of financial health, savings, etc. on the same platform. This is what will come in the next versions of the app,” says Augusto Álvarez, president of AlphaCredit, the group Bontu belongs to.
Anticípate 24/7 plans to incorporate a similar initiative together with a financial education fintech. Starting in the third quarter of this year, they will offer a self-service financial education module (with savings and investment products), at no additional cost.
Also, the startup has a maximum limit of 30% in the advance request, precisely so that workers “learn to manage their money”.
“The purpose of Anticípate is not only financial inclusion per se, but to address a need and educate so that salary advances are not needed so frequently,” says Claudio Arciniega, director of the new Peruvian fintech.
Quincelana also has a maximum advance amount of 30%, or less, according to each employer’s monthly deduction.
For Ernesto Haua, founder of the fintech, although their target market has little by way of savings culture, it is not necessary for the time being to add investment options to their application.
“Rather, instead of generating a savings option, we want to look for products that provide for them. A microinsurance, for example, where the users for a small premium can have coverage,” he says.
Bontu says companies with modern human resources functions – those who have gone from viewing payroll as a simple transaction to a means to preserve employee loyalty – are more likely to adopt their services.
“If you have happy employees, with low levels of stress and anxiety, not only are they going to be more loyal to the company, but they are going to be more productive, they are going to speak better of you as an employer, and they are going to stay there longer,” says Alvarez.
The representatives of Anticípate 24/7 say that the on-demand salary allows to reduce between 20% and 30% of the labor turnover, since it increases the benefits offered to employees.
“This solution not only provides liquidity for the user, but also for companies by allowing them to focus their resources on other high-value projects for their businesses, rather than on payroll issues,” says the startup’s CEO.
“Companies designate capital for these types of advances -usually at zero cost-, which has no return. Now they can designate it to a project that has a positive ROI, meaning that they can concentrate on their core business, and we can absorb this monetary and labor burden that the company used to carry”.
On-demand salary fintechs typically integrate with employers’ payroll systems, giving them a deep set of verified data about employees seniority, time of service, and earnings. Additionally, by deducting repayments from paychecks, these credit models have minimal delinquencies.
At Quincelana, for example, whose client portfolio today exceeds 75 companies, the employee repayment rate is 98.5%. And, since the amounts available are small, this 1.5% of non-payment does not generate a significant loss for the business.
“Having a high repayment rate has helped us grow in a structured way, and being at the industry level, we have a lot of options for growth,” says the company’s founder.
Typically, banks offer payroll advance loans. However, fintechs claim that their service model is more flexible and less costly than that of their competitors.
They emphasize on the customization that can be included in their products, such as offering a mix of programs with different payment models, or access to full or partial pay.
At Bontu, the employer may decide to absorb the cost of the service for the first few months, leaving it free of charge for the workers. Or, on the other hand, the service can be provided at the expense of the workers at a cost of between 20 and 30 pesos (US$ 1-1.50) per use.
“Traditional banking products have been slow to adapt to people’ needs today,” says Alvarez, adding that people do not always require a bank loan to alleviate their short-term needs.
“The bank does it in a very transactional way, they don’t know what kind of employee he is, or what his needs are. They are simply offering a credit […] based on the income they see the employee is receiving in his payroll account,” he adds.
This is another difference between banks and fintechs: disbursements do not necessarily have to be made into a payroll account.
“We can advance the money to the account of your choice, it can be a bank, a municipal savings bank or even someone else’s account,” explains Espejo of Anticípate 24/7, a fintech that operates with advances of between 30% and 50% of the paycheck; and commissions from 3% to 5%.
The experts expect the new fintech niche to continue to grow, while offering an opportunity to bridge the financial inclusion gap that still exists in the region.
“There is very little financial inclusion at socioeconomic levels that traditionally have a lot of difficulty accessing traditional banking products and today want easy, flexible and on-demand solutions without having to go to a bank branch,” Álvarez said.
Haua, on the other hand, assures that the new user behavior of “I want it, I have it”, together with a greater familiarity with mobile applications, are also important factors in the future development of this concept.
“It’s a sector that will continue to develop, even more so now, as people are familiar with apps and everyone wants things to be simpler. And yes, these services give you both, immediacy, and money,” he concludes.