Payday Loan Killer?

Payday Loan Killer?

For the millions of Americans who live paycheck to paycheck, an unexpected bill can wreak havoc. They may have to dip into their savings or take out a loan, potentially at a predatory rate, to make ends meet. To address this issue, companies like Venice-based Rain Technologies Inc. are offering early wage access, which lets employees access a portion of their upcoming paycheck in advance. Rain is looking to dominate this salary-advance market and is driving its growth with a new $300 million credit facility.

According to a recent study from financial education company GoBanking Rates, about 49% of Americans have $500 or less in savings. With early wage-access platforms like Rain, staff of a participating employer can access as much as 50% of their next paycheck’s gross earned wages ahead of time without paying interest or the stress of needing to pay back those funds in a short period of time. 

Rain’s chief operating officer, Fred Choquette, said that while employees directly benefit from its service, employers can also benefit from increased worker retention. He said the offering can also be an attractive incentive to potential new employees, similar to free meals or gym memberships.

“We see this as going from a ‘nice-to-have’ to a ‘must-have’ benefit,” Choquette said. “The employer obviously cares about their employees and their wellness, but there’s also big financial implications for the employers.”

Why people use payday loans

Payday loans are a common avenue taken when someone needs money ahead of their regular paycheck. These loans often come with high interest rates and require quick repayment; the practice has been referred to as “predatory lending” by Gov. Gavin Newsom and organizations such as the National Association of Consumer Advocates.

A California state law passed in 2019 capped the maximum one-time fee a payday lender can charge at 15% of the loan, with a maximum fee of $45. According to the California Department of Financial Protection & Innovation, a 15% fee for a two-week loan is equivalent to an annual percentage rate of about 460%. 

Duo: Rain Technologies’ finance chief, Nim Mann, left, and Fred Choquette, the company’s chief operating officer. (Photo by Thomas Wasper)

“We are in the market of trying to essentially eliminate the need for payday loans altogether and to disrupt the payday loan industry,” Choquette said. 

Employees can only access wages through Rain that they have already earned a paycheck on, as Rain is not a loan service. Instead, Rain plugs into an employer’s payroll or timekeeping system, allowing employers to directly offer the company’s services as a benefit to their employees. Rain is reimbursed by the employer’s system on payday. The platform has a minimum withdrawal of $75 and charges an instant processing fee of around $3. Most of Rain’s revenue comes from this fee, as well as some sponsorship revenue from participating employers.

Prior to its new credit facility, Rain closed a $116 million series A funding round last March comprised of $66 million in equity and $50 million in debt. A company spokesperson said the new $300 million of debt financing allows Rain to take initial debt from its series A funding at more favorable terms, leaving it with $101 million in equity to date. 

Rain disbursed more than $1 billion of earned wages to users across the U.S. last year, which Chief Executive Alex Bradford called a huge milestone. The $300 million credit facility will be used to disburse earned wage payments to users, and Rain is aiming to disburse about $10 billion this year.

Setting itself apart from its competitors

Other earned wage-access platforms include San Jose-based Payactiv Inc. and New York-based DailyPay Inc. 

Bradford said that Rain stands apart from its competitors because of its long-term product vision, which includes plans for a comprehensive suite of financial wellness tools, as well as its ability to directly plug into employers’ payroll systems. He said that without the latter feature, several steps are required to go through third-party payment processors and, if one step breaks, the employee may not receive their paycheck on time. DailyPay and Payactiv both state online that their solutions also plug into employers’ application programming interfaces.

“Our repayment flow is reconciled and confirmed automatically before payday, so we’ve completely removed that risk from the product,” Bradford said. “The employee can also easily see (the early wage access deductions) on their pay stub … whereas for our competitors’ structures, because the full paycheck has to go through the competitors’ system, the deduction amounts are not on the pay stub … that confusion results in a lot of questions from employees, which in turn results in a lot more manual work for employers.”

Payactiv and DailyPay charge real-time transfer fees of about $2.50 to $3.50, similar to Rain. Payactiv Chief Executive Safwan Shah said that by not having to wait for a biweekly paycheck, earned-wage access gives employees better control over their finances and helps them prepare for unexpected expenses.

“For employees it is financial security, emergency preparedness and, frankly, personal dignity,” Shah said.

A DailyPay spokesperson called its services a “win-win” situation for both employees and employers, as employers benefit from a less stressed, more productive workforce. 

“Employees enjoy choice and control over their pay, enabling them to avoid inferior products and strategies like payday loans, overdrafts, late fees, missed payments and more,” the DailyPay spokesperson said. “The pandemic was certainly a wake-up call for many businesses, realizing it became imperative to empower their employees … during such uncertain times.”

Getting its start during the pandemic

The pandemic was also a jumping-off point for the growth of Rain, Choquette said. The company was founded in 2019 and launched its app – called “Instant Pay” – in 2020. Choquette said that while fast food remained an essential industry at the pandemic’s onset, employers were struggling to attract and hire new workers in the sector. He said that those employers soon found that Rain was an easy way to get employees in the door. 

Rain has, he added, expanded to become one of the largest early wage-access players in the health care industry. It’s also seeing its footprint grow in industries such as manufacturing, retail, logistics and even the public sector. 

“We’re pretty diversified now in terms of industry and employees,” Choquette said. “Across all industries, we’re seeing a lot of adoption (with) any employer that has a large workforce.”

At the time of Rain’s series A funding last March, the company had disbursed $150 million of earned wages to users since its launch in 2020, which jumped to $1 billion in 2023 alone. Bradford and Choquette said that Rain’s business and tech structure have allowed it to significantly grow the number of clients served without needing to add a lot of employees – it currently has a headcount of 185. The company is planning on “staying flat” for the moment and focusing operations on its U.S. market for the next one or two years.

“We learned a lot in 2022 and 2023,” Choquette said. “We raised a lot of money in our series A, we took a lot of different bets, we went to a lot of different geographies … and at some point, we realized we probably should tighten our belts. The core U.S. market is so massive, there’s still so much work to be done here.”

Bradford added that, while Rain currently offers financial literacy coaching in its app, it’s looking to develop a differentiated investment tool, an overdraft-avoider product and a credit score-building tool, among other services. 

“We are looking at building products that can create more money for the user so that, over time, success at the individual user level looks like needing early wage access less often,” Bradford said. “Meaning, they’re saving more or … have more money coming in the door. We are looking at innovative products that are integrated with the employer, and distributed through the employer, that can help us on those objectives.”

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