Low-Touch Servicing: Helping Employees in a Financial Pinch
Editor's note: This is the second of a series of five blog posts from the Workforce Financial Stability Initiative (WFSI) at Washington University in St. Louis (funded by the W. K. Kellogg Foundation) and Prosperity Now discussing workplace financial wellness. To learn more, visit Prosperity Now’s website for actionable resources for employers and WFSI’s website for research on approaches to building financial wellness at work.
With the recent partial government shutdown, the financial insecurity of American workers received significant media attention. Unfortunately, not having enough money to cover unforeseen expenses or experiencing a loss of income is common for many families living paycheck-to-paycheck, who risk missing important payments like rent. But, employers can help by offering low-touch interventions like wage advances or small-dollar loans. These workplace benefits can help employees address their immediate financial needs and are often a simpler, more affordable option for employers.
This is what Lutheran Social Service of Minnesota (LSSMN), one of Minnesota’s largest nonprofit organizations, did after hearing that some of their employees were struggling to cope with financial emergencies. With an organizational vision to help their employees live “abundant and balanced lives”, it human resources team was deeply concerned that some employees were taking out high interest, predatory loans to deal with cash-flow shortages.
“When I started hearing that people might be paying 300 percent or 500 percent on loans through payday lenders, I realized that TrueConnect could help our employees access a far more affordable loan option, build credit and pay off their loan over a short period of time,” explained Joyce Norals, chief human resources officer for Lutheran Social Service of Minnesota. “This service also fits in perfectly with our employee wellness initiative that promotes emotional, physical and financial health.”
When employees experience financial hardships like car repairs or unforeseen medical expenses, some may turn to expensive alternative financial services like payday or auto-title loans. This is particularly true for low- to moderate-income households who tend to have less savings and poor credit that disqualifies them from credit cards or bank loans. These credit-based alternative financial services are designed to help workers manage cash shortfalls, and can be extremely risky for consumers who don’t fully understand the terms of these loans and/or use the loans in the long run.
The demand for safe, small-dollar loan products is high. The Office of the Comptroller of the Currency released a bulletin in May 2018 concerning lending principles for small-dollar installment loans, but banks have been slow to respond and only certain credit unions offer payday alternative loans ("PALs"). Furthermore, these loans from banks and credit unions require that borrowers have good credit. This is a problem for the half of all Americans who have poor credit or are "credit invisible".
By taking advantage of TrueConnect loans, LSSMN provided their employees—many of whom are part-time—a much-needed lifeline for special situations that they may not otherwise have been able to access. In a recent survey of TrueConnect users, more than 40 percent reported using payday loans in times of need before TrueConnect was available to them. TrueConnect loans have an APR of 24.99 percent, but charge no additional fees to the employee and are offered at no cost to the employer. Because payments are deducted automatically through existing payroll systems, they can be offered to employees at significantly lower interest rates than alternative financial services, regardless of employees’ credit history. TrueConnect offers turnkey implementation and assistance in promoting the product, which Norals described as “slick and easy”. Of the organization’s 2,300 employees, about eight to 10 percent of employees take out an average of 260 loans per year through TrueConnect.
TrueConnect is just one of many solutions to help employees manage financial emergencies. PerkUp is another platform that—through partnerships with participating credit unions—offers 12-month installment loans of up to $2,500 (at rates up to 17.99 percent) along with “NestEgg” savings accounts that offer savings incentives. There are also financial wellness platforms like Even, which enable access to earned wages through participating employers to help employees cover needs before payday.
The best way to be prepared for financial emergencies is to have emergency savings. Employers can play an important role to help staff build savings, starting with split direct deposit. The AARP Public Policy Institute found that 71 percent of surveyed employees said they would enroll in a "rainy day" savings program enabled by payroll deductions if their employer offered one. EARN, a nonprofit based in San Francisco, offers the "SaverLife" platform, which provides cash incentives and prizes to help lower-income individuals build savings. Employers could go a step further than split direct deposit by funding these incentives and prizes.
As mentioned in our first post, employers should consider mixing low-touch solutions discussed here with high-touch solutions so that their workplace financial wellness portfolio covers a variety of financial situations employees likely experience. In the next post in this series (March 6), we will explore high-touch financial wellness programs that help employees address long-term financial stability. In the meantime, if you’re looking for a list of low-touch interventions, check out this directory.