How Employers Can Run Predatory Lenders Out Of Business (and Why They Should)
By: Michael Zakaras
February 20, 2013
As we struggle through this recession, it's not surprising we are focusing on the unemployment rate, which is still hovering around eight percent. But we mustn't ignore two other problems that are less visible but arguably more dangerous over the long-term: financial illiteracy and insecurity.
These problems are vastly more widespread than unemployment. Americans have notoriously poor financial knowledge, often failing at basic interest calculations. Our workers are also bad savers compared with other OECD countries, which means we're more vulnerable to financial emergencies and crippling debt. According to one recent report, 43 percent of Americans are "liquid asset poor"--meaning they have little or nothing to fall back on if emergency strikes.
The problem exists across all earning groups (12 percent of people making $100K or more in 2012 still lived paycheck to paycheck), but it's especially acute for the working poor. A sick child or a broken down car can mean missed work, lost income and even a lost job. And for many, their primary safety net (if you can call it a safety net) is payday lenders. These lenders offer quick cash at exorbitant rates because there's a market for it among those without other alternatives. Payday lending is now a $60 billion industry.
According to the Center for Responsible Lending, the typical payday borrower makes an average of nine loans per year at annual interest rates over 400 percent. Even those with bank accounts will use overdraft protection as a de facto line of credit, paying the $32 per bounced check because it's their smartest option for keeping the bills paid. But it adds up quickly: two loans per month is almost $800 by year's end. This is why Ashoka Fellow Steve Bigari says "it's expensive to be poor."
But individuals are not the only ones who suffer as a result of financial illiteracy and insecurity. Organizations like Gallup are now making a compelling case that employee financial wellbeing should be a goal of employers--not just because it's the right thing to do but because it's good for business.
More than 40 million Americans who work full-time are considered financially insecure. As it turns out, money problems are the number one contributor to stress, which can result in everything from high blood pressure to insomnia and depression. These consequences translate into underperformance, on-the-job accidents, and high employee turnover--all of which cost employers money.
So why not take a preventive health care approach, instead of the emergency-room approach, to financial security? Thankfully, some people already are. Jonathan Harrison, for example, CEO of the B Corp Emerge Financial Wellness, wants to create a new asset class called the workplace loan, which he believes is a sustainable way to move millions of under-banked and unbanked workers into the financial mainstream.
Emerge works by embedding itself in the workplace as an employer-sponsored benefit, partnering with companies to help their workers plan their financial futures, build real credit, and save money. Employees enroll by taking a short financial wellness assessment and immediately get access to one-on-one financial counseling, either by telephone or online, as well as free monthly credit scores.
In an emergency, employees can apply for small affordable loans through partner banks and credit unions, with their job tenure acting as a de facto substitute for low (or no) credit. By linking loan repayment to direct deposit paychecks, the chance of default is reduced, and workers who would otherwise resort to payday lenders gain access to more favorable loans.
Emerge also offers workers an ongoing financial education program complete with daily text messaging, weekly emails, and monthly e-newsletters--all of which can be accessed online. In this way, the loan itself becomes an entry point for behavior change.
Again, there's a compelling business case to be made for programs like this. Early studies have shown a three-to-one return on every dollar invested in employee financial wellness. But there are bigger returns: just as democracy requires informed citizens, so too a healthy economy requires informed savers, investors, and borrowers. How much did subprime mortgages--another form of predatory lending--cost us all?
Companies are increasingly looking at how they can serve the public good while improving their bottom line. Investing in the financial wellness of their employees would be a good place to start.
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