Washington Business Journal
By: Bryant Ruiz Switzky
May 14, 2013
RLJ Cos. founder Bob Johnson is rolling out a campaign to promote an alternative to payday loans that aims to be the Aflac of subprime consumer lending.
Johnson, whose company is based in Bethesda, helped Think Finance Inc. of Fort Worth, Texas, develop the product, which relies on employers to make short-term loans available as a supplemental benefit, similar to the way Aflac Inc.'s supplemental insurance products are offered.
Employees agree to share their salary information with Think Finance, which offers them short-term emergency loans of up to $1,000, based on how much they make. Any loan payments would come directly out of employees' paychecks.
The product, which caters to people who don't qualify for traditional short-term financing like credit cards, has been in test mode for about six months and is now called MySalaryLine. The name will probably change when the financing program goes live, likely around August, said Think Finance CEO Ken Rees.
Think Finance will work with low-wage companies, such as fast food restaurants, that have many employees who live paycheck-to-paycheck and can quickly find themselves in a financial crisis after an unexpected expense like a car repair.
Johnson, best known as the founder of the BET channel, is among the most successful African-American entrepreneurs in Greater Washington. He has been a strong advocate for minorities, who rely disproportionately on payday lenders, which charge borrowers brutally high fees that often equate to a 400 percent annual interest rate.
About a year ago Johnson joined the board at Think Finance, which has been an alternative lender for more than a decade. (In February, Forbes named it the second-most promising private company in America.)
Johnson and Think Finance hope MySalaryLine will help bridge the gap between traditional forms of short-term credit and payday loans.
"Nobody likes payday lending. The consumers don't like it. The elected official don't like it," Johnson told me. "One elected official said to me, 'I don't like payday lending, but you've got to provide me with a real alternative. If we shut it down, people will go to loan sharks, and that's worse.'"
As it happens, Think Finance has been an online payday lender for more than a decade through its PayDay One brand. But the company is winding down that portfolio and exiting the business over the next couple of months, Rees says.
How is MySalaryLine different from payday lending? In contrast to the typical equivalent annual percentage rate, or APR, of about 400 percent for payday loans, MySalaryLine loans will come in around 115 percent (though the number is still in flux). That's still very expensive money -- about eight times the typical credit card rate of 15 percent, as published by Bankrate.com.
"Is it a 32 percent APR? No. But it is a hell of a lot less than what people are paying for payday lending," Johnson told me, adding later, "We don't want the perfect to be the enemy of the good."
Also, MySalaryLine borrowers have longer to pay off the debt.
Payday loans must be repaid in full in two weeks (which few borrowers can afford to do) or renewed at a substantial fee. Payday borrowers get trapped in a cycle of debt for an average of five months until they pay off their principal, according to some killer research by the Pew Charitable Trusts.
MySalaryLine loans, on the other hand, are repaid over five or fewer pay periods. Rees tells me that so far less than 1 percent of customers haven't paid off their loans within that time period, mostly because they left their jobs.
"Because it's linked to a payroll deduction, it provides inherently less risk" for the lender, he said.
If you would like a primer on how payday loans work, here's a great diagram from Pew.
Think Finance is partnering with a yet-unnamed bank, which will be making the loans. That bank needs to get approval, presumably from regulators, before the product can officially be offered, Rees said.
Aside from that, the biggest hurdle is convincing employers, regulators, advocates of the underserved and consumers that MySalaryLine is different from payday lending -- a radioactive product with which nobody wants to be associated.
Johnson is a big part of that effort. He issued a press release May 9, announcing "a campaign to end payday lending and to encourage access to low interest rate borrowing alternatives."
The press release makes no mention of Think Finance or its product. It is basically just a denunciation of payday lending that is meant to covertly grease the wheels for the introduction of MySalaryLine as an alternative.
Johnson acknowledged that his campaign is as much about marketing a product as it is about educating the world about the ills of payday lending.
"If you can do well and do good, God bless you," he said. "I'm trying to create business solutions to social problems."