Payday lenders are not the most scrupulous of operations. Taking advantage of the desperation of people who don’t have enough money to meet their next salary, these lenders provide short-term loans at exorbitant interest rates, forcing already cash-strapped clients into further debt. . And while many have tried to reform the payday loan industry, we are still waiting for the right answer.
Ram Palaniappan has a new approach. He wants to solve the problem at its root, by completely eradicating the salary.
According to Palaniappan, the real culprit here is the very concept of salary. According to him, there is no reason why people who have already done their job have to wait several days, even weeks, to get the money they have rightfully earned. So, in May, Palaniappan launched ActiveHours. Startup Palo Alto, which recently raised $ 4.1 million, is creating an app that gives hourly workers immediate access to the pay they’ve already earned, without having to wait for their employer’s standard pay cycle.
Also there are no charges. Instead, ActiveHours makes money on tips, asking users to pay what they want. “We are trying to build something that is completely aligned with the consumer, unlike what people are used to today in typical financial services, where it is, in some ways, contradictory,” he says.
Palaniappan is far from the only entrepreneur who sees an opportunity in the creation of an alternative to the personal loan. To lend, for example, raised $ 64 million to offer loans with lower interest rates that get cheaper over time. ZestFinance, started by an ex-Googler, is similar. But even these players still depend on the fees, both for profit and protection. In this demographic, after all, the delinquency rate tends to be high, so even the most honest lenders usually explain these losses up front. But with its no-cost model, ActiveHours is a radical change.
It is also riskier. The company is betting that when it has a choice, its customers — already in financial difficulty — will always pay for the service it provides. “Some people look at the model and think we are crazy,” says Palaniappan, “but we tested it and found the model is enough to build a sustainable business.”
Unlock the money you have already earned
This is not Palaniappan’s first experience with a financial services company. In 2004, he was part of the team that launched RushCard, a startup that allowed people without access to a traditional bank account to have their paychecks loaded onto an ATM prepaid card.1 The aim was to offer so-called “under-banked” people an alternative to Western Union or other check-cashing companies, which take a significant part in every transaction.
While Palaniappan was working at RushCard, he learned that an employee working in the call center had recently taken out a payday loan. He immediately wrote her a personal check and told her to pay it as soon as possible. “I didn’t want the people who worked for me to have to use payday loans,” he says. It was then that he realized that there should be an easier way for employees to unlock the money they had already earned.
When he left RushCard in 2012 after selling it to a private equity firm, he started experimenting with ways to automate such a service. It is a complex process that requires checking who an employee is, where they work, how much they have worked and what their hourly wages are. Then there’s the equally difficult process of integrating with banks to deposit and withdraw funds from each user’s existing bank account.
Palaniappan and several of its RushCard team members spent about a year developing the technology and released the app publicly in May. At the time, ActiveHours handled transactions for employees of 100 different employers. Today, that’s 250 employers, including Best Buy, Starbucks, and even big banks like Wells Fargo and Bank of America.
How it works
Employees can register for Active Hours themselves, by providing their bank account number. They use the app to upload a photo of their electronic timesheets (paper timesheets are not allowed). ActiveHours knows which systems are used by most employers, so it uses a photo of the system to verify that the timesheet is real and checks the hours recorded against past deposits made to the user’s bank account.
ActiveHours also uses geotagging to ensure the user was at work when they took the photo. Once a user has been approved, they can see how much money they have already earned and transfer any percentage of it to their bank account. ActiveHours basically gives the user a cash advance and deposits it into the user’s account the next day.