The Source Episode 3

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Episode Description: In this newest episode of The Source, listen to observations from special guest, author and Forbes contributor, Ron Shevlin, before we focus on the pitfalls of unnecessary financial exposure related to debiting worker bank accounts.

About Our Speakers

Gary Pearcy

Gary Pearcy is Vice President, Payment Operations at DailyPay, overseeing core payment functions including new partner launches, daily settlement, risk management, payment partner/vendor management, and recovery activities. Prior to joining DailyPay, Gary spent fourteen years at Wells Fargo leading various payments teams including his most recent stint as chief operating officer for Wells Fargo’s Merchant Services business unit. Prior to joining Wells Fargo, Gary held various positions in technology and business development at General Electric. Gary is also a military veteran, having spent twelve years as an officer in the U.S. Army’s Aviation branch.

Ron Shevlin

Ron Shevlin is the Director of Research at Cornerstone Advisors where he heads up the firm’s strategic research efforts, including commissioned research, the Insight Vault service, and the Cornerstone Performance Report. A nationally sought after speaker, Ron is the author of the Amazon best-selling book Smarter Bank, and is the purveyor of fine snark on the Financial Brand’s Snarketing column and the Fintech Snark Tank podcast. Ron’s prior experience includes research and consulting for Aite Group, Forrester Research, and KPMG.

Michael Baer, Host

Michael was formerly the managing editor overseeing domestic and international payroll information with Bloomberg Tax, previously BNA. He has spent the better part of three decades covering payroll and HR issues. Michael initially gained his experience in payroll and human resources with Marriott, and later was the personnel manager for the Shanghai Hilton. He lives with his wife and children in Alexandria, Virginia.

In this podcast you will learn about…

  • Why the writing is on the wall for the demise of predatory payday lending
  • An understanding that payday lenders and some on-demand pay providers require employees to give them access to their bank accounts to debit, prior to providing money before payday.
  • Find out how debiting can be misused in several ways, exposing bank account holders to overdraft fees as well as providing third parties access to transactions.
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Thanks for tuning in!

Podcast Transcript:

Speaker 1:

Welcome to The Source, the definitive destination for timely and informative regulatory updates and issues in the on demand pay industry. The Source is brought to you by DailyPay, the industry leading provider of the DailyPay benefit and pay experience. This material is for general information only and the views expressed here reflect only the views of the participants. This program should be considered marketing material and should not be relied on as legal, tax, accounting or regulatory advice. And now, let’s welcome our host, Michael Baer.

Michael:

Hello everyone, and welcome to The Source. The Source is sponsored by DailyPay and it’s your look into active and upcoming legislation, industry insights and news. And it’s also a chance to understand the questions surrounding issues in the early access to pay industry. And today, we’re going to start with some new developments bubbling up before state legislatures meet in January. And then, we’re going to get some insights on large trends for DailyPay in the DailyPay space from our special guest, Ron Shevlin. And after that, we’re going to get into the weeds and tackle the uncomfortable issue of allowing unregulated third parties to have added with our bank accounts. And that’s with DailyPay’s own, Gary Pearcy.

And let me introduce our guest speakers. Ron Shevlin is the Director of Research with Cornerstone Advisors. He’s the author of the book Smarter Bank, and he’s also the author of Fintech Snark Tank, which is on forbes.com. And he’s calling in from Boston. Ron, thank you for being here.

Ron:

Thanks Mike.

Michael:

Gary Pearcy, who recently joined DailyPay as Vice President of Payment Operations, oversees DailyPay’s new operations in Minneapolis, the new office there. He had a long military career with the 82nd Airborne and then migrated in the civilian life into payments, most recently was with Wells Fargo before joining DailyPay. Gary, thanks for your service to our country and welcome.

Gary:

Thank you, Mike.

Michael:

Okay. Well first, as it’s becoming a tradition here at The Source, today in legal history, we have actually two legal facts that happened on December 11th in the past. One is really ironic I think, because on this day, December 11th 1998, majority Republicans on the House Judiciary Committee pushed through guess what? Three articles of impeachment against President Clinton. And 10 years later, on December 11th 2008, Bernie Madoff was arrested and charged with securities fraud of about $50 billion as a so-called Ponzi scheme.

So these are not really two great events in legal history for sure. We’ve been focusing on some of the other landmark events that were more on desegregation side and things like that. They just happened to coincide with our podcast day. This day maybe not super positive, and as they say, history repeats itself. So the Clinton impeachment process, and now the Trump impeachment process. So both are happening in December. And that’s very interesting.

Next, I want to go through some recent developments because it’s been a busy month in our space in past October and November timeframe. And we are seeing a significant push by predatory payday lenders to circumvent existing state laws, limiting interests that can be charged on small payday loans. These are the results of what appears to be a successful effort to lobby The White House so federal agencies could possibly look the other way.

For example, in Arizona, there’s a petition circulating for a ballot measure called the Arizona Economic Freedom Act. And that would roll back laws that are in place right now that prohibit payday lender activity, and it would allow such lenders to set their own rates, however high they may go. Oh, and also this ballot measure would put a cap on any minimum wage increases in the state and eliminate the recently enacted paid leave requirement.

Adjacent to Arizona is Nevada, where payday lenders are lobbying to be excluded from regulations that would implement a law that limit their practice in Nevada. And there is a little loophole in that law that allows some companies to not be included in the coverage of that law, and they’re trying to go in there and they feel that any rate cap laws, they would be harmless under this special program if their businesses can be a part of that. [inaudible 00:05:31] think that they should be allowed as businesses to join that program.

And then all the way across the country to Florida, some payday lenders are reportedly using out-of-state banks to issue loans, circumventing state law that limits interest on payday loans to between 18 and 36%. And this, “Rent-a-bank,” quote unquote situation, this is a national issue that actually ended up being… Maybe endorsed is too strong a word in November, but there were proposed regulations put out by both Office of the Comptroller of Currency and the FDIC that essentially would allow that practice to continue. And that is where a payday loan operator in a state that limits interest amounts can actually use a bank in another state that is a national bank, that is set up in another state that doesn’t have a particular interest cap. And then through that bank can actually do payday loans at a much higher interest rate.

However, on the other end, we do have several members of Congress in both houses. They’ve offered up a bill that would limit the interest charged on such loans countrywide the 36%. And now, switching from this payday lender jag that I was just on, on a more regulatory level dealing with specifically the on demand pay industry, the IRS Advisory Committee’s 2019 report, which was also released last month in November, included an entire section devoted to on demand pay with questions about processes being solicited by the agency. And I can speak for us here at DailyPay that we’re on top of this issue and are looking to be a constructive part of answering questions surrounding how we help employees access pay before payday.

So a lot is happening and this is a good reason to stay tuned to The Source next time for more updates. Let’s move on to Ron Shevlin. Ron, when you and I talked before the podcast, you had some fascinating observations about employees now being able to access pay prior to schedule payday. Could you please elaborate on some of those observations you have for our audience?

Ron:

Yeah, absolutely, Mike. And thank you very much for inviting me to participate in this. I’d love to chat about what’s going on in the market and especially this emerging area of wage on demand or early wage access, which I think is really going to grow and take off in the next couple of years.

It was interesting to hear you talk a lot about the regulatory movements. To a large extent, I really can’t help but feel that to a large part, the regulatory aspect’s a tail wagging a dog that’s moving a hell of a lot faster than they are. A lot of things going on in this space and I think that the payday lenders in particular are going to find themselves very much far behind this. And to some extent, many of these regulations are just going to have zero impact, positive or negative.

And part of the reason I feel that way is looking at what some of the changes from a technology perspective are enabling and also from a more broader demographic and sociological shift. So let me talk a little bit about the technology aspect of this. If you ever step back and think, “Why do we get paid every two weeks or every month?” And it would seem obvious, but it really is rooted in a very paper-based non-technology driven environment where it simply would be too expensive for an employer to pay an employee every day. Couldn’t do it in cash, didn’t want to write a check every day. You didn’t see that person necessarily every day. So sending off a check through the mail every day to your employees would really be ridiculous because they wouldn’t get it for two to three days. Things happen with the mail anyway.

And then the other part of the issue is that for many employers, especially smaller ones, there are cashflow management issues that they have to be on top of. Certainly a Google or Facebook, maybe even an IBM has got plenty of money sitting there, they don’t have to worry about the daily cash flows. But for many small businesses, they have to wrestle with having enough money for payday. But-

Michael:

I have to interject here, Ron.

Ron:

Yeah.

Michael:

I don’t think that’s just exclusive to small businesses. There are cash flow problems in midsize and some larger ones, maybe not the Googles you’re right. But they can struggle with meeting it as well.

Ron:

Yeah. So that’s maybe not universal, but it’s certainly a bigger issue. And that limits the amount of times that somebody can get paid. But with direct deposit and more importantly, with the rise of digital banking, online banking and now mobile banking, it makes for electronic transfer of funds much simpler, much more convenient, and an ability to time those payments and movements in a very minute and detailed way.

So that’s one of the things that enable that. I think we still are in an environment where there’s a whole lot of education around these wage on demand or early wage access types of services available. I think to a large extent, consumers don’t know about these and so there’s still a lot of education that’s necessary. I think the industry’s going to have to really step up those efforts because there’s a whole another trend, and this is where I want to get into the demographic and the sociological trends that are happening, is really seeing a shift in employment trends.

The idea or the notion of the gig economy, where a lot of people increasingly don’t have the traditional nine to five, Monday to Friday, or five day a week type of job, is becoming much more prevalent. And as a result, while this gives them a lot of flexibility to do different things and different jobs and so forth, there has been one really important financial implication and that’s cashflow management and timing of cashflow with bills.

Michael:

And that’s on a personal level. Is that right? You’re talking personally cashflow, right?

Ron:

Absolutely. This isn’t necessarily an income level problem, Mike, it’s a problem with timing. It’s not that a lot of these folks aren’t making enough money, it’s the timing of when they make money that becomes a challenge and an issue given when bills and so forth become due. Historically, yes, there have been a segment of consumers who have addressed those issues with payday loans, but there’s a lot of other things that are flying under the radar. Excuse me.

A lot of people intentionally overdraw on their accounts and incur that 30 or $35 fee, whatever it might be, intentionally in order to make certain payments and so forth. And so the ability to tap into what is effectively their money, accrued wages, accrued earnings, is becoming a huge benefit to a growing number of consumers. And especially because enabled through electronic banking, electronic money transfer services, it makes it easier for them to avail themselves of these services, especially as online and digital banking adoption increases. And we see the near 100% adoption of smart phones, especially among consumers under the age of a 55 or 50 in particular.

So this is an absolutely growing area that is really addressing not just a huge need among consumers today, but I think more importantly, addressing a growing need among consumers over the next 10, 15, 20 years.

Michael:

So that’s on the consumer side. Now, let’s talk a little bit, you had mentioned to me about what advantages employers can have by steering people to these other options.

Ron:

Yeah. There’s things that people might not necessarily think about. I mean immediately as we had talked about before, you may think that there’s mostly downside for the employer from a cashflow perspective. But actually, the benefits to the employer are quite substantial as well because first of all, we’re talking about employees who are seeing their financial issues alleviated through these types of services. So there’s one thing about having employees, I wouldn’t say who are healthy and happy and all that at the job, but there’s a certain level of stress reduction that comes from having your financial issues that plays out on the job. So there’s some measurable benefits from that perspective.

But in today’s economy where unemployment is so low and many businesses are struggling to find talent, the ability to provide an important value added service like this becomes a huge differentiating benefit for a lot of employers. And especially those in the healthcare arena where you see a lot of these types of gig economy type workers, or especially in hotels, other fast food services, franchise type environments, you see a lot of consumers who… Or I should say people, employees, who need these types of services and see that it’s the employer who’s providing these services to them, and that increases loyalty and on job performance. I think that might be a little hard to measure, but I think anecdotally, you see a lot of evidence of that.

Michael:

And actually, we’ve seen measurements of that by users of our services.

Ron:

Excellent.

Michael:

Actually, the employers are reporting a dramatic reduction in turnover rates. So that’s one of the things. Another thing that’s been observed is that people seem to want to be sure that they’re punching in and out, which has always been a problem on the payroll side to make sure that there’s actual good entries there to start accumulating that pay. These folks now are more aware and I think it’s a financial awareness thing. By looking at the app, they can see how much money they made, maybe pick up another shift somewhere. That seems to be happening as well. So that’s what we’ve been noticing here.

So Ron, I really do appreciate your comments and your observations from both the consumer’s perspective and on the employer side. Why don’t we move away from your excellent high level observations and we have Gary Pearcy here with us, as I mentioned. We’re going to get into a specific problem that has surfaced with some providers of on demand pay, but not DailyPay, And I’ll frame the issue here. It’s a scary one. Many who want access to their pay before payday are told by the providers of amounts that they need to allow access to the bank account where their payroll direct deposits are made. It may seem innocuous and it is legal in somewhat in a normal way of doing business nowadays, but there are pitfalls and such a requirement should not be necessary to access your pay before payday.

Now Gary, you’ve been in the payment business a while. People are sharing their financial information all the time. Often, they just don’t understand just how much access into their personal finances folks are allowing entities to have. Am I right? I mean to debit accounts, to take back money, provided before payday, is supposed to be the main reason. But there are problems with that that we’ll discuss. But there is this additional layer of possible exposure here, right?

Gary:

Thanks Mike. You’re absolutely correct. I think that people don’t realize that they may be enabling some third parties to view all… More than just view sometimes, but they can view all of their financial data when they agree to authorize them as a requirement to get [inaudible 00:19:32] pay.

Michael:

All? You mean all of it? They can see all their different transactions?

Gary:

They can see all of it, Mike. When you provide credentials to your bank account and we limit what we need from our end users. We’re using their routing number and their account number. But there are a lot of actors, nefarious actors out there, that are asking for more information and get it actually granting access to online banking, which of course, you’d know that if you get it to an online banking session, you have not only the access to see everything that that person has in their online banking world, but they have the ability to move money, which is really dangerous.

Michael:

Mm-hmm (affirmative). But I mean that might be okay on the banking side. What’s the difference between say allowing a financial institution like a bank, say, and then maybe just one of these other third party actors to have this access to your account?

Gary:

Well certainly, banks operate under the rules that are enforced by their regulators. You’ve got the fed and the OCC, depending on the size of the bank, they’re heavily regulated and they have the responsibility to know their customers, and that’s their job is to protect their customers information. The problem is many people are allowing broad account access to the non-regulated entities. And this is common and most of these organizations, most of them are prudent in their access, but there’s no formal oversight into their behavior.

Michael:

Well that’s scary. It’s like an invited invasion of privacy in my mind. I mean it’s like giving somebody the keys to my apartment who I don’t know very well that could just come in and do what they want.

Gary:

Absolutely. It is frightening. And I mean you have to be very prudent, very conscientious about who you’re allowing to access your account and understand the controls that you have available to you. That really is the bottom line. And we try to educate our users and we’re not one of those nefarious characters out there. We’re out there to help these customers, not to hurt them.

Michael:

Right. But actually, there’s two aspects to this whole role of authorizing a third party to debit the account. And that is probably more impactful to the user directly I guess to on demand pay users, is this access allows debiting amounts from the account that we’ve seen instances of people complaining from other actors that the service provider, well, they didn’t wait until their pay was deposited to cover that early access amount and instead, they’ve gone in two, three days before payday drawing the money out that these people had access to. And then leaving the employee basically in the same bind as if they didn’t have that access with having extra fees and overdraft problems. What can you tell us about that process?

Gary:

Well, this can drop an account holder into a negative balance, certainly resulting in overdrafts and fees associated with them. It’s simply bad all around. But it certainly happens. 75% of the people living paycheck to paycheck, this could be devastating financially. The agencies that have access to these users bank accounts can for very different reasons do something wrong to harm that customer. And again, these aren’t the regulated agencies out there. They’re not the ones that are being examined on unfair, deceptive and abusive acts or practices, right? These are businesses that are trying to grow their bottom line and don’t necessarily have that customer’s financial wellbeing at heart.

Michael:

But when it comes to DailyPay, this is not something our clients need to be concerned about who are clients of DailyPay. Is that right?

Gary:

That’s correct, Mike. It’s not our practice at DailyPay. We do not debit accounts. There are situations that come about where there are discrepancies between the employer and what the employer’s payroll pays to the end user versus what gets paid through DailyPay, and from time to time, we’ll have to reach back out to the end user to let them know that they’re in what we call a negative balance. We know that they’ve essentially overextended themselves due to reasons unbeknownst to either them or us at the time.

But we’ll never debit a user’s account to address the negative balance without that user’s permission. And in general, the users want to clear up the idea of those situations right away. We also offer various remedies to include what we call payment plans. We won’t put a customer in a negative situation on a payday and if they are, we will allow them to address that negative balance over a course of a couple of paydays, so as not to create a financial hardship for them.

Michael:

So I guess bottom line is that the DailyPay clients, when they sign up, they’re not immediately asked to do this authorization. They may be asked later on these rare instances where there might be a discrepancy. Am I right about that?

Gary:

Yeah. Again, you’re right, Mike. Clients simply redirect their direct deposit designation to a particular accounted DailyPay on payday. The DailyPay receives their direct deposits and removes the earned amounts that were paid out during the pay cycle, and instantly sends a remainder balance back to the employee’s accounts. No questions asked. And other benefits associated with having the account, again, you highlighted it earlier in the day that they really have a chance to see what they’re earning, they know when their bills are and when they need to pay those bills in order to avoid those late fees. They know how much money they need and when, and that’s what we’re putting in the power [inaudible 00:27:02].

Michael:

All right. Well thank you very much, Gary Pearcy. We appreciate you calling in from Minneapolis, Ron Shevlin, do you have any other comments before we close out this podcast?

Ron:

Nothing major, Mike. I just want to thank you for letting me share some thoughts and ideas. I think this is a really exciting space and what’s nice is it’s one where consumers are definitely getting a huge benefit and I think that’s one of the big differences in a lot of the Fintech areas these days, is this is not just one more lending, one more fee, one more convenience thing, it’s something that really goes to the heart of financial health. And I think we need to see a lot more financial health oriented services come to market.

Michael:

All right. Fantastic. Well again, thank you for joining us today from Boston. I just want to say this that next month, we will have another exciting broadcast of The Source. And in that one, we’re going to switch over to the payroll area and we’re going to have two experts from the payroll field, Lori Brown of Hanger will be talking with us, specifically about her impressions of the disruptions that are being caused in payroll by the on demand movement.

And joining her will be Bill Dunn, who is the Director of Government Affairs for the American Payroll Association. So I’m really looking forward to next month. So we’ll be switching to a payroll oriented one, but we hope that everybody will sign in and register and listen to that podcast as well and get informed. We’ll also have an update on any of the new things that have happened in our space, in our area that we’ve been covering, and we look forward to you all continuing to listen to us and we will see you next month. Thank you very much.

Gary:

Thanks Mike.

Ron:

Thanks Mike, thanks Gary.

Speaker 1:

Thanks for attending The Source, brought to you by DailyPay. Join us again next month for up to date insight on on demand pay and pay experiences. Keep an eye on your inbox for more information regarding featured guests and new topics.

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