For a moment, I’d like you to imagine you purchased a new lightbulb for your lamp. The sole purpose of this — and any — lightbulb is to illuminate the room. And this particular lightbulb does that …. but for only 1.9 days out of every 14 day period. Outside of that limited period, the lightbulb remains dark. It simply does not do what it’s meant to do for the majority of the time. One might conclude this is the worst lightbulb ever.
This is what it’s like to have a consumer bank account as a lower income earner. A consumer bank account is a powerful tool. It’s a place to store money, pay bills, and save in a continuous motion. And for anyone who is considered to be mass affluent and above, it is usually available at little to no cost.
But for a lower income earner, none of this is true. In fact, consumer bank accounts simply don’t fulfill their purpose for most everyday Americans. For 12.1 out of 14 days, a consumer can’t use her bank account for what it was designed to do. She can’t use it to store her money, she can’t use it to pay a bill, and she certainly can’t use it to save. This is because according to the Pew Research Center, the average American has a $0 (or negative) balance in their checking account for 12.1 out of every 14 days.
When a low income earner doesn’t use her bank account, that’s bad for the bank too, which is why for years, banks have struggled with how to make money from lower income consumers. They admittedly do need to make money because (most) banks are for-profit enterprises. But this reality has led to a number of suboptimal approaches to consumers. Low income consumers “borrow” from their banks in the form of overdraft protection. Historically, banks made $12 billion of NSF and overdraft fees, with the poorest 9% of bank customers paying 80% of these fees. In recent history, those fees have come under pressure due to policy decisions and earned wage access, and as a result, banks have sought to increase fees on these customers to offset that lost revenue. Just last month, Citibank raised its account balance minimum 20x from $1,500 to $30,000 for free checking. More broadly, over the last 12 months, checking account fees have risen nearly twice as fast as the CPI. This is truly a sublime result where this is the equivalent of lending one’s money to the bank and being charged for doing so, almost a form of “reverse interest.”
The fundamental explanation for why consumer banks have failed to serve low income earners is because most low income earners are in fact not “consumers.” The very definition of a consumer is someone who has the choice to spend or not to spend, to save or not to save. Lower income people do not have these choices. They are in fact living paycheck to paycheck, have urgent bills to pay, and exigent needs to meet. Choice is simply not something they enjoy.
When viewed through this lens, it’s clear that low income earners are really not consumers. Their financial lives begin and end with their paycheck. They do not have a checking balance off of which to get a mortgage, or a savings balance to earn interest, or a retirement account to provide financial security. Everything about the paycheck to paycheck individual is about …well, her paycheck.
The person who understands this the most, is the low income earner herself. And this is why she has begun to seek out solutions to her banking needs around her paycheck, i.e, at work. Over the last few years, there has been a meteoric rise in the number of “Workplace Banking” programs ” that really are just financial and banking products. They enable low income earners to access liquidity, build savings, and monetize employment-related assets. I call this entire set of offerings “The Workplace Shadow Banking Market.”
As you may know, he term “shadow banking” refers to non-bank counterparties offering financial services in a non-traditional and usually unregulated way. It is often used to describe consumer services like check cashing, payday loans, pawn shops. Essentially, these are services that consumers use to access liquidity and other financial services that aren’t regulated banks. It is an obscure corner of the finance world, hence the connotation of the word “shadow.”
In my experience as an HR and Financial technology entrepreneur, I have observed the emergence of workplace shadow banking firsthand. At my first company DailyPay, we invented something called the Pay Balance, an entirely new account balance. For the first time ever, we could use technology and financial engineering to accurately reflect the amount of net pay an employee had earned, and then display that as a balance minute to minute in the user’s app. Prior to this, that information only existed in unconstructed data across multiple HR systems of an employer. The Pay Balance was named one of Time’s Best Inventions in 2021 because it unlocked “new” and “real time” money for the user.
At my second company Salt Labs, we have invented a new form of ownership asset that an employee earns as she works. For example, if an hourly worker works 8 hours today, she earns 8 Salt, funded by the employer. Initially, the employee views Salt simply as “points for working”, and just like any other points and loyalty program, she can take those points and redeem them. In Salt’s program, that could mean a special purchase, savings products, or investments. Over time, our users build a Salt balance, and like any other loyalty program participant, become “obsessed” with earning more (anyone love their airline miles?!). Against the backdrop of a national savings crisis, this obsessive behavior is noteworthy. Workers making less than $60k have an average savings rate of negative 2%, leaving nothing (or negative amounts) for real savings. The fundamental challenge that exists for lower income earners is that they are unable to save out of their already stretched paycheck. It’s why contributing into a 401(k) is virtually impossible for a lower income earner because it’s unfathomable to imagine even having a percentage points less of one’s paycheck if you’re already stretching to the next one. Despite the widespread availability of the 401k, less than 20% of sub-$50k earners have a 401(k), and that rate drops to a paltry 6% for those making less than $25k.
At Salt Labs, we have created a solution to this problem which is to offer the employee something to obsessively earn and save that is non-fungible with her paycheck, i.e, Salt. Her Salt balance acts as her first real Savings Account, from which she then can convert Salt at any time into real dollar savings.
Both the Pay Balance and Salt are offerings that are greatly desired by employees. At DailyPay, we save adoption rates anywhere from 30–50% of the employee base. At Salt Labs, the adoption rates are even higher, between 40–70%. The reason for these high rates of adoption is because these products are filling the gap for where the banking system has failed. The Pay Balance IS the consumer’s checking account. And the Salt Balance IS her savings account. Other examples include paycheck-linked loans and paid-time-off monetization. All of these points how the Workplace Shadow Banking market actually meets the needs of the low income earner profoundly better than the traditional consumer banking system.
….But they also provide a clue as to where consumer banking needs to go to really serve low income earners. Banks that seek to serve lower income consumers need to provide a Pay Balance, a Salt Balance, and the other myriad of “benefits” that are today only offered through the HR department. These are the financial services and needs of the lower income consumer, and so there’s no reason why they should be accessed through an HR benefit. Rather they should and can be offered through a single banking platform. On the employer side, HR probably needs to stop offering these services through HR vendors. These vendors are essentially providing the fabric of the banking landscape for millions of Americans, but with little to no oversight, regulation, or capitalization commensurate with the role they are playing. Many, if not most, are unprofitable and are subject to the vicissitudes of the private venture capital market, as opposed to having their own capital base from which to draw. And lastly, HR vendors are largely operating with any regulation that protects consumers from fees and economic harm.
There is no better time than now to be part of the changing world of banking for everyday Americans. It is admirable what has been started through HR vendors in terms of meeting the financial needs of low income earners. But the bank who figures out first that their customers are really being banked by HR vendors and then starts to add these products to its own offering, will likely be the winner in the end.
