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Bank, fintech team up to offer no-cost early wage access

Evolve Bank & Trust, fintech startup Branch and Mastercard are working together on a product designed to help the millions of Americans who don't save enough to cover emergencies.

It's a combination of a mobile banking app and debit card that also allows users early wage access to money they've earned but haven't yet received, with no fees or interest.

“The way a lot of people work now, I don't think it's a traditional eight to five job environment anymore,” said Hank Word, chief technology officer of Evolve Bank & Trust. “The gig economy is here and I like how Branch is responding to what the world is now instead of focusing on the traditional banking paradigm. I like the fact that they are trying to innovate around that and solve that problem.”

Almost 40% of American adults wouldn’t be able to cover a $400 emergency with cash, savings or a credit card charge that they could quickly pay off, according to the Federal Reserve's 2018 report on the economic well-being of U.S. households. About 27% of those surveyed would need to borrow the money or sell something to come up with the $400 and an additional 12% would not be able to cover it at all.

And while early wage access programs are not new, and are sometimes controversial, this version does not appear to have the payday loan trappings of some others. For the bank, the program is bringing in new customers and deposits to which Evolve would not otherwise have access, and it’s part of a relatively new business model through which it offers banking-as-a-service to others. For Branch, this is a building block to becoming a full-fledged challenger bank.

The evolution of Branch

Branch started out with the intention of helping hourly workers earn more income by picking up additional shifts in their workplace, according to CEO Atif Siddiqi.

One thing we found out fairly quickly was that the reason they were looking for more hours is that their schedules are variable on a week-to-week basis — some weeks they would get 20 hours, another week 10 — and it made it very difficult for these workers to plan paycheck to paycheck," he said.

Siddiqi and his team built an app that helps people manage their shifts and, if they link a bank account, manage their money and set and track budgets. It provides upcoming bill reminders and low-balance alerts.

Along the way, the company collected a lot of data about when workers work and how much they make.

It built an early wage access feature that uses that data to let users receive a small amount of an upcoming paycheck to meet an unexpected expense.
It’s not a loan. Branch makes sure the money has already been earned, so there’s little risk. It doesn’t perform a credit check, only an identity verification/Know Your Customer check.

“One of the things we found fairly quickly was that these workers face a slew of financial challenges,” Siddiqi said. “In addition to the wage volatility, they had little or no access to credit and very low savings.”

He shifted the goal of the company to trying to help people earn more money and grow their daily account balance over time.

The company recently launched a free, digital checking account and debit card for hourly workers in partnership with Mastercard and Evolve Bank & Trust.

Now, in addition to an employer-sponsored model in which Branch receives payroll data directly from about 200 employers and provides financial wellness tools and early wage access to their employees (it’s a recruiting and retention tool), Branch now has a direct to consumer model.

With this move, Branch says it’s now the only company that offers instant paycheck advances at no cost, with no fees, tips or interest charged. Branch makes money off the interchange fees it receives from merchants each time its debit card is used, Siddiqi said.

The goal for Branch is to have customers switch their direct deposit to its account and actively use the card. But they have the option to keep their existing account.

Branch has “hundreds of thousands” of users, he said.

Its user demographic matches that of the hourly worker population, about 82 million people who are mostly gen Z and millennials making less than $35,000 in annual income. Many of them work in retail, restaurant, hospitality, or logistics.

Branch is also working on a savings products to help users create a financial cushion for themselves.

Where Evolve Bank & Trust comes in

When Siddiqi’s group met with Evolve Bank & Trust, they saw a good fit between the bank’s mission and their own, a joint interest in financial inclusion for underserved demographics.

Evolve, which is based in West Memphis, Ark., is the FDIC-insured bank that holds the Branch account deposits. As the sponsor bank, Evolve provides access to the Mastercard network. (Another company, TapaPay in Mountain View, Calif., provides connectivity to Mastercard itself to execute the pay advances.)

About two years ago, Evolve created a new department focused on banking-as-a-service and providing APIs, technology and other solutions to third parties. It worked with Mastercard and TabaPay to develop data connectivity, APIs and the ability to settle the funds between customers, the Mastercard network and Evolve. It took more than six months to get that worked out and documented and accounts opened for that to work, Word estimates.

It’s signed on several fintechs, many of which use Mastercard Send for payments. (It still serves consumers directly and plans to continue doing so.)

The bank looks for innovative partners that have a clear, stated purpose on a problem they're trying to solve and a solid definition of how they’re going to solve it, he said.

“[Branch was] also really open, happy and willing to talk about compliance and things that you have to do to make sure that one of these programs is compliant going forward and is a safe and secure product for everybody,” Word said.

The main thing the bank gets out of its relationship with Branch is new customers and deposits.

“There’s a lot of folks out there trying to provide banking services,” Word said. “So this is one way for Evolve to acquire customers — working with partners like Branch who have a focused market they're going after.”

Objections to early wage access

One concern that arises with early wage access is that borrowers could effectively become addicted to it, relying on it each month rather than for sudden expenses.

“I have mixed feelings about these early wage access programs even with low or no fees,” said Lauren Saunders, associate director of the National Consumer Law Center. “As an option for a very occasional use they can be helpful, but more often than not they just push people into a cycle of chronic use where there is always a hole in the next paycheck.”

Evolve said the bank has thought about this.

“It's certainly something that Branch is working to address,” Evolve's Word said. “There's a consumer education component to what they're doing. They also don't want to create a bunch of drug addicts that are using their products over and over and over and over. Their goal is to try and teach people how to do a better job of managing their money and not get into this situation if possible.”

Siddiqi acknowledged the risk, but said that in any given week, only 15% to 20% of Branch customers use the early wage access feature, and it’s not the same customers every week. The rest of the time, customers just use the shift management and budgeting features. And when they do take the pay advance, it’s only for a small portion of their income, he said.

“There might be others in the space that are trying to increase the amounts available to these employees,” Siddiqi said. “We restrict it to only a portion, it's really just to help mitigate some type of short-term need there.”

The most common reason people use Branch’s pay advance is to avoid an overdraft on a bank account, he said.

“We feel employees shouldn't have to take $35 or $100 in overdraft fees a month, that in itself seems a little predatory,” Siddiqi said.

The other reason people use early wage access is for unexpected expenses, like extra groceries.

“It really gets them to the next paycheck,” he said.

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