At first glance, FlexWage Solutions is selling something that looks a lot like a payday loan.
But founder Frank Dombroski says he has built a more customer-friendly alternative to those much-criticized products, and one that will even benefit from regulators' increasing scrutiny of the payday lending industry.
His startup, founded in late 2009, has developed a payroll card with an unusual feature: it allows employees to access wages they have earned before the end of their employer's pay period, for a flat fee of $3 to $5 per transaction. People can essentially use FlexWage cards to get part of their paycheck ahead of time — but they are paying for early access to earned funds and are not taking out a loan against future earnings, which Dombroski says has insulated his company from regulatory scrutiny.
"The whole payday lending and pawnshop thing has gotten a lot of very negative press, and that's opened up a nice window for us," he told American Banker recently in an interview.
Dombroski, a former JPMorgan Chase (JPM) executive, says that regulators have so far voiced support for the company as a substitute for payday lending.
"Unanimously, [regulators] do not view us as a lender. They're interested and enthusiastic about what we're doing," he says, adding that FlexWage has spoken with the Consumer Financial Protection Bureau, the Treasury Department and state banking regulators.
A CFPB spokeswoman says the agency does not endorse or comment on particular companies.
But some consumer advocates are more skeptical, warning that FlexWage or other start-ups looking to meet the demand for short-term loans may still contribute to consumers spending beyond their means.
"Even if the fees are low, it encourages employees to spend their money in advance of when they would normally be paid, making it too easy to get behind in the pay cycle and putting them in a cycle of paying extra fees each month just to have access to their regular income," Lauren Saunders, a managing attorney with the National Consumer Law Center, told American Banker in an email.
"The ease of the program is a big part of the problem with this product and payday loans and other 'fast cash' products, because they encourage overspending beyond emergencies," she adds. "Whether the funds are called a loan or an advance on pay already earned doesn't really make a difference; either way it is taken out in a lump sum from the next regular paycheck."
Other industry members warn that while FlexWage may have so far avoided tripping regulatory alarms, the CFPB and other regulators are still grappling with how to assess new products.
"No matter what happens to this particular product, we're going to continue to see a lot of uncertainty regarding applying laws and regulations written for a different time to these innovative products," says Joseph Barloon, a partner at Skadden, Arps, Slate, Meagher & Flom.
"At the end of the day, the [CFPB's] view on a product like this may well depend on an analysis of the alternatives. The focus on payday lending and on overdraft fees over the last couple of years has led to a realization with a lot of regulators that it is important to address the short-term needs of low-income consumers, and I think they're struggling to determine the best ways to do that," he adds.
FlexWage made its name in part last year as one of four finalists in the Core Underbanked Innovation challenge, a contest sponsored by Core Innovation Capital, the investment arm of the Center for Financial Services Innovation.
The Mountainside, N.J., company didn't take the top prize in the contest, but it has now signed on seven businesses for its payroll cards, according to Dombroski. Those clients include call centers, retailers and manufacturers, which often employ short-term and low-income workers who are paid by the hour. He says FlexWage is also in talks with restaurant and hospitality chains.
The company's current client businesses have about 1,300 employees, and about 400 of them are using a FlexWage payroll card, according to Dombroski. Cardholders include both those without bank accounts and those who already had direct deposit set up at a bank. The startup partners with CenterState Bank, of Davenport, Fla., to issue its payroll cards.
Employees depositing funds on the card pay no monthly fee and have one free ATM withdrawal a month, according to Dombroski. If they choose to use the paycheck-advance feature to access their funds ahead of their pay date, they pay the flat fee of $3 to $5. That compares to typical payday loan prices of $15 or $20 per $100 borrowed for two weeks.
"We anticipated probably six to nine [paycheck-advance] transactions a year per employee, and we're seeing more on the order of ten to twelve transactions," says Dombroski.
Businesses that contract with FlexWage are charged $1 to $2 per month per active employee, which covers card issuance and data management, he adds.
But going forward, one big challenge could be signing on additional companies.
"The hurdle is actually selling to companies. Companies need to see that there's value there, to pay their employees this way," says Gil Luria, a managing director with Wedbush Securities. "Once you've been selected by an employer … then you really don't have much competition for that employee, you just have to compel them to sign up for it."
And the larger the employer, the more bureaucratic red tape, adds David True, a former MasterCard (MA) executive and payments consultant.
"I think they've got a good angle on it, but the chief hang-up is going to be systems integration," True says.
"Selling to an employer, that can be dangerously hard," he adds. "With any company of size, the bureaucracy builds up, so if you want to do an integration with the system," it could take could months, even years, to prioritize implementation of such a program.
Dombroski says that his existing clients are hoping that the FlexWage cards could help reduce turnover, a critical problem in many industries with hourly wage workers.
Turnover "is one of the key reasons that our early adopters have chosen to roll the product out. They believe it will drive satisfaction and retention," he says.
But getting employees to use the product could be another hurdle, says True. While people without bank accounts have started using prepaid cards instead, others still prefer the simplicity and anonymity of using cash and paying check-cashers as needed.
"How much is the ability to get an advance on your pay going to outweigh having the fondness for a check?" True says.