Government shutdown casts a spotlight on payroll pain points

As the federal budget dispute shoves an increasing number of government workers to the sidelines, there’s a window to provide payments relief that’s superior to options such as payday lending and bartering.

The government shutdown has entered its second week with little sign of a resolution. While the dispute is mostly over what constitutes border security, government contractors are caught in the middle because there's no promise of retroactive payment when the government reopens.

There’s also some uncertainty for full-time government workers due to the complex mix of workers who have been sent home versus those deemed essential and working normally. There’s also the chance that more federal workers, such as those at the EPA, may be furloughed later this week.

Zach Gibson/Bloomberg

While the news is almost universally bad for all involved, these marooned employees provide a chance for financial institutions to step in with data-driven products that could address the costs of emergency credit, or the higher premiums merchant acquirers receive for private gig economy payments.

There is a market for fintechs that provide flexible payments to contractors, gig economy workers, and sharing economy apps to use real-time payments to better match revenue flow to expenses. These same technologies could help the furloughed workers whose cash flow was upended by the shutdown.

For example, there is a potential to execute flexible real-time payments with lower cost, thus providing flexible lending and other dynamic payroll products for government gig workers. By analyzing an existing and trusted flow of direct deposit data, banks could offer quick furlough-triggered loans and payroll advances, said Richard Crone, a payments consultant.

“The FI looks at the [originating financial depository institution] and suddenly you have introduced a new data-driven lending product where only the FI has the confirmed data,” Crone said. “Not a credit bureau, not a payday lending, not a fintech … just the FI. It’s a unique competitive advantage.”

Some credit unions and USAA, a member-owned financial institution for military personnel and their families, are offering discount credit products related to the shutdown. USAA did not return a request for comment on its program by deadline.

The government’s vetting of contractors and other government workers provide potential cover for lower rates and faster payments since the long data feed from direct deposit payments would help manage the credit risk.

“For contractors that are working for the government, imagine the prequalification that goes into that,” Crone said. “That contractor has to pass a vendor qualification from the federal government. The banks don’t have to be flying blind here.”

The incentive to provide relief also extends to payment solution providers, said Tim Sloane, vice president of payments innovation at Mercator Advisory Group. It's a good customer service play, Sloane said.

Green Dot Bank, for example, could offer low cost loans to gig employees, and processors such as Hyperwallet could offer services to employers or employees based on fintech loan suppliers, Sloane said, adding the lending could be crowdsourced. Green Dot and PayPal, which owns Hyperwallet, did not return requests for comment by deadline.

Tipalti, which offers payment processing and other services for contract workers, contends a company survey of more than 200 freelance workers found more than 80 percent would be interested in an early payment program to mitigate their cash flow pains.

“While this research applied to reducing the payment window on traditional Net 30 payment terms, leveraging a qualified third party to meet payment obligations sooner could have benefited everyone in the" government shutdown, said Chen Amit, CEO and co-founder of Tipalti.

While there is an opportunity for a targeted payments service to aid those affected by a government shutdown, the resources that banks or fintechs put into that opportunity must be proportionate to the frequency at which they expect the government to send its workers home.

“The real question of course is how frequently is our government going to act like an intransigent child that makes everyone else suffer,” Sloane said. “Building a solution would be expensive and so it would only be worthwhile if this becomes standard practice.”