Startup pitches loans repaid by paycheck deduction

An ex-Citigroup executive has raised about $9 million in a new round of early-stage funding for Paywallet, which enables extension of credit to borrowers whose repayments come from their paychecks.

Paywallet, of Jacksonville, Florida, has been piloting the concept over the last couple of years and plans to formally launch its product this year using a new chunk of funds from Pasaca Capital, a Pasadena, California-based private equity firm. Paywallet’s total funding to date is $14 million.

The concept falls somewhere between payday loans — though Paywallet contends its terms are less onerous — and earned wage access, a newer product that gives workers a portion of their paycheck ahead of the typical two-week cycle. Both of those models have drawn the attention of regulators who worry about consumers entering a cycle of debt.

Paywallet describes its product as one that allows borrowers with low credit scores access to loans they couldn't get from mainstream sources.

“Using a completely consent-based approach in which consumers can direct a portion of their paycheck to any deposit account, our technology facilitates loans to people who have low or no credit at much better rates than they could get otherwise,” Paywallet CEO DK Sharma said.

Paywallet operates as an intermediary connecting lenders to borrowers using digital income-verification tools to extend installment loans that are repaid through deductions from each paycheck, according to Sharma, who was previously chief information officer for Citi's international consumer business.

Paywallet's technology enables private lenders to fund borrowers with blemished credit who take out loans likely to be in the range of $300 to $10,000 with interest rates of about 30% to 36% that are repaid over months in installments via paychecks, according to Sharma. Paywallet hasn't disclosed the names of the lenders it has partnered with during the pilot.

Interest rates on payday loans, by contrast, often reach 400% or more for a two-week advance.

“Because loans facilitated through Paywallet are being repaid directly from paychecks, lenders are willing to take a risk on people with very low or no other credit options,” Sharma said.

Participants begin by giving Paywallet permission to verify their income and employment through a third party. Argyle, a global employment data verification provider, is one of the firms working with Paywallet, Sharma said. If the loan is approved, the lender disburses the funds directly to the borrower by ACH within 24 hours.

The borrower also authorizes the lender to receive funds equal to the amount of the loan’s installment payment with each paycheck via a Paywallet-managed virtual account. Paywallet passes each loan payment on to the lender, who sends the borrower a receipt. Paywallet declined to disclose its banking partner.

Lenders working with Paywallet assume the risk that the borrower may switch jobs or simply decide to end the agreement and stop funding loan repayments, but Sharma said borrowers during the pilot phase are more interested in building a line of credit with Paywallet than defaulting.

“If the borrower runs into trouble, they can work out a different repayment deal with the lender,” Sharma said.

Paywallet's concept uses various modern digital tools, but the basic concept of deducting installment loans directly from paychecks isn’t completely new, according to Brian Riley, director of Mercator Advisory Group’s credit advisory service.

Atlanta-based Purchasing Power for several years has been using a similar strategy to provide credit for specific purchases like electronics and furniture through participating employers.

"One downside to this type of model is high customer turnover,” Riley said.

Another risk could be tightening regulations around paycheck services and loans targeting vulnerable borrowers.

Paywallet’s service leans in a direction that has already attracted regulators’ attention—the rapid expansion of “earned wage access” companies like Earnin and PayActiv in which workers agree to have their prepaid wages deducted from their next regular paychecks.

In response to rising concern about the unregulated earned wage access — also called early wage access or EWA — programs, last year California regulators reached agreements to oversee the operations of five EWA companies through regular examinations of their business practices.

About two months ago the Consumer Financial Protection Bureau launched an inquiry into the business practices of fintechs offering buy now/pay later loans which tend to target borrowers with little or no credit history.

The push for services tapping payrolls comes as half of working Americans say they have no money left over after paying expenses following each payday, according to a survey conducted last month by MagnifyMoney. More than one in three workers do have money left over after paying bills and 15% said it varies.

Workers earning less than $35,000 annually are most likely to be living paycheck to paycheck, but increasingly workers earning more than $100,000 also report little money left over after paying bills.

Qualtrics conducted the online survey between Jan. 19 and Jan. 21, 2022, among 2,100 U.S. adults.