Thursday, August 11 2022

A former Citigroup executive has raised about $9 million in a new round of early-stage funding for Paywallet, enabling lending to borrowers whose repayments come from their paychecks.

Jacksonville, Fla.-based paywallet has been piloting the concept for the past few years and plans to officially launch its product this year by raising a fresh portion of funds from Pasaca Capital, a Pasadena, California-based private equity firm -Society, used. Paywallet’s total funding to date is $14 million.

The concept falls somewhere between payday loans — although Paywallet claims its terms are less onerous — and access to earned wages, a newer product that gives workers a portion of their paycheck before the typical two-week cycle. Both models have attracted the attention of regulators concerned about consumers falling into a debt cycle.

Paywallet describes its product as one that gives borrowers with low credit scores access to credit that they could not get from traditional sources.

“Through a fully consent-based approach, where consumers can transfer a portion of their paycheck to any deposit account, our technology enables people with little or no credit to lend at much better rates than they could otherwise get,” says Paywallet CEO DK called Sharma.

According to Sharma, who was previously the chief information officer for Citi’s international consumer business, Paywallet acts as an intermediary, connecting lenders with borrowers who use digital income verification tools to extend installment loans repaid through deductions from each paycheck.

“Because loans brokered through paywallet are repaid directly from paychecks, lenders are willing to take a risk for people with very little or no other borrowing options,” said DK Sharma, the startup’s chief executive officer.

Paywallet’s technology allows private lenders to fund bad-credit borrowers who take out loans likely in the $300 to $10,000 range with interest rates of around 30% to 36%, which Sharma says are spread out over months be repaid through paychecks. Paywallet has not disclosed the names of the lenders it worked with during the pilot.

interest payday loanon the other hand, a two-week advance often reaches 400% or more.

“Because loans brokered through paywallet are repaid directly from paychecks, lenders are willing to take a risk for people with very little or no other borrowing options,” Sharma said.

Participants first give 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 through ACH within 24 hours.

The borrower also authorizes the lender to receive funds equal to the installment of the loan with each paycheck through a paywallet-managed virtual account. Paywallet forwards each loan payment to the lender, who sends a receipt to the borrower. Paywallet declined to disclose its banking partner.

Lenders working with Paywallet run the risk that the borrower might change jobs or simply decide to end the agreement and stop funding loan repayments, but Sharma said borrowers are more interested in taking out a line of credit during the pilot phase Build a paywallet than default.

“If the borrower gets into trouble, they can negotiate another repayment agreement with the lender,” Sharma said.

The paywallet concept leverages various modern digital tools, but the basic concept of deducting installment loans directly from paychecks isn’t entirely new, according to Brian Riley, director of credit advisory service at Mercator Advisory Group.

Based in Atlanta purchasing power has used a similar strategy for several years to provide credit for specific purchases, such as electronics and furniture, by participating employers.

“A downside to this type of model is high customer turnover,” Riley said.

Another risk could be tightening regulations on paycheck services and lending to vulnerable borrowers.

Paywallet’s service is trending in a direction that has already caught the attention of regulators — the rapid expansion of wage-earning access companies like Earnin and PayActiv, where workers agree to have their prepaid wages deducted from their next regular paycheck will.

In response to growing concerns over the past year over the past year, the unregulated programs to access earned wages – also known as Early Wage Access or EWA California regulators have reached agreements Monitored the operations of five EWA companies by regularly reviewing their business practices.

About two months ago the Consumer Financial Protection Bureau started a request into the business practices of fintechs that offer buy-now/pay-later loans, typically targeting borrowers with little or no credit history.

According to a MagnifyMoney survey conducted last month, half of working Americans say they have no money left after paying expenses after each payday. More than one in three workers have money left over after paying bills, and 15% said this fluctuates.

Workers making less than $35,000 a year are most likely living paycheck to paycheck, but a growing number of workers making more than $100,000 are also reporting that they have little money left after paying bills.

Qualtrics conducted the online survey among 2,100 US adults between January 19 and January 21, 2022.

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