‘Earned wage access is the next evolution in improving day-to-day liquidity’: Argyle’s Matthew Gomes

The following was produced by Tearsheet Studios. We worked with employment and income data platform Argyle to create a podcast about how alternative lending options such as earned wage access, early pay and paycheck-linked lending can solve some of the challenges for consumers who do not qualify for traditional credit today.

More than 50% of Americans live paycheck-to-paycheck and may have thin or no credit history. In today’s podcast, we’re speaking to Matt Gomes, Director of Strategy at Argyle. He breaks down how alternative options like paycheck-linked lending, earned wage access, early pay, and cash advance can offer different solutions.

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The following excerpts have been edited for clarity.

Matthew Gomes, Argyle: I’m Matt Gomes, the director of personal lending and banking solutions at Argyle. We power financial institutions in the US and Canada to bring the next generation of financial products to consumers. I lead product strategy and go-to-market strategy for both of those solutions. Prior to joining Argyle, I spent the last seven or eight years of my career in the personal lending space in the US.

Looking at where we are in the evolution of the pay cycle, why is the two-week pay cycle out of date? What issues can the cycle cause for everyday American consumers?

Specific to the US, one of the challenges that everyday consumers face is the economic reality they find themselves in. The most recent stats show that 150 million Americans have less than $1,000 in savings, 115 million of them report living paycheck-to-paycheck, and about a third of the US adult population lacks access to traditional forms of credit. 

The reason that the two-week pay cycle, or the monthly pay cycle, is out of date and creates a problem is that a segment of the population cannot absorb unexpected expenses. Trying to manage a day-to-day budget with that type of constraint can be very tricky. The most telling statistic is that in 2019, banks in the United States made about $18 billion on overdraft fees. Assuming a $35 average overdraft fee translates to about two overdrafts per adult in the US. That is a very present and growing issue.

We've seen earned wage access as a theme pop up here on the Tearsheet Podcast. Why is access to revolving earned wages critical in an economy like ours?

It is to combat that lack of liquidity if an unexpected expense does crop up. One of the ways to think about that is the extreme growth in folks participating in the gig economy. One of the advantages of platforms like Uber, DoorDash, or Lyft is that they allow drivers to take an instant payout right after completing the trip. We saw the growth of these platforms throughout the 2010s and into this decade. More people are turning to them to increase earnings on the side or gain that liquidity. 

Earned wage access is just a different flavor. If someone has worked one of the two weeks' pay cycle, making $2,000 per paycheck, they’ve earned 1000 out of that 2000. There's no reason that individuals shouldn't be able to access their pay. Earned wage access is the next evolution in improving day-to-day liquidity, and it's table stakes moving forward in my mind.

Given where you sit and where Argyle is sitting in the ecosystem, what are the options for workers to access funds faster?

There's a handful out there with varying levels of maturity. Earned wage access is solving short-term liquidity problems. It's for someone who needs 100 to 150 dollars for groceries and a tank of gas to make it to the next paycheck. 

Early pay is becoming common and will be available across financial institutions within the next five years. Once a bank or credit union has the ACH instructions from payroll, they know those funds will hit their customers' accounts. They make them available two days early, at no fee, just based on deposits they already hold. I think that's going to become table stakes. Helpful, but it doesn't necessarily solve an unexpected expense earlier in the pay cycle.

The last one we're seeing growth in is paycheck-linked lending. It is an installment loan repaid directly from a paycheck and allows folks with little to no credit to qualify. The difference between that and earned wage access is that it's not for short-term liquidity issues, like grocery bills or a tank of gas. It's more for auto repair and unexpected medical expenses if you have a high deductible healthcare plan. So we're talking 1500 to 6000 dollars, somewhere in that range.

From a consumer's point of view, are the benefits and the challenges of using each one of these different options clear?

It’s not easy for consumers to navigate this space. Furthermore, it’s not easy for regulators to navigate the space either. Specific to earned wage access, there are several companies out there that offer it. And there are two models for going to market. The first is pitching them as an employee benefit. Companies go B2B, and after they've signed a client, they can make that product available to their employees. The other is direct to the consumer.

The CFPB published a letter in 2021, giving some guidance on earned wage access and the requirements to qualify as an earned wage provider. But they haven't formalized that guidance. It's still a pretty nascent space.

The short answer is that it's not crystal clear to consumers. I would also argue that because of how new the space is, the whole industry is still learning.

I'm curious about the benefits of underwriting someone's income versus using a traditional credit score.

Both earned wage access and paycheck-linked lending are great examples of this. One of the challenges in underwriting based on credit score is that as more people work in the gig economy – and broaden that to include independent contractors – all of these people tend to have high revolving balances, to manage the day-to-day business expenses. 

The problem with having a high revolving balance is if you don't pay it off every month, your FICO score goes down. You could be a high-income earner but look like a risky borrower if you were purely underwriting a traditional credit score. FICO is still predictive, but it doesn't tell the whole story of that applicant or that borrower.

Where we're headed, and there are several ways to get there, are more sophisticated financial institutions. Underwriting focuses on things like, what's your complete income picture? What's your cash flow look like month to month? Ultimately, not only do you need that historical record of someone's ability to borrow, but you also need a much better understanding, in today's economy, of what someone's income and cash flow look like, month to month.

Underwriting income allows us to underwrite folks that we probably wouldn't have been able to if we relied on FICO. From the consumers' perspective, it opens up these new innovative products, like earned wage access or paycheck-linked lending, they qualify for a better APR and potentially more cash than they would otherwise be able to.

Sometimes we get caught in either/or: FICO versus income-based lending. But it sounds like we're going to take the best of both solutions to get a more rigorous and thoughtful appreciation of someone's creditworthiness.

For a long time, pre-FICO,  it was a relationship underwriting. That probably was true into the late '70s. Then we had the rise of intelligent FICO scoring. They're on FICO model 11 at this point. They've gotten better at pricing risk, and it's a valuable tool. 

But now that we're entering web 3.0, there's more data available across the board. It's responsible and ethical to explore all those opportunities to figure out how to better price risk. It's a constant evolution, and in the long term, the folks that win the space will use both.

What are the benefits of earned wage access and paycheck-linked lending?

Earned wage access is a win-win-win as a product. From the consumers' perspective, it's a very inexpensive way to access smaller amounts of emergency funding. Again, something like groceries and a tank of gas. It allows someone who likely doesn't qualify for a traditional credit card to avoid ending up in a cycle of debt. They can access the funds they need and pay them off quickly at a relatively low cost compared to the traditional options available, which people agree are flat out predatory compared to newer products. It has consumer benefits and allows people to manage their finances without ending up in a cycle of debt. 

From an employer's perspective, it reduces employee turnover by up to about 30%. There's a Harvard Kennedy School paper on this, published in 2016. It's less expensive to offer it as a benefit than to recruit new talent, train them, and deal with the lost productivity of both periods. 

From a financial institution's perspective, it builds customer loyalty. It's a relatively low-risk product, where FIs get repaid directly from a paycheck from the next pay cycle. People love the product, it's a great way to build customer loyalty and potentially cross-sell additional products in the future. So, I view it as a win-win-win.

On the paycheck loan side, it's a similar story. The benefits are felt more broadly by the financial institution and the borrower than the employer, although similar stats exist. From a lending perspective, tying repayment directly into someone's paycheck adds roughly 60 points to their FICO performance. It doesn't add it to the score. But, if someone has a 600 FICO, and they repay directly from a paycheck, they perform like someone with a 660 FICO. That's a meaningful performance improvement. 

There are two things that an institution can do: the first is to pass savings on delinquency rates and write-offs onto their broader borrowing base, and the other is to expand the credit box that they're willing to underwrite. If it's someone you already would have extended credit to, and they repay via paycheck, you can reduce the APR that you're charging them and preserve the same ROE that you would have otherwise seen.

Normally, they would have been denied the product, but we're willing to underwrite them if they repay from their paycheck. FIs can expand their total addressable market by using that technology. The folks who ultimately win the space will take advantage of both. They will pass those savings along and expand the box they're willing to underwrite. 

On the consumer side, it's almost the reverse. It's either you're able to qualify to meet an emergency expense like a car repair. Every time I go to the mechanic, it's at least $1,000, probably closer to 1500. Think back to the stat I shared at the top of our conversation, over 150 million people don't have $1,000 in savings. How do you pay for it? A paycheck-like loan is a much less expensive way of going about that than putting it on a credit card or turning to some of those traditional options that exist. 

The other real advantage for consumers, especially for the large segment of the population that falls into that non-prime space, is that it expands access to credit in a much less predatory way than some traditional options.

I'd love to shift gears to look at Argyle and ask, how is Argyle enabling paycheck-linked lending?

The paycheck-linked lending process has a couple of key data points that anyone would tell you they need. First, you need an employment history. The benefit to a paycheck-linked loan is it doesn't apply universally. A seasonal worker in retail, where the annual turnover in that industry is over 100%, is likely not going to see the same 60 Point FICO improvement as a postal worker who's been in their job for ten years. 

First, we need to know where someone's working, we need to know how long they've been there, and we need to know their income because we need to effectively determine how much credit we can extend. One of the great things about the API we've built is we allow consumers to authenticate into their payroll platform, share all of that data, and more with the financial institution looking to extend credit to an applicant. We handle the verification and the data needed to underwrite.

The other key component of a paycheck loan program is securing repayment via paycheck. Traditionally, you had to work with HR teams and communicate how those payroll distributions need to be updated, how much is still going into the checking account, and how much is going to the lender. There is an administrative lift on behalf of the company itself to support this program.

Argyle handles all of that for a financial institution. Now, FIs can make those updates and calls – our API handles it. We eliminate that administrative burden on HR, which allows you to offer this directly to the consumer, or if you are going B2B, to be up and running much faster. We handle both the underwriting side and facilitate repayment.

Given your career, you've seen the evolution of the payroll world. What gets you excited to come to work every morning?

What gets me most excited is that we're barely scratching the surface of the usefulness of payroll and income data. The focus to date, not only in the payroll space but also in the banking data space, has been on data accessibility and increasing the number of data points that a financial institution can use to make a credit decision.

The industry we're in can build scoring on top of all these additional data points. Something like income and employment stability should be able to broaden access to credit and financial products. We're still at the point where we're building that access piece and building the perfect dataset for income and employment verification to power all of these great new products. It will add even more value for our clients and downstream for consumers.