June 10, 2019
Technology and financial inclusion: Wagestream as a case study
Being a venture capital investor in the fintech space, I see amazing ideas and innovations on what feels like a daily basis. As these ideas gain traction and mature, the successful ones make it into the mainstream, enabling the wider society to experience the power of this innovation, albeit probably not at a pace that feels like the world of finance is changing on a daily basis (which, incidentally, it is).
While the pace of innovation and change is only getting faster, it is important to take a moment to slow down to think about our values, and how they impact the change that is happening around us. Our values as investors, entrepreneurs, consumers, and citizens will clearly impact the world we leave behind for our children, and some of the value judgments we have to make often involve difficult tradeoffs. I will explore some of the more difficult choices in future blog posts, but today I wanted to start somewhere easy, in a place where I hope we can all agree: More financial inclusion is better.
Neither finance nor new technologies are necessarily inclusive or exclusive by design. Rather, it is how we use them as a society that determines the ultimate utility of a technology. A brick can be used to build an exclusive wall, but it can also be used to build an inclusive plaza that is open to all, or a brick road that connects people.
Today, lots of people are excluded from the immense wealth and prosperity that is being created in the world. And the list of people impacted is vast: Women, minorities, the elderly, the financially disadvantaged, immigrants, members of certain religions, nationalities or racial backgrounds have all been excluded from access to wealth and prosperity during the course of history, and still find themselves in this position today.
No one person or organization can solve all the problems in the world. However, they can tackle one problem at a time, gradually improving the world for the better. In this spirit, today I want to highlight one specific example that I happen to know very well: Wagestream.
As QED we were in a unique (and very fortunate) position with Wagestream in that not only were we the first backers of its cofounders Peter Briffett and Portman Wills, but given our unique hands-on and entrepreneur first investment style, we were also effectively a cofounder with them, helping them build the vision and the business from day one.
The initial Wagestream proposition was simple. If somebody is working hard, has earned their pay, but have not yet been paid, that person should not have to go to a payday lender to meet an unexpected expense – they should be able to access their already earned wages! And just after a year since inception, that is what Wagestream has become today – a way for workers to access their already earned wages.
Now this does not mean that lending is bad, or that Wagestream can solve all the problems of the world. For example, if the unexpected cash need the person has come up against is greater than their disposable income, or the money they have earned in that month is not enough to cover their needs, they may need a lending solution. And in those cases, responsible lenders are needed (more on that in a future blog post).
But if the money that the person needs is less than their disposable income, and if they have already earned that money, they clearly should not go to a payday lender that will charge them more than 10x.
When you consider that close to 60% of workers in the UK (and the ratio is similar in the US) cannot meet an unexpected expense of GBP 200 before their paycheck, one clearly sees how something that at first may seem like a niche actually becomes a very big opportunity for a better solution that impacts the majority of the working people in the UK.
But why did this solution not exist before? And why are the other alternatives so expensive? The answer lies in how the founders leveraged new technologies and a superior product structure that is fully integrated with employers. We will examine each one in more detail below, as this is indeed a great case study in how technology can create more financial inclusion.
First and foremost, Wagestream used both new and existing technologies to create cost efficiencies and product differentiation in a number of different ways. One element of this was new payments technologies such as virtual bank ledgers and API banking, which is an area we had been watching closely as QED for some time. As a result, we were able to help the founders design and connect to a back-end banking infrastructure that leveraged some of the fastest, cheapest, and most secure solutions in the market. Whereas before there would have been a cumbersome process, requiring customers to actually switch their bank accounts, or Wagestream requiring access to existing accounts, using virtual ledgers and API banking we were able to create a cheaper and frictionless solution.
It also really helped that we launched the product in the UK, which is very much on the cutting edge of payments innovation, with new products such as faster payments readily available. Faster payments is not only fast (effectively instant) as the name implies, it is also much cheaper to its predecessor products in the payments space.
The end result was a state of the art back end technology, which when combined with the automation of most operational processes, resulted in Wagestream being able to operate faster and cheaper than any similar company that had ever come before it.
These dynamics make Wagestream’s income streaming categorically different from payday lenders who have to work in an entirely different manner – they have to process each payday loan separately, onboard each customer separately, and in many cases with less automation. In addition to this cost disadvantage, a payday loan is indeed a loan, which means in addition to having to charge a high rate because of its cost disadvantage, payday lenders actually go after customers that do not pay them back, whereas Wagestream is 100% non-recourse – but that leads us to the product structure, and more on that below.
The second element that differentiates Wagestream is indeed its innovative product structure. The key differentiators here lay in the tight integration with the employers and the fact that Wagestream is fundamentally a payments product as opposed to a credit product.
With regards to the employers, Wagestream is able to achieve a very high level of integration with both the time keeping (rota) and payroll systems. Going back to the point on technological shifts, this is also made much easier with the rapid spread of cloud accounting, which is driving a lot of change in the world of fintech. As a result, Wagestream is able to see exactly the moment at which a worker has completed a shift. Combining this with its automated back end infrastructure described above, Wagestream is able to help the employer stream a pre-determined portion of that wage to the worker that completed his or her shift, who thus gets access to that portion of their earnings instantly. Whereas previously it would have been very difficult (and expensive) for an employer to process a portion of the payroll for a subset of the workers, Wagestream has effectively automated the entire process, and it all happens at the click of a button.
And with regards to the payments vs. credit nature of the product, the main thing to note is that since Wagestream is designed more as a payments product, there is no credit risk (the employee has already earned the money), and hence also no recourse whatsoever to the worker that is using the product. The only risk that Wagestream really takes is either one of payments or payroll fraud (which, given the tight employer integration is difficult), or a counterparty risk that the employer will not be able to process payroll at the end of the month. And given that even companies that enter insolvency make their payroll as a first order priority, this risk, while real, is very low.
Moreover, when compared to a product such as payday loans which in fact have very significant credit losses, the benefits of being more on the payments side become clear. Just consider that in any lending product there is an inherent level of cross-subsidization: The people that pay back their loan have to “subsidize” the lender for the losses incurred by those that did not pay back their loan. This simply does not exist with Wagestream where the concept of consumer credit risk has been eliminated.
Most importantly though, the great thing about this product design is that it is inclusive to the maximum. There is no credit underwriting of the employee, or in other words no workers that fail to get access to this because they may have a bad credit score or have had difficulties in the past. As long as their employer is a Wagestream partner they can use the product, and when that unexpected cash need arises they can access their already earned wages instead of going to a payday lender. So here it is then, technology enabling better financial inclusion – Quod Erat Demonstrandum.
Being a venture capital investor in the fintech space, I see amazing ideas and innovations on what feels like a daily basis. As these ideas gain traction and mature, the successful ones make it into the mainstream, enabling the wider society to experience the power of this innovation, albeit probably not at a pace that feels like the world of finance is changing on a daily basis (which, incidentally, it is).
While the pace of innovation and change is only getting faster, it is important to take a moment to slow down to think about our values, and how they impact the change that is happening around us. Our values as investors, entrepreneurs, consumers, and citizens will clearly impact the world we leave behind for our children, and some of the value judgments we have to make often involve difficult tradeoffs. I will explore some of the more difficult choices in future blog posts, but today I wanted to start somewhere easy, in a place where I hope we can all agree: More financial inclusion is better.
Neither finance nor new technologies are necessarily inclusive or exclusive by design. Rather, it is how we use them as a society that determines the ultimate utility of a technology. A brick can be used to build an exclusive wall, but it can also be used to build an inclusive plaza that is open to all, or a brick road that connects people.
Today, lots of people are excluded from the immense wealth and prosperity that is being created in the world. And the list of people impacted is vast: Women, minorities, the elderly, the financially disadvantaged, immigrants, members of certain religions, nationalities or racial backgrounds have all been excluded from access to wealth and prosperity during the course of history, and still find themselves in this position today.
No one person or organization can solve all the problems in the world. However, they can tackle one problem at a time, gradually improving the world for the better. In this spirit, today I want to highlight one specific example that I happen to know very well: Wagestream.
As QED we were in a unique (and very fortunate) position with Wagestream in that not only were we the first backers of its cofounders Peter Briffett and Portman Wills, but given our unique hands-on and entrepreneur first investment style, we were also effectively a cofounder with them, helping them build the vision and the business from day one.
The initial Wagestream proposition was simple. If somebody is working hard, has earned their pay, but have not yet been paid, that person should not have to go to a payday lender to meet an unexpected expense – they should be able to access their already earned wages! And just after a year since inception, that is what Wagestream has become today – a way for workers to access their already earned wages.
Now this does not mean that lending is bad, or that Wagestream can solve all the problems of the world. For example, if the unexpected cash need the person has come up against is greater than their disposable income, or the money they have earned in that month is not enough to cover their needs, they may need a lending solution. And in those cases, responsible lenders are needed (more on that in a future blog post).
But if the money that the person needs is less than their disposable income, and if they have already earned that money, they clearly should not go to a payday lender that will charge them more than 10x.
When you consider that close to 60% of workers in the UK (and the ratio is similar in the US) cannot meet an unexpected expense of GBP 200 before their paycheck, one clearly sees how something that at first may seem like a niche actually becomes a very big opportunity for a better solution that impacts the majority of the working people in the UK.
But why did this solution not exist before? And why are the other alternatives so expensive? The answer lies in how the founders leveraged new technologies and a superior product structure that is fully integrated with employers. We will examine each one in more detail below, as this is indeed a great case study in how technology can create more financial inclusion.
First and foremost, Wagestream used both new and existing technologies to create cost efficiencies and product differentiation in a number of different ways. One element of this was new payments technologies such as virtual bank ledgers and API banking, which is an area we had been watching closely as QED for some time. As a result, we were able to help the founders design and connect to a back-end banking infrastructure that leveraged some of the fastest, cheapest, and most secure solutions in the market. Whereas before there would have been a cumbersome process, requiring customers to actually switch their bank accounts, or Wagestream requiring access to existing accounts, using virtual ledgers and API banking we were able to create a cheaper and frictionless solution.
It also really helped that we launched the product in the UK, which is very much on the cutting edge of payments innovation, with new products such as faster payments readily available. Faster payments is not only fast (effectively instant) as the name implies, it is also much cheaper to its predecessor products in the payments space.
The end result was a state of the art back end technology, which when combined with the automation of most operational processes, resulted in Wagestream being able to operate faster and cheaper than any similar company that had ever come before it.
These dynamics make Wagestream’s income streaming categorically different from payday lenders who have to work in an entirely different manner – they have to process each payday loan separately, onboard each customer separately, and in many cases with less automation. In addition to this cost disadvantage, a payday loan is indeed a loan, which means in addition to having to charge a high rate because of its cost disadvantage, payday lenders actually go after customers that do not pay them back, whereas Wagestream is 100% non-recourse – but that leads us to the product structure, and more on that below.
The second element that differentiates Wagestream is indeed its innovative product structure. The key differentiators here lay in the tight integration with the employers and the fact that Wagestream is fundamentally a payments product as opposed to a credit product.
With regards to the employers, Wagestream is able to achieve a very high level of integration with both the time keeping (rota) and payroll systems. Going back to the point on technological shifts, this is also made much easier with the rapid spread of cloud accounting, which is driving a lot of change in the world of fintech. As a result, Wagestream is able to see exactly the moment at which a worker has completed a shift. Combining this with its automated back end infrastructure described above, Wagestream is able to help the employer stream a pre-determined portion of that wage to the worker that completed his or her shift, who thus gets access to that portion of their earnings instantly. Whereas previously it would have been very difficult (and expensive) for an employer to process a portion of the payroll for a subset of the workers, Wagestream has effectively automated the entire process, and it all happens at the click of a button.
And with regards to the payments vs. credit nature of the product, the main thing to note is that since Wagestream is designed more as a payments product, there is no credit risk (the employee has already earned the money), and hence also no recourse whatsoever to the worker that is using the product. The only risk that Wagestream really takes is either one of payments or payroll fraud (which, given the tight employer integration is difficult), or a counterparty risk that the employer will not be able to process payroll at the end of the month. And given that even companies that enter insolvency make their payroll as a first order priority, this risk, while real, is very low.
Moreover, when compared to a product such as payday loans which in fact have very significant credit losses, the benefits of being more on the payments side become clear. Just consider that in any lending product there is an inherent level of cross-subsidization: The people that pay back their loan have to “subsidize” the lender for the losses incurred by those that did not pay back their loan. This simply does not exist with Wagestream where the concept of consumer credit risk has been eliminated.
Most importantly though, the great thing about this product design is that it is inclusive to the maximum. There is no credit underwriting of the employee, or in other words no workers that fail to get access to this because they may have a bad credit score or have had difficulties in the past. As long as their employer is a Wagestream partner they can use the product, and when that unexpected cash need arises they can access their already earned wages instead of going to a payday lender. So here it is then, technology enabling better financial inclusion – Quod Erat Demonstrandum.