Fintech Can Solve Basic Liquidity Problems for the Poor

A simple concept, well executed. That is Active Hours, a Fintech solution that pays employees who live paycheck to paycheck as soon as they have earned their pay, rather than two weeks later.

The Active Hours story says a lot about how Fintech has started to impact basic financial needs of those with not much to spare.

I had the privilege to participate recently in an excellent conference co-sponsored by CFED and the San Francisco Federal Reserve Bank. CTED and the SF Fed have created a very helpful and insightful book called “What It’s Worth: Strengthening the Financial Future of Families, Communities and the Nation”. A series of insightful essays brings together many factors underlying poverty in the US. One theme running through them all is that of financial health. Sponsored by the Citi Foundation, this substantial book is free to order or download.

One of the panelists was Ram Palaniappan, CEO of Active Hours. His company grew out of a realization that employees of his previous company were paying overdraft charges or late fees on bills, because although they had earned some money, they had to wait two weeks to get paid.

Ram decided that the two week delay was because of outdated manual payroll procedures, and that there was no reason people shouldn’t be paid as soon as they had worked. He started to make advance payments to his own employees when they needed it. Then he was advancing against earned pay for others, including some he didn’t know. As this remarkable practice grew, he needed some automation.

The Active Hours site allows his customers to give him access to their timesheets (often through employer- or payroll-company APIs), and their bank accounts (ideally through APIs).  Active Hours reads and values hours worked since the last pay period, and immediately transfers requested funds (up to the value of the timesheet) into their current account. Some customers will do this at the point of sale before paying for purchases – that’s how immediate it is.

Active Hours is reimbursed by direct debit from the customer’s account as soon as their “official” payroll hits.

Here’s the most amazing part. Active Hours charges no fees or commission. Instead, customers are invited to pay whatever they think the service is worth. And it works!

A few observations:

1. Fintech is often at its best when it seeks to remove artificial constraints imposed by technology or business limitations of the past. In our example, Active Hours removes the two-week delay for payment that historical payroll processes have imposed.
2. Fintech is highly relevant to improving financial health. Recent research such as Portfolios of the Poor and US Financial Diaries show that the poor need a range of products to manage their complex cash flow. Active Hours is one example of many that address one small piece of the complicated financial life of someone around the poverty level. Wouldn’t it be great if someone collected them all together in a kind of super-wallet to create a Fintech portfolio of tools designed specifically for the poor?
3. Active Hours offers an interesting lesson in trust. Banks want to be trusted, but they don’t seem to trust their customers. They are accountable to shareholders and regulators, and probably don’t have much choice. And generally, banks are still trusted even though the industry as a whole is not exactly widely appreciated.
   Fintech companies, on the other hand, need to work to generate customer trust. When Active Hours shows trust to its customers by letting them choose how to compensate, doesn’t that also generate tremendous consumer trust in Active Hours?
4. Active Hours has a focused use case – specifically improving short-term cash flow for (mostly) lower income employees. But even then, there is significant valuable data to collect. It would be good to see a social analysis of customer payments to Active Hours – who is tipping, and how much? What are the demographics? How does it relate to hourly pay rates? Fintech is creating some great opportunities for social research, in addition to the more obvious marketing studies.
5. Active Hours depends on APIs or screen-scraping from bank accounts and corporate payrolls. Banks will soon be required by law in Europe to open up account information. Other countries will follow, including the UK soon, and eventually the US. The opportunities to do good will surely grow when API standards become widely adopted.

“What It’s Worth” is a book well worth reading, and reading with Fintech in mind. There are many ways in which Fintech can contribute to the vision, ideas and strategies contained within the book.

Most Fintech entrepreneurs would like their companies to have a positive social impact. With the kind of creativity seen in Active Hours, they surely can.