Fintech in Focus
Australian Fintech (financial technology) has been one of the hottest talking points in business in the last few years, as the Fintech scene has produced some of Australia’s most impressive start-ups, including Afterpay, Zip Co, Novatti and numerous others. We see that these hyper-successful Fintechs operate at the breaking edge of innovation in both their technology and business model, and maintain a hyperattentive focus on customer and client experience.
In focus today is Earnd – a Fintech which ticks all these boxes, as it combines technological and business model innovation with a sharp focus on the employee experience of its customers.
Earnd in Focus
Founded in Australia in 2018, Earnd addresses a simple problem; Although employers normally remunerate their employees with lump sums on a fortnightly or monthly basis, employees frequently need or want payment for work they have done in advance of ‘pay-day’. This is clearly a significant pain point for many employees, as is made clear by the considerable size of the predatory ‘payday loan’ market, estimated at over $1.7 billion in 2019.
The solution clearly involves finding a way to enable employees to be paid as soon as they have done the work. Payday loans traditionally fulfilled this function, but generally charged prohibitive interest rates, up to 4% of the value of the loan per month with 20% establishment fees. Newer fixed price advanced pay services similarly consume a significant portion of the employee’s income – for example, BeforePay, a Fintech which recently listed on the ASX, charges a 5% fixed fee on advanced pay. Inevitably, high fees and interest rates will scare away all but the most vulnerable employees, resulting in a small, predatory market and an unserved mass of employees.
These high interest rates and fees are largely due to two key issues at play in the market for advanced payments or loans:
Firstly, there is the information problem – the information provided by an employee as to how many hours they either have worked or will work, their pay rate, their date of pay and other relevant information may be false, misleading, or changed by the employer without notice to the lender. Faulty or unreliable information bleeds into higher default rates, which must be offset by higher interest rates on loans. Instead, most services rely on what they can know for certain – past income, past pay dates and other factors of account history. However, the oft repeated saying that “past performance is not necessarily an indicator of future performance” rings true here as well, as past income can be a poor indicator of future income, leading to loans being issued which are too large or cannot be repaid, raising default rates.
Secondly, there is the security problem – payday loan lenders do not receive the employee’s payment direct from the employer and this entails the risk that upon ‘payday’ the employee may choose not to use the income to pay back the loan or advanced pay. This risk is offset by higher interest rates on the loans. Indeed, BeforePay has suffered default rates ranging from 3-6% in calendar year 2021.
What Earnd identified is that these two crucial problems with payday loans are entirely solved if the employer, or an organisation partnering with the employer, issues the advance payments to employees. This solves the information problem, as the employer knows exactly the hours worked, pay rate and other crucial information (as well as being the decision maker as to changes in this data). Similarly, it also solves the security problem, as the employer can simply deduct the early payment from the employee’s final pay check.
The Earnd Business Model
Earnd responded with an innovative software as a service (SaaS) business model, charging employees zero fees to access earnings early and shifting the cost to employers. Employers are able to integrate the Earnd app with their payroll and internal systems, and their employees are able to withdraw a portion of their income (set by the business) as they earn it. Their hours worked and remuneration claimed early are logged and integrated into payroll.
By partnering with employers, Earnd solves the key issues of information and security identified above which challenge the business models of other competitors. However, because they are selling to employers, Earnd’s success hinges on reframing views of early payment services. Instead of being seen as an individual service, the service had to be reframed as a wildly popular employee benefit, promising faster recruitment, improved productivity, greater employee satisfaction and decreased turnover. In short, Earnd’s business model hinges on successfully convincing clients (employers) of the immense benefits to them of an employee experience that includes early payment services.
Fortunately, Earnd has been growing at a time of unprecedented global focus on employee experience, and amid frenzied talk of the ‘Great Resignation’ in 2021 and going into 2022. As workplaces struggle to engage and retain employees, Earnd has capitalised on the opportunity that services based on the employee-experience presents.
How Earnd Improves Employee Experience
Earnd’s services benefit employee experience in three key ways:
- Allowing employees to deal with emergency or otherwise unexpected expense through a zero fee product, rather than making use of payday loans, which can often cause financial stress and debt spirals. AMP projects that employees financial stress costs Australian business $31 Billion each year in absenteeism and distraction.
- Tying together work with reward. The conventional payment system delays gratification and limits it to a single moment of a single day when pay is received. However, when employees can instantly access pay for hours worked, it strengthens the connection between them and gratification of work – tying together the work they put in with the benefits they receive.
- Encouraging budgeting and easier financial planning. Employees don’t need to be as focused on specific pay dates and on ensuring that cash reserves will last to those arbitrary dates, and can rather plan around receiving pay when they actually work.
Although these benefits may have been merely theoretical when Earnd began, they have since eventuated, with Earnd uncovering significant gains for both employee experience and for the employers which make use of their software (at least insofar as Earnd has disclosed). Critically, Earnd has found that employees of their client have had an 88% reduction in payday loans, 79% uptake of the service amongst employees and an astonishing 97% customer satisfaction score – demonstrating a significant positive impact on employee experience.
In terms of direct benefit to the business from this improved employee experience, Earnd reports that use of their service allows roles to be filled 27% faster, a 16% reduction in attrition and an average reduction in absenteeism of 9.9 hours a week for financially stressed employees.
Earnd has been able to demonstrate to a range of high profile customers that this service truly delivers improved employee experience, and that improved employee experience adds value to the business. Key customers include Hungry Jacks, Bupa, The Adecco Group and JD – just to name a few of those publicly disclosed by Earnd, Earnd having around 200 clients globally in 2021, according to the AFR.
It is an instructive Fintech story – illustrating how a combination of innovation in business model, strong technology and a focus on the customer (or, in this case, the employee) experience can drive growth. Earnd appears to be set for considerable growth, given their strong offering, and continuing pressures upon employers to retain existing staff and hire new staff in a tight labour market.
Note: A controlling stake in Earnd was purchased for ‘around $20 million’ in 2020 by Greensill, and, upon Greensill’s insolvency, was sold to Wagestream for an unknown amount.
Authored by Gidon Goodman, Assistant Consultant and Jeffrey Tobias, Managing Director.
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