An entire sub-niche of fintech has emerged in the last five years. Given the API economy that has been developed, it is now possible to connect in real-time to most sources of income for the vast majority of the population. This has enabled completely new products to be developed and made some existing products much more efficient.
It all began with the creation of an employment verification database in 1985 by TALX Corporation called The Work Number. This was done to help large enterprises leverage their own workforce data and eventually enabled others to do the same. TALX was acquired by Equifax in 2007 and renamed to Equifax Workforce Solutions. The Work Number brand remained and became the largest database of employee data in the country.
It was only a matter of time before fintech companies began to take notice of the success of The Work Number. Companies like Argyle, Atomic, Pinwheel and Truv took this one step further. Rather than maintain a database they connected with payroll platforms and gig economy marketplaces directly in real-time to provide an instant and holistic view of an individual’s income. This innovation has created new opportunities.
The evolving use cases for income data
Getting accurate and real-time information on income is useful for a variety of purposes:
- Income verification for a loan
This was the original use case for The Work Number and it is still used hundreds of millions of times a year. It is a great way to foster financial inclusion because, with accurate income data, lenders can expand their market to include more thin-file borrowers. The new fintechs are undercutting The Work Number on price, making income verification available for smaller loan sizes and different loan verticals. - Direct deposit switching
Income verification involves read-only access to payroll data. The fintech companies have figured out a way to not just read the data from payroll systems but to write back to them. This powerful feature allows these companies to update the bank account where payroll is sent. So, voilà, instant direct deposit switching is born. Pinwheel were the pioneers in this area and as we recently covered they now power direct deposit switching for American Express. Getting a direct deposit is the holy grail for banks and fintechs and this technology has just made this process as simple as a few clicks. - Earned Wage Access
Why is it that, in 2023, we are still getting paid on a fixed schedule? This is a major impediment to financial health for the tens of millions of people living paycheck to paycheck. Earned Wage Access is a relatively new fintech development making a huge difference here. With real-time access to payroll systems, it is now possible to know up to the minute how much money has actually been earned within the current pay period. This information can be used by EWA providers to advance money to employees that they have rightfully earned.
- Payroll linked lending
Most loans are paid back from the borrower’s bank account. But with read/write access to payroll systems there is another way. With permission from the borrower, some lenders are now setting up loan repayments by payroll deduction. All that needs to happen is for a portion of a borrower’s income to be deposited into the lender’s bank account. So, the lender can be repaid every time payroll is run. This creates much less risk for the lender and can therefore earn borrowers a reduced interest rate, often significantly so.
This is just the start. There are other use cases in various stages of development today including tax withholding optimization and tax refunds but I think the lending use case is what is most powerful today.
We can’t really talk about real-time access to bank accounts without mentioning Plaid. They were the first to do this at scale and are now ubiquitous when it comes to connecting bank accounts.
Plaid Income was first announced back in 2021 and I assumed that this might mean the death knell for the other fintechs in the space. But that has proven not to be the case. In fact, Plaid recently announced improvements to its income verification service that involves partnerships with both Pinwheel and Atomic to improve their coverage.
I am excited to see what the future holds for this dynamic segment. It is technology that is really making a difference today in financial health with new and better products. And with enterprising fintechs tackling this space, you can be sure that new and better products are coming.
