Household debt is at its highest since the 2008 crash, with middle and low-income earners hardest hit. The founders of SalaryFinance explain why consolidating employee debt at a low fixed rate and deducting it from payroll could make good business sense
At the start of this year, the TUC issued a stark warning. Household debt proportionate to income was at its highest since 2008. Citing data from the ONS, the TUC said the average UK household owed £11,800 – 26.5 per cent – of its annual income on credit cards and loans, including student loans but not mortgages, in the third quarter of 2015. This echoed Bank of England figures for November showing unsecured debt of £2,759 per household, excluding student loans.
Why should that matter to employers? It doesn’t take a genius to realise that such levels of debt could have an adverse effect on an employee’s wellbeing. But how many business leaders are aware of their staff’s financial health? Very few, according to a survey by Close Brothers Asset Management, which found that under half of employers do not have a wellbeing strategy in place and, of those that do, only a quarter have considered specifically addressing finance.
Step forward former banking consultant Asesh Sarkar and his SalaryFinance co-founders (entrepreneur Daniel Shakhani and ex-Google UK boss Dan Cobley), who aim to rectify this. Describing itself as ‘fintech with social purpose’, SalaryFinance’s business model is to consolidate employees’ debt into a single loan (up to 20 per cent of their annual income) with a fixed 7.9 APR, paid off in instalments through the employer’s payroll system.
The idea came when Sarkar learnt his children’s nanny was paying a “significant” portion of her salary on high-cost debt repayments. With $6.1m (£4.5m) from Cobley’s Brightbridge Ventures (a VC subsidiary of Blenheim Chalcot), SalaryFinance was born. “I was surprised that I could get a very low-interest rate loan, yet someone who worked for me wasn’t able to,” he says.
Sarkar paid off his nanny’s debt in full and collected repayments through her monthly pay, saving her a significant amount of money from her monthly interest bill. With 12 years’ industry experience under his belt, Sarkar understood banks have to manage their risk, but he was convinced what he did for his employee could be rolled out on a wider scale.
“Consumer finance is good for high earners with good credit scores but not as positive for those on lower incomes,” he explains. “High earners and those with savings and investments get good advice and very good rates. The less you earn, the more debt you have as a proportion of your income, the lower credit risk score you have and the higher interest you pay. So the less you earn, the more you pay. I saw that middle-to-low-income earners were paying a premium for being that.”
Key to SalaryFinance’s business model is that it costs employers nothing. Cobley’s experience has helped the fledgling firm build a flexible technology platform that can be integrated into payroll systems. In addition to partnering with established lenders Zopa and RateSetter, SalaryFinance is also integrated with employee benefits platforms including Benefex and GroupSchemes.
Shakhani says SalaryFinance, which launched last September, saves its customers £900–£1,500 on average. “For most people that’s enough for a holiday or savings pot. As an employer, you are addressing financial wellbeing and start to get an almost holistic approach to savings and building better, happier and more productive employees.”
The more successful they are commercially, they say, the more impact they can make in society. “Last year 200,000 teachers took out payday loans with interest over 1,000 per cent,” claims Sarkar. “They applied to mainstream banks and got rejected and the only option they had was a high-cost lender. When you’ve taken a payday loan, a traditional bank won’t lend to you for the next five years because they think you are a bad risk. They are basically screwed for the next number of years because it’s hard for them to get out of debt – the interest rate is high and they are in a negative spiral. If they get the opportunity to go from 1,000 per cent interest to 7.9 per cent paid off quicker, they are super grateful to their employer.”
SalaryFinance, he says, is not about lending consumers new money: “There’s so much debt out there already… [it’s about] taking their debt, reducing their interest rates and helping them pay it off. We wanted to create a model where the more [money] we saved people by innovating on their behalf, the more money we make. For every £25 we save someone, we make £1 in profit. So if we are extremely successful commercially then society is better off.”
Fintech for good
It’s not only traditional lenders from whom the partners wish to differentiate themselves – they’re drawing a line in the sand between themselves and other fintech businesses too. “We’re often called a fintech business but we’re championing something called ‘fintech with social purpose’. There’s been a lot of negative talk about banks but the fintech industry gets lots of positive press. My personal view is if it’s just different people making money then it doesn’t really add value. Fintech needs to have some social basis to it. That’s what we really champion.”
Shakhani, who has worked with Kimbal Musk (brother of Tesla founder Elon) and sat on the board of economic think tank the Milken Institute, says being part of Blenheim Chalcot gives the small but fast-growing SalaryFinance greater leverage when working with firms of all sizes. “Blenheim has been around since 1999. It is established – 40 businesses have been within the group – with a £350m turnover. They are not a venture capital firm, they are a venture builder. They take a very active role in working with companies they effectively partner with.”
Three of its partners sit on the SalaryFinance board, he adds, giving it board-level insight and access to the chief executives of major corporations, public sector organisations and SMEs. “That’s the key differentiator for us. But from a customer perspective it gives them comfort that you’re backed by an organisation… It’s not just ease of integration, but are you going to be there in five years’, 10 years’ time? Because our reputation is key.”
Shakhani has built an advisory board of business leaders, which includes Victoria Raffé, former director of authorisations at the Financial Conduct Authority. “[For] any organisation able to do business with large companies and small businesses, one of the first things you look at, if you haven’t had a long track record, is not just the board members and our backers but also the quality of the people who sit around the business.”
The founders see SalaryFinance not only becoming a core product alongside other salary sacrifice benefits like the Cycle to Work scheme or childcare vouchers, but also moving from debt repayments to longer-term savings plans: “I can see a future which lends us to creating savings products and creating other solutions which allow employees to manage their money more effectively,” says Shakhani.
“In this country one in two people have debt of an unsecured nature. If they pay off just the minimum of their credit card bills on a monthly basis, on average it takes 18 years to pay that debt off. Get people out of debt more quickly and you can imagine the impact that putting that £900–£1,500 into a savings product is going to have.”
Sarkar agrees: “We want to help people be great with money. There’s a real toxin in the system today, which is debt. We’re starting with that but then we can help people save from their salaries. If we can say to someone, ‘You’ve paid off your debt now, you’re used to £100 coming out of your account, we’re moving this to a savings account, this is what the next two years looks like…’ we can help them get better at managing their money.
“With physical health like obesity it is very obvious, but you can’t tell who is financially stressed. Every day we see people’s credit reports coming in, these people have bailiffs on their doors, red letters they can’t pay off. It’s impossible to come into work and just forget about it.”
Help to ease those worries, he says, and employees will be “super grateful”, loyal and more positive about your business.
SalaryFinance: Vital stats
HQ Hammersmith, London
Projected 2016 turnover £2m
Key clients SalaryFinance has teamed up with retailer Dunelm, FTSE-listed companies such as Saga and Hays, and the NHS via My Trust Benefits
Did you know? Prior to heading Google UK, co-founder Dan Cobley was vice president of marketing at Capital One, Europe
To find out more about its fintech innovation, visit salaryfinance.com