Payday Mayday — salary finance thoughts & landscape

Intro

A very limited number of investors I know enjoy writing content but many of them say they need to start writing to capitalize on research and heavy lifting they’re doing.

On the other hand, most of the investors are basically skimming through articles looking for either bullet points, quotes, or landscapes. I’m no different so let me introduce you to my Pareto approach to writing content — coming from an investor to investors, but founders might find it useful as well.

You’ll find a concise summary of my current research, a product of numerous conversations with founders, investors, corporates, and colleagues.

What’s more, I have invited 4 colleagues of mine, great investors from France, Germany, Austria, and Spain to add a few lines of comment. Thanks Nina, Bartek, Enrique, and Jordi — your input was invaluable!

Thoughts

As promised, without a longer introduction: here are promised bullets.

Market

• The USA is 5–6 years ahead with market development.
• In Europe, no surprise, UK leads in a number of companies, funding, and biz dev.
• A lot is happening in Spain and France, CEE is keeping up.
• Over 60% of American employers pay salaries either weekly or biweekly (source). Weekly or biweekly salaries are dominant in the UK. It is easier to introduce salary advancement products in countries where people were used to receiving their cheques more often.
• There are countries in Europe (like France) changing regulations to impose salary advancements on employers as an employee benefit → those will be early movers in software adoption (new problem occurred — additional manual work burden).

That’s what Jordi from Kibo said about the market:

Problem

• According to the Finder’s report (check it out) the problem exists. 3 out of 4 credit takers take more than 1 loan a year of an average £260 size with £100 being a single most popular size of a loan.
• Over 60% of loan takers stated that the reason was unexpected (again here’s the source).
• There is a decent percentage of especially low-income employees (varies from country to country) that are underserved with financial products — the risk is too high for banks to take.
• In many countries even now it is possible to advance salary but a psychological barrier of asking a superior for financial help makes this product cumbersome → software eliminates this barrier.
• Employees find expensive overdrafts or even more expensive traditional payday loan companies more accessible than asking superior for an advancement.
• Payday loans and overdrafts from traditional players offer the possibility (mainly to blue-collar workers) to pay their bills in case there are unexpected expenses.
• Financial constraints create a loss of focus of employees and an overall bad atmosphere which ultimately harms the employer. Hence, offering a salary advance (or on-demand) creates a positive impact on both employer and employee.

I have asked Enrique from Speedinvest what he thinks about the problem:

Product

• There are companies that are basically advancing the salary: a worker can withdraw a proportion of worked salary (or a percentage of earned salary) and those that are providing payday loans. It’s called EWA — Earned Wage Access.
• Companies differ on how they finance salaries: (1) using their own balance sheet, (2) using employer balance sheet, (3) partnerships with financial institutions, (4) a mix of (1) or (2) with (3).
• Salary advancement module is more a feature than the product.
• If the company is not a payroll company originally it needs to integrate to access data or acquire the entire employee salary (“stream accounts”).
• Some companies stress the importance of financial education built into a product.

Nina from ProjectA shared her thoughts about the product:

Distribution

• There are two predominant distribution models: (1) B2B2C → selling to enterprise and onboarding an end-user, (2) B2C → selling directly to end-users.
• The biggest B2B2C use-case is within huge enterprises hiring blue-collar, shift workers (hospitality, manufacturing). People with less than £1500 average household income.
• The biggest B2C use-case is within gig-economy workers and freelancers.
• It’s not a product of daily usage, end users advance their salary when a need occurs, sometimes providers need to wait months until they convert a user.
• Regulatory and tax differences make it relatively hard to scale this business outside of one country. It’s not impossible obviously, but it’s not trivial as well.

Is distribution that obvious? Below you can see what’s the opinion of Bartosz from Alven:

European landscape

All right, now let’s go to companies. I’m lazy so please don’t expect beautiful infographic (which in most cases are annoying because you can’t interact with them).

NOTE: During my research, I found out some companies raised recently but they decided to keep it undisclosed — respecting their decision I’ll not disclose it as well.

• UK, France, and Spain are the main hubs where salary finance products occur.
• Surprisingly I couldn’t find companies working on salary finance products in the DACH region (please reach out if you’d like to be featured!).
• There are also other players known from payroll or banking products entering salary finance space. It’s a pretty obvious direction since the model is tested to be working.

You can access the comprehensive list of ~40 European and USA-based salary finance companies HERE.

If you’re running a company in this field and would like to be featured, please reach out directly or fill THIS FORM.

My opinion

To keep it short and simple:

• This model works and is proven by a number of companies.
• Continental Europe is yet to see a leader, but the next 12–18 months will show who’s on pole position.
• Multiple sources state that Covid-19 delayed expansion plans of UK leaders in continental Europe. It’s an opportunity to grow for local players.
• You can grow only one big company in each region (eg Iberia, France & Benelux, DACH, CEE, UK).
• The long tail will consist of smaller companies and most likely we will see a lot of consolidation movements a couple of years from now.
• Regulations are an important risk factor to consider.

I hope some of you will find this research useful. In case of any questions don’t hesitate to hit me at maciej.gnutek@innovationnest.com.