Using a ‘salary link,’ employers can help low-income workers get access to credit.
By Todd H. Baker and Snigdha Kumar
More than 50 million Americans in low-income working families struggle to manage everyday cash flow. That means they have the resources to pay monthly bills but can’t handle small financial shocks or timing mismatches because they lack the savings buffer the more affluent take for granted. Most lack access to reasonably priced credit and can’t stretch out medical, home and auto expenses over time. The result is a damaging cycle of reliance on high-cost payday loans, auto-title loans and bank overdrafts that often leads to financial ruin. While interest groups squabble over whether more or less regulation is the answer, people suffer.
There is a solution with benefits for employers and employees. In a new working paper published from Harvard’s Mossavar-Rahmani Center for Business and Government, we show that mobile and online financial products sponsored by employers can cover a wider range of borrowers and charge them less money than those available to individuals in the market. Use of these FinTech products may also significantly reduce employee turnover and save employers millions. The key to their success is the “salary link”—meaning the money provided to employees is automatically repaid through salary deduction. Large employers can make these benefits available today without changes in law or government intervention.
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