Salary Finance: A Killer Product for European Lending?
The Problem
Salary Finance is a class of quasi-lending product which takes advantage of a simple premise - for an employee, it does not seem to be fair to receive her pay check every moth or even every week.
Why? In the age of digital, ever-connected fintech products and instant information availability, there is (at least theoretically) no reason why one should receive their pay check as-you-go on a daily basis.
This status quo in the market is where a lot of payday lenders benefit. A sub-segment of these companies even in a predatory way with their inflated APRs for short-term loans - which are used to finance couple of weeks of immediate financing needs anyway.
Chart on the left illustrates the magnitude of this problem in Europe - more than 51% of economically active people tend to run out of money before their pay period.
Interestingly enough, this is not an issue of economic development. Even residents in advanced economies such as Austria, France or Belgium are not immune to the issue.
What is Exactly is Salary Finance Then?
Symmetrical.ai: Salary Finance in Poland
Salary Finance is a new class of a de facto lending product which goes about solving a massive financial need and market asymmetry in a smart way.
Simply put, salary finance players connect employees, employers and optionally financing partners in a singular tech ecosystem which enables ‘streaming’ of wages in real-time, as they are earned.
Salary Finance is great example of a win-win fintech proposition; if you consider the following factors:
Solving the trust issue & decreasing lending risk. Employers already do know their employees. They have the best visibility on the employee’s payroll and also timing when the wages are being distributed. Depending on how the product is set up, there might not be a need to do KYC or even regulate the scheme in a typical way as a retail lending service. this removes a lot of complexity for all parties involved.
Decreasing the cost-to-borrow for the customer. With decreasing the APR for such lending or pre-financing can essentially approach zero. Outside of the edge cases such as employee contract termination, the funds are simply collected from the payroll automatically.
Ethics Alignment Employer is a gatekeeper which ensures that only ethical and curated financial products are available to the employees, as opposed to the zero-sum world of payday loans.
Employee Benefits Play A proposition like this creates obvious upside for the employers who can spin this as another employee benefit policy. Especially if they make the decision to bear the salary finance fees on behalf of their employees and thus offer this perk at zero cost to the employee.
Process & Distribution Streamlining For the salary finance startups themselves, partnering up with employers makes a lot of sense, as they effectively act as channel partners to acquire and activate the end-users. As Piotr Smolen, co-founder and CEO of Symmetrical.ai puts it “thanks to b2b2c distribution the cost of acquiring an user is 10x lower compared to traditional acquisition channels".
On the process side, leveraging direct integrations with corporate payroll systems streamlines the full loan lifecycle - from scoring, disbursement to collection.
In addition, from the perspective of startups salary finance is a strategically intruiging vertical to be in. These platforms will be leveraged further for new types of products directly to the end customer - from credit consolidation to smart personal finance management.
Piotr Smolen, explained the promise of salary finance to me:
”Europe lacks attractive financial solutions and products for the 50% of population who are below average salary. As the post-corona recession is approaching, there will be more disadvantaged financially people.
At the same time the banks will restrict lending for lower income people + payday lenders will lose liquidity providers, that all means that there is 100+ m people market available for salary finance in the coming years in Europe.
SF with trust and distribution cost advantage might be a winner of the next 5y period in finance.”
Big Fintech is Paying Attention. Banks Left Out.
This product category is something the big fintechs are looking closely at. For example, Monzo offers 1 day early payday to its customers.
On the other side of the pond, one of the key differentiators for US-based neobanks such as Chime is to getting paid 2 days early. Chime ensures that you get paid early by making the money available as soon your employer deposits it – which is often up to two days before most other traditional banks make the funds available to you. The flavour here is a bit different - it’s about streamlining the payment rails with taking on a little amount of risk on Chime’s side rather than partnering up directly with employers. Nevertheless, the core of the value proposition the same.
Apparently, other fintech heavy weights such as Revolut and N26 are exploring options of how to enter this space.
Monzo’s take on early payday proposition
Why are traditional banks not entering this space more aggressively?
Firstly, they perceive the market to be still too small in general. Perhaps more importantly, the class of salary finance products likely cannibalises legacy products. It is no secret that short term consumer credit products rank among the highest income generators.
Thirdly, this is not a simple product on the technology side to execute. It requires deep integration between the employer, financing providers and employees - simply way too much effort outside of internal banking systems.
The European Landscape
With the big fintech starting to pay attention and incumbent banks failing to take action first, where does that leave the marketplace? It turns out that it is getting pretty heated in Europe.
I collated market data and came up with a map of 12 relevant players in the European salary finance ecosystem in various stages of their lifecycle - from pre-seed startups to late growth companies.
Check out the map below for more data on the companies.
As in other areas of European Fintech, UK is the hotspot of activity with companies such as Wagestream, Neyber and Salary Finance have raised hundreds of millions in venture capital. In fact, market consolidation has begun with Salary Finance acquiring Neyber.
Nevertheless, salary finance is becoming a hot fintech vertical in the big markets of continental Europe such as Spain and France with new players popping up with ambition to win these big markets. VC activity follows suite - for example, just recently Speedinvest has made a an investment in Madrid-based seed stage startup Cobee which is trying to conquer the space.
In Eastern Europe, Finch Capital has led a pre-seed round in Symmetrical.ai which has been making waves in the Polish market of more than 40 million people .
Additionally, there are early challenger emerging in this space - for example, Flipful is a recent graduate from Startup Wise Guys SaaS accelerator and trying to launch salary financing in the Baltics and Nordics. In Bulgaria, Klear is originally a peer-to-peer lending platform which is trying to make a push into this space in the Baltics.
Want a deeper dive into the research or have an insight of your own to share? Please get in touch!
I want to thank Piotr Smolen for providing invaluable insight to this article.