Employer sponsored health & life insurance are bare essentials in any employee benefit program. In-fact insurance coverage goes back even prior to the origin of the word “employee benefit”.
There was an acute shortage of workers during the WW2 in US. Economy was however booming so employers started raising wages which caused high inflation. US government actually imposed a nationwide wage freeze to combat inflation.
Companies responded by focusing on perks that were not considered part of wages and employer contribution to insurance which was not taxed then and is not taxed now became the main part of these perks. There is an annual tax subsidy of hundreds of billions of dollars to these insurance programs every year.
These employer sponsored programs have many negative fallouts. Employees are reluctant to leave their jobs solely due to rising healthcare costs which again are a fall out of these programs. Some argue that removing tax subsidies on this perk could both reduce healthcare costs and put more money in the hands of the employees but the industry is well entrenched now and change will be painful in the short term so it is unlikely to change. Prevalence of US MNCs ensured that these programs soon became best practices around the globe and first the local conglomerates and then pretty much everyone else started providing healthcare benefits, India being no exception.
Similarly employer based lending has been proposed for long but it really started picking up after Federal Deposit Insurance Corporation (FDIC) nudged financial institutions to explore employer-sponsored small-dollar loans (ESSDLs) post the 2009 GFC. It is now estimated that upto 50% of US companies have some sort of tie-ups for ESSDLs. Alongside increased employer demand, fintech’s have introduced scalable products to help people manage their finances. These include short-term, small-dollar loans, as well as solutions designed to build savings, smooth uneven income streams, or facilitate instant access to accrued wages. This trend is now coming to countries like India.
It is critical that HR leaders consider how different lender business models, loan terms, and loan features affect financial outcomes for workers while meeting needs for companies and communities. For example, They should also consider whether paying salaries more regularly or tying up with a platform for accessing earned wage without changing the payroll schedule is a better option. Employers must also consider the numerous trade-offs between “low-touch” loan programs (offering a basic loan with limited direct interaction with borrowers) and “high-touch” loan programs (offering a loan bundled with other services, including financial education and one-on-one coaching or counseling).
Employer-Sponsored Loans should offer better deals vs traditional borrowing in terms of eligibility and interest rates simply because lenders default risk, collection and operation costs are minimal due to access to payroll data and payroll deductions. Marketing costs are reduced or eliminated by leveraging existing employer communication channels. Employers may further reduce lender concerns about profitability by providing a “loan loss reserve” to cover estimated losses on loans because of defaults and nonpayment. Employers can themselves extend earned wage access to completely eliminate the need for <30 days loans, overdraft etc.
It also has a social impact as people don’t fall into debt traps.
Now let’s look at how employer sponsored lending and/or earned wage access (EWA) helps the employers
REDUCES RISK FOR EMPLOYERS
Before sponsoring small-dollar loan products, some employers in US provided ad hoc loans to employees or offered payroll advances. Employers offering such direct assistance face financial risks if workers fail to repay loans or leave their jobs. Employers also risk perceptions of unfair treatment if the process for accessing a payroll advance is not transparent or if loans are not available to all workers. Having a formalized loan program with clear eligibility requirements minimizes these risks.
Employers experienced elimination of requests for payroll advances, faced no default liability and small increase in costs. Offering an earned wage access program is even less risky and cost effective for employers.
POTENTIALLY REDUCES EMPLOYEES’ HIGH-COST CREDIT USE
Employers are aware that many of their employees struggled financially and receive calls from loan debt collectors. These platforms reduce dependence on such loans and helps employees refinance higher-cost debt.
POTENTIALLY REDUCES RETIREMENT PLAN/PF LOANS AND HARDSHIP WITHDRAWALS
PRIVACY ABOUT WORKERS’ FINANCIAL CIRCUMSTANCES
Employers cite the relative privacy of the employer sponsored loan process or EWA as a benefit to both employers and employees. Privacy is an important factor in choosing which product to offer. Anonymity of borrowers is part of the program’s appeal but some organizations want to introduce an approval process. Employers don’t always want to know the specifics of employees’ financial circumstances, but the application process doesn’t allow for complete anonymity. Some employers express reservations that these program as they increased the company’s involvement in employees’ financial lives because human resources staff must verify employee eligibility. This however can be automated once the pilot goes well
CONVENIENCE FOR EMPLOYEES
Employers believe the convenience of payroll deductions for loan repayments reduced the risk of missed payments. Also, the quick delivery of funds—sometimes within a business day—is a selling point. For employers concerned about workers seeking nonbank loans, convenience matters. People seeking emergency funds often need money fast, so the application process must be competitive with the speed and convenience of digital lending apps
BUILDING CREDIT AND SAVINGS
Employers cite the credit-building and saving features as important employee benefits. Employers like that the savings feature helps young workers establish healthy savings habits.
FINFI platform that combines low cost EWA access, best return purchased linked saving schemes & refinancing of high cost debt is built with insights from research around the world but is getting fine tuned with real data from India. We believe we will build the best employer sponsored platform in the world. Come partner with us in this journey. Reach us on care@myfinfi.com