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The power of payroll APIs in consumer finance

Pinwheel Team

April 25, 2022

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The development of APIs in the fintech space has ushered in a new era of open finance, giving consumers power over their own financial data.

Payroll APIs play an important role in the open finance ecosystem. APIs connect to payroll providers and other income platforms, like Uber or DoorDash, allowing third parties to access the data inside these systems.

It’s important to point out that payroll APIs can also refer to solutions that allow embedded payroll. But for the purposes of this post, we’ll use this term to talk about payroll data connectivity APIs like Pinwheel’s that have opened access to consumer payroll data.

On a basic level, payroll connectivity can make financial management easier by letting consumers easily switch direct deposits or link loan repayments to their salary.

Even more importantly, payroll APIs are laying the foundation for a fairer financial system by enabling innovation and improving old underwriting models.

Paycheck-linked lending

Traditionally, borrowers would repay their loans by making manual payments. Paycheck-linked lending, however, allows borrowers to set up automatic loan repayments that are linked to their paycheck via their income or payroll platform. So as soon as they get paid, they also make their repayment.

The most apparent benefit of paycheck-linked lending is increasing repayment rates and lowering the risk of default for lenders. Perpay, a Pinwheel client, was able to grow its repayment rates by 3x using our payroll API. Because the API enables automatic repayments, lenders can expand their total available market (TAM) to include credit-invisible and credit-damaged consumers.

As for consumer advantages, paycheck-linked lending allows borrowers to access loans at lower interest rates. It’s an invaluable benefit to low-income consumers who might otherwise get stuck in a vicious cycle of high-interest loans they’re unable to repay. Here’s how the situation often plays out: When borrowers miss several repayments, they risk defaulting on a loan. A default on their credit report negatively impacts their credit score, leading them to high-interest loans that are more difficult to repay, resulting in missed repayments... It doesn’t take an expert to see how this process leads to worsening financial health.

In contrast, paycheck-linked lending can help consumers build their credit and become eligible for better financial services in the future.

Earned wage access

Most employees are used to getting paid on a fixed payment schedule, either once or twice a month. But earned wage access (EWA) is a service that allows employees to access their income as they earn it. The demand for EWA is growing, but launching it can be a challenge.

To build an EWA solution from scratch, a financial service provider would need to connect to numerous income and payroll platforms, which takes considerable time and resources. But a payroll API is already connected to these platforms, and it can quickly retrieve data to verify earned wages.

Pinwheel is connected to over 1,600 payroll and income platforms, including the top 20 time & attendance (T&A) platforms used by roughly 25 million American workers. Our API pulls data on shifts and paystubs to calculate the income available, so employees can withdraw it whenever they need it.

Direct deposit switching

Payroll APIs can power automated direct deposit switching, which allows consumers to quickly route a portion or the entirety of their paycheck into a new bank account. Without automated deposit switching, consumers have to manually fill out forms and submit them to their employer. This tedious process is an even bigger inconvenience now that we rely on apps to do most of our banking — switching deposits should be as easy as sending money to a friend.

A direct deposit switching solution like Pinwheel’s gives consumers the freedom to split their paycheck between different bank accounts any way they see fit. In just a few taps, our API allows consumers to log in to their payroll or income platform and select how they want to allocate their money on payday.

To financial service providers, one of the most valuable advantages of automated direct deposit switching is the ability to capture more share of wallet and become their customers’ primary financial institution. After all, consumers are more likely to invest, save, or take out loans from their primary bank. And more clients funding their bank accounts equals more interchange revenue.

Automated direct deposit switching is an essential feature to woo customers away from their current bank, considering that inconvenient switching is one of the top 5 reasons consumers stay with the same financial institution. So every financial service provider who wants to win over more clients with smooth onboarding should create a friction-free deposit switching process.

And it’s not just banks and fintechs that can benefit from automating deposit switching. Crypto exchange platforms can use it as a fiat onramp.

Learn more about automated direct deposit switching with Pinwheel.

Income and employment verification

Verifying income and employment is an integral step when underwriting loans and screening potential tenants. It’s a process that determines an applicant’s ability to pay and verifies their identity to protect against fraud. Payroll APIs simplify the process of income and employment verification by pulling robust data from payroll systems with the consumer’s permission.

A payroll API can expand access to affordable loans and improve loan underwriting models with information that goes beyond an applicant’s credit score. For example, Pinwheel’s API allows lenders to verify the applicant’s paystubs, salary or hourly wage, important identity information, and check how long they’ve been employed.

Since Pinwheel is a Consumer Reporting Agency (CRA), anyone using our payroll solution can use consumer-permissioned data for credit decisioning while remaining compliant with the Fair Credit Reporting Act (FCRA). Pinwheel also enables recurring access to income and employment data, which allows financial service providers to get a real-time overview of their client’s financial picture and proactively respond to any changes.

Payroll data can also minimize fraud in renting on top of simplifying the lease application process. Instead of submitting paystubs or tax documents to get approved for a lease, tenants can grant permission to an API to retrieve that data for them.

Personalization of financial services

Personalized financial products are increasingly important to the modern consumer, particularly the younger demographic.

Today, niche fintech startups provide solutions to specific consumer needs, such as neobanks for gig workers or couples. Eighty-one percent of Gen Z say that personalized features could strengthen their financial services relationships. Thanks to the wealth of data they can access, payroll APIs allow financial service providers to better understand their customers.

With income and employment data, providers can launch services such as earned wage access by analyzing how many of their clients are salaried vs. hourly employees. Or, they can launch credit-building products powered by paycheck-linked lending to help their clients increase their credit scores.

Pinwheel’s API also enables direct deposit allocation monitoring, a functionality that allows providers to see who else is competing for their customer’s paycheck and understand how they can better serve them vis-à-vis their competitors.

Payroll APIs are driving innovation in consumer finance

When it comes to consumer financial data, we can’t get any more granular than payroll. From deposit switching to showing proof of income, payroll APIs can streamline a host of time-consuming processes.

Access to such detailed employee data can help financial service providers analyze and segment their consumers in ways that weren’t possible before. Pinwheel’s API covers 80% of American workers across 1,600 payroll and income platforms, including those in the gig and creator economy, so providers can create services that align with the modern workforce.

With a greater understanding of consumer needs, companies can focus on what they do best — innovate.