As the virus crisis bites deeper and deeper into workers’ wages and household finances, big money is pouring into workplace finance initiatives.
The virus crisis is opening up a rich vein of opportunities for some well-placed financial intermediaries. Salary Finance, one of the UK’s leading workplace lenders, enables cash-strapped workers at its client companies to receive advances on their wages as well as other financial products, including low-interest loans that are deducted directly from workers’ pay checks — a mechanism that sharply reduces default rates, since it’s much more difficult for borrowers to avoid paying their debt if it is extracted directly from their salary.
The company has secured funding from two FIRE-sector heavyweights, Legal & General and Experian, the latter of which was partly attracted by the rich seam of new data Salary Finance intends to extract, including on workers’ earnings and job profiles. As Lisa Fretwell, managing director of data services at Experian, one of the world’s biggest consumer reporting companies, gushed, “employment linked financial services, and the provision of consented real-time employment and income data, are both huge global growth areas in finance and technology.”
Salary Finance expanded its business at the beginning of this crisis after picking up the assets of its now-defunct rival, Goldman-backed Neyber, on the cheap. Thanks to that acquisition, Salary Finance now provides services to one-fifth of all FTSE 100 companies, eight of Britain’s ten largest supermarket chains and non-food retailers and a quarter of NHS Trusts and police forces across the UK. In total, its UK and US platforms are used by 500 employers and available to four million people.
“Financially Healthier and Happier”
The company’s mission, it says, is to improve the financial inclusion and health of its client companies’ employees, while of course pocketing juicy fees along the way:
“Inequality in society has grown, as has the financial ill-health of millions, including those in work. Salary Finance uses employment data and a salary-link to offer better structured and better value products, that help employees become financially healthier and happier.”
Another company that is making big inroads in the workplace finance arena is Softbank-backed fintech giant Greensill, which has already made a name for itself in the controversial world of supply chain finance. Through a string of acquisitions, including of Australian start-up Earnt, Greensill has developed a mobile app that allows employees of private companies and public institutions to “access the cash they have earned as soon as they finish a day’s work and at no cost to them.”
By applying a similar model to its supply chain finance services, Greensill hopes to install itself as a financial middleman between companies and their employees, just as it has between hard-up companies and their suppliers. On its website, Greensill markets the app as a tool for helping financially challenged workers avoid the poverty trap. The ultimate goal, it says, is to “end payday poverty”:
“Waiting to be paid is a fact of life. It generates ‘pay day poverty’ costing workers billions of dollars a year in needless interest and loan fees, is a leading cause of anxiety, and effectively provides employers with free credit. Less debt means less stress and makes for a happier workforce, which is why companies can offer Earnd as a competitive advantage to attract and retain workers.”
Greensill has already made its Earnd app available to all staff of the UK’s National Health Service through a partnership with NHS Shared Business Services (NHS SBS), which itself is a public-private joint venture between the UK’s Department of Health and Social Care and the European IT consultancy and global services company Sopra Steria. Here’s what NHS SBS said about the deal:
“Following the agreement, Earnd – a mobile app that improves financial wellbeing by giving employees free and flexible access to their salary – will be available to NHS users via the existing MySBSPay app… The new collaboration aims to help NHS organisations enhance their employee benefits, whilst reducing reliance on expensive employment agencies.”
An Unlikely Ally
While the stated goals of reducing the NHS’s dependence on employment agencies and its low-paid staff’s dependence on payday loans by getting the wages they’ve earned into their pockets as early as possible are certainly laudable, Greensill’s workplace finance solutions will come at a cost. And that cost will ultimately be borne by the NHS’s backers (i.e. British taxpayers).
The main reason why so many working people in the UK (and other advanced economies) have fallen into poverty is not that they aren’t paid soon enough but rather that they aren’t paid enough. For decades wages have stagnated as the cost of living and corporate profits have soared. Inserting a fee-skimming financial intermediary between employers and their employees is likely to intensify rather than mitigate this trend.
Greensill says it wants to apply the lessons it has learned from its role as the world’s biggest non-bank provider of a controversial supply chain finance method called reverse factoring to the early payment of salaries. What Greensill neglects to mention is that in that role it has become embroiled in some of the worst corporate collapses and scandals of the past few years.
Here’s how reverse factoring works: a company hires a financial intermediary, such as Greensill, to pay a supplier promptly in return for a discount on their invoices. As a result, rather than getting paid in 30 days or 60 days – or longer, as is often the case when small businesses deal with big ones – a supplier can get paid immediately, albeit at a discount. The large company gets to repay the intermediary at a later date. Rather than wait for that payment to arrive, some intermediaries bundle up invoices into securities and sell them to asset managers, insurers and pension funds.
In the supply chain finance industry this arrangement is touted as a win-win for all concerned. The supplier benefits from its larger customer’s better credit rating, in the process getting cheaper funding, albeit to cover payments they should have already received. The customer keeps its suppliers reasonably happy. And the intermediary gets to skim juicy returns on both sides of the deal. Of course, none of this would be necessary if large companies were actually compelled by law to pay their suppliers promptly, such as within 30 days of receipt of invoice.
Hiding Monstrous Amounts of Debt
Arguably the biggest problem with reverse factoring is that it essentially turns a company’s accounts payable into financial debt that is owed to a financial institution. But this debt is treated as a trade payable, meaning it does not have to be disclosed as debt and can be hidden from the view of investors and auditors, sometimes for years. This is precisely what happened with Spanish green energy giant Abengoa, which collapsed in 2016 after billions of euros of off-balance sheet liabilities came to light.
The demise in similar fashion of UK construction giant Carillion two years later set off alarm bells about the pent-up risks posed by companies using reverse factoring to obscure the true state of their financial health. On its collapse, Carillion owed £498 million through its seemingly innocuous “early payment facility”, much more than its reported borrowings. As Fitch ratings wrote in a report later that year, reverse factoring essentially served as a “debt loophole,” enabling Carillion to hide the true scale of its growing debt load.
As the virus crisis continues to bite, concerns are rising that hordes of struggling companies are turning to reverse factoring as a means of last resort to continue paying their suppliers, reports Reuters:
The world’s top banks are set to earn $27 billion from financing supply chains this year, data from research firm Coalition shows, as larger borrowers, mostly in Europe, scramble to help suppliers hammered by the pandemic. This represents a rise of about 5.5% in 2020, compared with an average 2% increase in the previous four years… “Supply chain financing is the latest financial engineering that could have serious consequences for working capital,” said Pierre Verle, head of credit and a portfolio manager at French asset manager Carmignac. “I am not sure many investors realise how serious it is.”
Greensill says it too saw volumes and new business increase in 2020, despite the fact that in the first three months of the year three of its reverse-factoring client companies — NMC Health, rent-to-own retailer BrightHouse, and Singapore commodities trader Agritrade — collapsed in short order, once again under billions of dollars of undisclosed debts. In the case of UAE-based FTSE 100 health care company NMC Health, $2.7 billion of unreported debt was suddenly unearthed, on top of its $2.1 billion of disclosed debt. Since then, an additional $1.8 billion of heretofore hidden debt has come to light, taking the company’s total debt load to $6.6 billion — more than twice the amount it had reported in its financial statements.
In the ensuing scandal, attention turned to the incestuous relationship Greensill had forged with its primary backer, Soft Bank, and Swiss mega-lender Credit Suisse. Greensill had been appointed as the exclusive broker of the assets of Credit Suisse’s $8 billion supply chain business. Then, as luck would have it, many of those assets ended up financing companies funded by Greensill’s biggest investor, SoftBank’s Vision Fund.
The firm is also under investigation by German banking regulator BaFin and the Association of German Banks, an industry group, over its subsidiary Greensill Bank’s outsize exposure to a single client: U.K.-based steel magnate Sanjeev Gupta.
Given Greensill’s short but chequered history, it probably makes sense to be wary about its claims of wanting to help out the world’s legions of low-paid workers. Its reputation is now so tarnished that it was unable even to persuade one of the Big Four accountancy firms to audit its books as it mulls a stock market listing. The Big Four — KPMG, Deloitte, EY and PwC — are not exactly famed for their propriety but after taking flak following a string of corporate collapses, they are becoming pickier about which clients they take on.
But even as Greensill struggles to find an auditor big enough to audit its books as it tries to raise fresh capital amid surging client defaults, it still enjoys the backing of Softbank and continues to wield significant political clout, having contracted the lobbying services of the likes of former UK premier David Cameron and former Australian foreign minister Julie Bishop. In the words of Mr Greensill himself, it wants to use that influence to “unlock capital for businesses and people around the world”.