It is becoming more and more difficult to pay the rent, the mortgage and the bills, such as water and energy services, which are so critical for everyday life. This means the debt owed to local governments – for a range of services that can cover electricity bills, sewage, court costs, traffic fines and parking tickets – is rising.
PYMNTS’ own research determined that 61% of Americans live paycheck to paycheck. The most vulnerable among us – the 77% of people who earn less than $50,000 a year – also live paycheck to paycheck, with less than $800 in savings on hand.
Cash cushions are shrinking and inflation is on the rise, making the struggle to make ends meet all the more difficult.
As Phaedra Ellis-Lamkins, CEO of payment platform Promise, Karen Webster of PYMNTS said, “Government debt needs to be made accessible. We see a lot of people being left behind, struggling to pay water bills, child support bills and parking tickets – and they need help.
To get a sense of the extent of the problem, consider the fact that, as Ellis-Lamkins estimated, in the current environment and in the recent past, we have seen two segments of the population struggling with public debt.
Related: PYMNTS Intelligence: 61% of the American population lives paycheck to paycheck
There are those directly affected by the pandemic, where many service agencies could see 40% of people falling behind on payments (where, before the pandemic, the rate might have been less than 10%). These are people who were just one paycheck behind on payments – who suddenly lost their paycheck and then started struggling in earnest. We could call these people “COVID poor”.
Then there are the consumers who belong to the so-called “structurally poor” segment, according to Ellis-Lamkins, who do not really have the means to tackle the growing debt of services. They have been excluded from the traditional financial system and often do not have a bank account, instead using prepaid cards or payday loans to make their payments.
As for the impact on the agencies themselves, utilities and parking authorities simply don’t know how to handle the debt burden. They have never experienced this volume of missed payments before and simply do not have the technical infrastructure to handle this burden.
Most utilities, she noted, run on legacy enterprise software. This software assumes that if, by assumption, a payment is not made by the due date at 5 p.m., then there has been a consumer default and the cycle of debt begins.
Yet, as Ellis-Lamkin said, two-thirds of those who miss payments make them within 14 days – which then means that on the agency side, people are navigating through spreadsheets and checks paper. Along the way, due to legacy technologies and inefficient manual processes, that $40 parking ticket can quickly become $120 in a month, inflated by fees and penalties.
Many utilities and government agencies using their own systems, she said, won’t even consider the idea of a payment plan until a balance reaches $500 — which is then off. reach for a large percentage of the population. The debt goes into collections, and the agency has to pay for the execution.
Ellis-Lamkin said the most palatable solution is to get people and governments to tackle debt sooner, over time, without penalties, while avoiding a service disruption.
See also: 70% of millennials live paycheck to paycheck
The friction in the system
The friction in the system, she told Webster, is the outdated assumption that everyone has a paycheck that comes in every two weeks or once a month. Income, she said, is actually variable and inconsistent – and payment cycles can stretch up to six weeks.
Platforms like Promise can increase revenue for these governments and utilities by helping consumers set up payments through installment plans. The platform model and flexible payment methods, she said, can ensure that critical services are not interrupted, while consumers avoid penalties and interest charges.
Promise, which recently announced a $25 million Series B funding round, makes money from transaction and onboarding fees levied on client agencies and organizations.
The company works with governments the same way one might buy a Peloton, with predictability for both the government and the consumer. It also has a “Relief Portal” that helps government entities distribute financial assistance funds, such as the Water Assistance Program for Low-Income Households or CARES Act funding. These funds can be instantly applied to outstanding consumer balances.
Promise also increases payments on uncollected parking tickets and toll debt. Payout rates on the bonds, she said, are significant — in the high 90% range.
The incentive is there, of course, so that people don’t have their water cut off, that they keep their driver’s license so they can get where they need to go. As for delivering aid faster, she said Promise can work with parties to deliver debt relief immediately, in a streamlined way.
In the past, an aid recipient might have to go to a non-profit organization and bring a copy of their tax returns. But by linking with Promise, she said, outreach is possible, where the company can send an individual a message notifying them that they have been pre-qualified and the debt has been cancelled.
“We don’t just bring money to governments – we also help transfer the money to qualified recipients,” she said.
Looking ahead, the company is experimenting with its prepaid card pilots to track how and where people are spending their money. Promise also seeks to create a “safe and trusted brand” for low-income customers, including seniors living on fixed incomes.
Ellis-Lambkins said that in 2022 and beyond, individuals in the paycheck economy will face additional challenges, in part due to inflation. We may also witness a perfect storm where government resources are reduced. Forbearance periods are ending for mortgages and student loans, meaning household cash flow will face pressure – and installment plans for essential services will be, well, essential.
“When these businesses are successful,” she told Webster, “the people who rely on the services are also successful.”
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