Original article from Emily Mason at Forbes
Rain is a four-year-old company that uses technology to advance employees, typically hourly workers, their wages shortly after a shift ends so they don’t have to wait for payday to have cash on hand. The Los Angeles-based business says it secured a $250 million valuation through a $116 million funding round made up of $66 million in equity and $50 million in debt.
The raise was led by fintech-focused venture capital firm QED investors and Invus Opportunities. Wndrco, Tribe Capital and Dreamers VC, which was co-founded by the actor Will Smith, also invested.
In the time waiting for their next paycheck to arrive, individuals with low cash savings are vulnerable to overdraft fees, low balance fees and high interest rates if they choose to take out a payday loan or carry a balance on a credit card. Two in three Americans doubt whether they have enough emergency savings to cover a month’s worth of living expenses if they lost their job, according to Bankrate’s annual emergency savings report.
“If you don’t have access to credit and find yourself in a very short-term pickle before you can get your paycheck, you can be unwittingly drawn into the arms of payday lenders,” says Nigel Morris, co-founder of QED investors.
The first earned-wage access service was patented in 2010 by FlexWage. The fintech category promises a credit-free alternative to payday loans and has grown over the past 13 years as players like 11-year-old PayActiv and 8-year-old DailyPay have launched products. The aim is to provide cash-strapped workers with immediate access to their pay to cover essential expenses.
As the number of startups pitching the service grows, regulators are beginning to look more closely at how different earned-wage access products are structured to determine if there is consumer credit involved. Earned-wage services are either offered through employers, as is the case with Rain, or directly to employees. When offered to employees, a provider reviews the consumer's banking history and uses that information to advance funds based on estimates of future income. When the wages are paid, the advances are deducted. Earlier this month the U.S. Government Accountability Office recommended the Consumer Financial Protection Bureau clarify when earned-wage access counts as credit under the Truth in Lending Act, which would make the service subject to closer oversight and existing lending rules.
Alex Bradford, CEO and co-founder of Rain, is adamant the company does not provide a credit product, but instead operates under wage-assignment law. When employees sign up for the service they assign their wages to Rain, meaning the company is compensated for the advances automatically by the employer through its regular payroll system. Rain does not allow employees to take advances of more than half their earned wages in each pay period. “We view–and our employers and HR software partners view–our product structure as significantly more compliant or less in the gray zone than our competition,” Bradford says.
The funding for Rain’s short-term advances comes from a debt facility arranged by Sound Point Capital Management, a New York-based hedge fund. Rain is free to employers and makes money charging employees a fee every time they access their earned wages, which averages around $3 and is akin to an ATM fee. Employees can avoid the fee by waiting for next-day delivery.
Rain’s main competitor is DailyPay, a service that also integrates directly with employers’ payroll systems. In addition to charging an ATM-like fee to employees, DailyPay has a debit card that allows the company to earn interchange, the fees merchants pay when consumers swipe their debit and credit cards. When employees transfer their earned wages to the Friday card, they do not pay any fees. Rain plans to launch its own card product, Bradford says. DailyPay does not limit how often employees can use the service. Digital bank Chime reportedly bid as much as $2 billion to buy DailyPay last year, but the company rejected the offer. DailyPay declined to comment and Chime did not respond by time of publication.
Bradford says Rain can improve employee retention and help companies attract more applicants for open positions. It is currently used by McDonalds, Taco Bell, Applebee’s, Marriott and Hilton. Since launching in March 2020, Rain has distributed over $150 million in wage advances.
Bradford notes that employees open the Rain app multiple times a day to check how much they have earned in near real-time. While currently focused on earned-wage access, Rain plans to use this high level of engagement and integrations with employers’ human resources, timekeeping and payroll systems to expand into other financial products such as health savings accounts.