Do Revenue Sharing Agreements Replace Payday Loans?

Revenue sharing is not a common funding method as of 2019 – although lately it has started to attract much more interest from investors and innovators, especially in the context of the student loan financing. The basic structure of the program in a student revenue sharing arrangement is that an investor essentially pays a student’s tuition on the condition that when the student graduates and starts working, he gives up a part of his future income for a given period of time. .

There are a variety of players in the field who are looking for these types of education funding agreements. Purdue University was the first major research university in the United States to offer a revenue sharing agreement to its students. On the start-up side, the best-known and best-funded player in space is the Lambda Schoolfounded in 2017. Valued at $150 million, Lambda has seen investment from Bedrock founder Geoff Lewis, as well as Google Ventures, GGV Capital, Vy Capital, Y Combinator and actor Ashton Kutcher.

In education, the model makes sense, according to Austen Allred, co-founder and CEO of Lambda, as it more properly aligns incentives in the education sector. Students have collectively incurred $1.5 trillion in debt, and they must pay regardless of the actual career outcomes they experience after graduation. Schools, he noted, should have some skin in the game.

“There is no incentive for any school to have its students succeed anywhere. Schools are prepaid, they are paid in cash – whether it is by the government or by an individual doesn’t really matter” “, he told PYMNTS. “At the end of the day, schools get paid no matter what. I think to create better results, the school has to take the hit.”

Plus, it’s a wise investment to make – motivated young students early in their life as employees, who have every reason to succeed, are a great investment overall.

However, will the model also work for people who are not training for their career, but have already started it. Can revenue sharing be a traditional lending alternative for assets? Adam Ginsburgh, COO of Align Revenue Share Fundingsaid his company was founded on the theory that it could work, giving workers a much better alternative for income smoothing than payday loans.

“When we started looking at this model, it came to mind [that the same] mindset could be applied to workers for general household purposes,” Ginsburgh said in a meeting.

The system works similarly to its educational counterpart. Client applies and is assessed based on Align’s assessment of their income level, credit history, and other (proprietary) data characteristics. They are then offered the possibility of borrowing between $1,500 and $12,500 depending on their income. The consumer then agrees to repay the loan at a fixed rate that runs between two and five years. So far, the average loan term on the platform is around three years, and the average loan amount is around $5,000. Customers get a repayment schedule of two to five years, and the contract says it won’t take more than 10% of someone’s income.

However, in this case, the use of the term “loan” is a bit misleading. Align applies underwriting standards when evaluating clients because what it offers is technically – and more importantly, and legally speaking – not a loan. In an income-sharing agreement, the entity providing the funds does not lend money to the borrower, but invests in a worker’s future earnings with the expectation of a return.

A hope, in particular, but not a guarantee. This is one of the important points that separates funds invested from funds lent, but more on that in a second.

Because of this legal status, it’s unclear whether Align and similar companies are required to comply with federal “truth in lending” regulations, which require borrowers to be provided with a sheet showing the interest rate. workforce, or whether they have to comply with things like state-regulated caps on APRs. The most common opinion is that they don’t, even though the arena is still so new that it remains a gray area.

The most differentiating aspect of the statute is that the payment term is set at five years – and consumers are not obligated to pay if they lose their job (through no fault of their own). The payments “continue”, but the consumer makes a payment of $0 each month that he is not employed. If the deadline elapses before the total amount has been refunded? The investor is strapped for cash, just as they would be if they bought a stock that had fallen in price or invested in an unsuccessful startup.

Align’s underwriting standards aim to avoid these kinds of losing bets, and the payback period and terms offered to the consumer reflect the level of risk an investor is taking. Still, given the option between a revenue-sharing agreement and a payday or short-term loan, the comparison is favorable. There are no endless, inevitable cycles of indebtedness, nor years of calls from a collection agency – the consumer always has in view known expiration data at the start of the agreement.

However, Align may also charge high rates, particularly if a consumer’s income increases significantly during this five-year period. This issue sparked controversy when Arizona Attorney General Mark Brnovich recently allowed the startup to operate in Arizona, despite the fact that its products actually charge an APR higher than the 36% state law. Arizona caps interest rates. Brnovich, however, is authorized under a new state “sandboxing” law to allow consumer loan exemptions to allow businesses to try new or unusual financial schemes in Arizona.

“Allowing Align in the sandbox is like giving a potentially new business model the chance to show that it’s different under state law,” Brnovich noted in a Release. “We think they have a legitimate argument that it’s not a consumer loan under state law.”

Additionally, he noted, because it’s unclear if the business model is subject to state loan laws, it’s also unclear if Align even needed its permission to operate in Arizona.

“Here we have the opportunity to see how it works in a controlled environment, how the company interacts with consumers, and ultimately whether their product works,” he said.

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NEW PYMNTS DATA: ACCOUNT OPENING AND LOAN SERVICE IN THE DIGITAL ENVIRONMENT

On: Forty-two percent of US consumers are more likely to open accounts with financial institutions that facilitate automatic sharing of their bank details upon sign-up. The PYMNTS study Account opening and loan management in the digital environmentsurveyed 2,300 consumers to explore how FIs can leverage open banking to engage customers and create a better account opening experience.

About Judith J. George

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