It is becoming increasingly difficult to pay the rent, mortgage and bills such as water and energy that are so important to daily life. That means debt to local governments – for a range of services that can include utility bills, sewage, court fees, traffic fines and parking tickets – is mounting.
PYMNTS’ own research found that 61% of Americans live paycheck to paycheck. The most vulnerable among us — the 77% of people who make less than $50,000 a year — also live paycheck to paycheck, with less than $800 in savings.
Liquidity cushions are dwindling and inflation is rising, making the struggle for survival all the more difficult.
as Phaedra Ellis-LamkinsCEO of the payment platform promise, said Karen Webster of PYMNTS: “Government debt must be made achievable. We are seeing large numbers 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 how widespread the problem is, consider the fact that, as Ellis-Lamkins appreciated, in the current environment and in the recent past we have seen two population groups grappling with sovereign debt.
Related: PYMNTS Intelligence: 61% of the US population lives paycheck to paycheck
There are those directly affected by the pandemic, where many service agencies could see 40% of people default on payments (where the pre-pandemic rate may have been under 10%). These are people who were just a paycheck behind on their payments – who suddenly lost the paycheck and then started fighting in earnest. We could call these people “COVID poor”.
Then there are those consumers who, according to Ellis-Lamkins, belong to what is known as the “structurally poor” segment, who have no real means of dealing with mounting service debt. They have been locked out of the traditional financial system and often do not have bank accounts, instead using prepaid cards or payday loans to make their payments.
As for the impact on the agencies themselves, utilities and park authorities just don’t know how to handle the debt burden. They’ve never experienced such a volume of payment defaults before and simply don’t have the technical infrastructure needed to handle the strain.
Most utilities, she noted, run on outdated enterprise software. This software assumes that if, hypothetically, a payment is not made by 5pm on the due date, there has been consumer failure and the debt cycle begins.
Yet, as Ellis-Lamkin said, two-thirds of those who miss payments make them within 14 days — which then means people are navigating the agency’s site with spreadsheets and paper checks. Due to outdated technology and inefficient manual processes, the $40 parking ticket can quickly grow to $120 in a month, inflated by fees and penalties.
Many utilities and government agencies using their own systems wouldn’t even consider a payment plan until a $500 balance is reached – which is then unattainable for a significant percentage of the population. The debts go into collection and the agency has to pay for the enforcement.
Ellis-Lamkin said the tastier solution is to incentivize people and governments to address debt sooner, over time without penalties and avoid business disruption.
See also: 70% of Millennials live paycheck to paycheck
The friction in the system
The friction in the system, she told Webster, lies in 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 as long as six weeks.
Platforms like Promise’s 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 critical services aren’t shut down — while consumers avoid penalties and interest charges.
Promise, which recently announced a $25 million Series B funding round, makes money through transaction and integration fees charged by its client agencies and organizations.
The company works with governments the same way you would buy a Peloton, with predictability for both the government and the consumer. It also has a “help portal” that assists government agencies in distributing financial aid funds, such as: These funds can be immediately applied to consumers’ outstanding balances.
Promise is also increasing payments for uncollected parking fees and toll arrears. Commitment payment rates, she said, are substantial — in the high 90% range.
The incentive for people is, of course, to keep their water on, to keep their driver’s license so they can get where they need to go. Regarding the faster distribution of the aid, she said Promise can work with the parties to set up immediate debt relief in a streamlined manner.
In the past, a grantee might have had to go to a nonprofit organization and bring a copy of their tax returns. But by linking to Promise, she said, an outreach is possible where the company can send a message to a person advising them that they’ve been prequalified and the debt has been forgiven.
“We’re not just bringing money to governments — we’re helping distribute the money to qualified recipients,” she said.
Looking ahead, the company is experimenting with its prepaid card pilots to track how and where people spend their money. Promise is also committed to building a “safe and trusted brand” for low-income customers, including seniors who are on a steady income.
Ellis-Lambkins said individuals in the paycheck-to-paycheck economy will face additional challenges in 2022 and beyond, partly due to inflation. We can also experience a perfect storm where government resources are reduced. Mortgage and student loan grace periods are ending, meaning household cash flows will come under pressure – and installment plans for essential services will, well, be essential.
“When those companies thrive,” she told Webster, “the people who rely on the services thrive, too.”
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