Most of the small and medium businesses (SMB) provide loans to their employees in need, which in turn is a huge problem for the employers. One, their working capital gets tied up in loans instead of being used to grow the company. Secondly, a lot of time and money is invested on loan administration. Ziero is an innovative lending- as – a service (LAAS) company delivering financial flexibility and peace of mind to the workforce through 0% interest loans. It is a simple solution that helps employers to free up both time and working capital.
Financial concerns are the biggest problem facing employees in the US right now. Credit card outstanding balance is expected to reach $1Trillion this year. Most adults have on an average 3.7 personal credit cards. Indebted households carry an average credit card balance of $15,706 2. Financial difficulties span across all income levels. 7 out of 10 employees live paycheck to paycheck. 67%of households with income between $50k- $100k have difficulty coming up with $1,000 to cover an unexpected bill. An employee troubled by personal financial matters would not be very effective for an organization. Ziero was born to remedy this catch-22 situation. It is based out of San Francisco and launched in 2015 with a seed capital of $150,000 from Ferst Capital Partners. It was founded by Benny Yu (CEO), a FinTech executive with a passion for financial innovation, and with an extensive experience overseeing $500MM+ of loan origination in the marketplace lending industry. Richard Gross (COO) is an investor and advisor to start-ups. He focuses on strategy, operations, marketing, and sales and has 20+ years as a founder, operations, and business development executive.
What sets Ziero apart from other players in the market is that they do not charge any interest from the borrowers. Most of the other players in the market spend millions on direct mail and buying 3rd party leads, resulting in high CAC. Also, most players in payroll lending are largely manual, especially the underwriting process. Even the online payroll lenders charge usurious interest rates which only aggravate the employee’s financial problems in the long run. Fraud risk remains a top concern for online lenders, leading to high operating cost where as Ziero have an employee- employer model thus minimizing the risk of frauds which leads to lower OPEX. With limited number of near- prime borrowers, platforms seek expansions by going down the credit pyramid, leading to rising default rates whereas Ziero concentrates on the above average employees whom employers are trying to retain, hence resulting in higher NIM (Net Interest Margin)
They do client acquisition using various outlets like small business accounting firms, SMB consultants, and media. They do not target the big corporations, rather look for companies with less than 100 employees and which share a close relationship with their employees. There are approx 3 million SMBs with 70 million employees (2-99 employees). The SMBs don’t have funds for generous benefits, but Ziero offers an affordable benefit that’s custom-made for any employee. They do not charge any interest; employers cover the interest by paying the fee in the beginning. They don’t face payroll problems like prosper and LC and they use ACH for repayments. They have a business model based on interest-free loan through low-cost acquisition channel. By providing financial wellness they try to gain trust from the borrowers. They establish the bank account connections with the borrower’s bank to get full access to borrower’s credit profile.
The biggest problem Ziero feels is convincing the employers. Employees are obviously in awe of the product. 50% of the employees feel they can use the money if it is free and will use to pay down the credit card debt. An employer can free 90% of its cash by giving 10% to Ziero as charges; it will also help the SMB to leverage its scarce capital and resources to grow aggressively. They also generate revenue through credit card debt refinancing. Underwriting is done by credit card bureau data, employment data, banking data and alternative data sets. Average loan size ranges from $1,000 to $5,000 and term of the loan is from 6 to 12 months. Once, the first loan is given, they use the credit data to build the borrower’s profile in their system. They charge 10% up front from the employer. Next loan to the same borrower is more traditional with a bigger amount; they lend to refinance credit card debt. APR for a 6-month loan is around 35%, and origination fee is 1%-5%.
The start-up tries its best to provide interest-free loans to all employees, but there are situations where employees do not meet their minimum credit criteria. In cases like these where an employer wants to make loans available to everyone, they will help build a customized program that will allow the business to provide a surety of repayment in the case an employee defaults.
In the second round of raising capital, they are aiming to raise $750,000-$1 million. With that money, they plan to hire a management team and increase their market size. To raise the money for lending, they plan to target high net worth investors and then hedge funds. Only, once they have a big enough balance sheet, will they go to banks and investors. According to IRS, loan size beyond $10,000 is sizeable and will have a considerable impact on employer’s taxes but a benefit of $99 is still taxable but the impact is minimal.
In future, they plan to provide a range of other financial products that will include financial planning, credit card debt consolidation, financial wellness programs and more and also down the line they plan on working with HR benefit brokers as well. Ziero is planning to be Zenefits for the fintech space. It has come up with an innovative product. The winner in the space will be decided by who is able to stitch up the millions of SMB first as the product is easily replicable by other well-funded competitors.