Making payday lending redundant, with Caroline van der Merwe and Simon Ellis

South Africa has an awkward history with payday lending and payday adjacent lending, so I was a touch concerned when I first heard that a fresh pair of South African entrepreneurs were looking to shake up the industry. Luckily, all my concerns were misplaced, because SmartWage is not looking to rethink payday lending, they're looking to make it redundant.

You can read more about SmartWage, now re-branded as Jem at https://www.jemhr.com/

In today’s episode, we talk about digitising communication between employers and employees, removing trucks’ worth of paperwork, and providing access t0 earned wages.

Follow Carolyn van der Merwe on LinkedIn for news on SmartWage but also updates from the Yale Africa Startup Review (or just head there directly at https://www.yasr.org/)

Follow Simon Ellis on LinkedIn for news on SmartWage but also his thoughts on leadership and his podcast hot tips - including The Knowledge Project and The Tim Ferris Show which were mentioned.

You can learn more about myself, Brendan le Grange, on my LinkedIn page (feel free to connect), my action-adventure novels are on Amazon, some versions even for free, and my work with ConfirmU and our gamified psychometric scores is at https://confirmu.com/ and on episode 24 of this very show https://www.howtolendmoneytostrangers.show/episodes/episode-24

If you have any feedback, questions, or if you would like to participate in the show, please feel free to reach out to me via the contact page on this site.

Regards,

Brendan

The full written transcript, with timestamps, is below:

Carolyn vd Merwe 0:00

In the very early stages of this product idea, we came across a corporate that prints 18,000 payslips every single month and spends R25,000 carrying them around the country - and it just completely blew our minds. Here you had a market where we needed a little bit of cooperation from payroll in order to offer an on-demand pay product, but we had the ability to save payroll literally days of work every single month by taking those payslips and offering them via WhatsApp.

Simon Ellis 0:29

100 years ago, you work today at the end of the day, you waited in line and you got given a bunch of cash. Now employees can't get access to their money and have to rely on predatory lending. With technology today, we can give employees a percentage of what they've already earned. That is really not lending, but just giving people access to what is already theirs in an efficient way.

Brendan Le Grange 0:54

I've found myself in an interesting position, knowing I'd be in South Africa for all of August - don't rob my house, please - I reached out to a few extra guests to build up a stack of episodes to tide me over. And then everyone said yes, so now rather than hoard July recordings until October, I'm flipping the script and publishing a South African themed bonus episode every Tuesday of my trip. This is the second one of those.

South Africa has an awkward history with payday lending and payday adjacent lending. In the days of Apartheid, some lenders, often in the form of furniture retailers, would open so many direct salary deduction loans, that somebody might spend a whole month working down the gold mines, only to get a negative paycheck after.

When I started my career, that was what we pointed to when we wanted a shorthand example of predatory lending. Then a few years later, a couple of South Africans started Wonga, the now defunct payday lender whose astronomical APR has made it the UK's contemporary byword for over-aggressive lending.

So I was a touched concerned when I first heard of a fresh pair of South African entrepreneurs looking to shake up the industry. Luckily, all my concerns were misplaced, because SmartWage is not looking to rethink payday lending, they're looking to make it redundant.

Welcome to How to Lend Money to Strangers with Brendan le Grange.

Carolyn van der Merwe, Simon Ellis, you're the co-founders of SmartWage and it's a pleasure to have you both on the show with me today. Now you both individually bring some really interesting experience to the business, so let's start with that and maybe a quick overview of the routes you've taken to get to where you are today.

Carolyn vd Merwe 3:01

Thank you for having us, Brendan, we're very excited to be here.

So I came to SmartWage in a sort of a roundabout way. My background is actually all in the employee benefits space and building large scale employee rewards and recognition programmes across Sub-Saharan Africa, and that's where I cut my teeth in the space that we find ourselves in now.

And I went to business school, got my MBA, and then I went overseas to Yale to get another business degree. And I really just spent my time there trying to find an opportunity to come back to South Africa. And, serendipitously, I met Simon during the beginning of the COVID pandemic, when we were both stuck inside and networking for lack of anything better to do.

So we met and we were such different people, but we had this complementary skill set. And that's where SmartWage started for us.

Brendan Le Grange 3:46

Now, Simon, you've come from a background of entrepreneurship with a few projects already under your belt, what is your background?

Simon Ellis 3:53

Apart from the projects that didn't go so well!

My background is in accounting. I worked at Deloitte for four years, and I loved it. But I realised I was never going to be an accountant or an a partner long term. And so I had tried a few things, most of them failed, but I realised towards the end of 2018 that I really wanted to go out and do something, and find a team to build something. And that was really the start of that journey.

So I left Deloitte and worked with a bunch of companies to help them raise capital. I loved doing that, loved the energy and passion of entrepreneurship, but realise that if you want it to actually make a difference, you need to be the team doing it, and not helping someone else do it. And so that was SmartWage.

And as Caro said, we met very serendipitously and we were co-founders together for, I'm not sure, it was probably five or six months before actually meeting in person. I do recall that very first conversation in person which was which is kind of weird, but was the times we were living in and I guess it does show you the power of communication and connecting with people.

Brendan Le Grange 4:51

You both talked about connecting and entrepreneurship there, I see you both also do quite a lot of voluntary work in the broader entrepreneurship space.

Carolyn vd Merwe 5:01

So the Yale Africa Startup Review is just a project I started working on with fellow African students when I was over in the US. And really what it came from was my own business school experience, seeing the lack of African business cases in the business school learning experience. And given the interest of global investors in Africa and the opportunities for growth and investment, we as students in the US, thought it was a huge mistake that this doesn't exist.

And really what the Yale Africa Startup Review seeks to do is raise awareness around all the exciting innovation that is happening in Africa and also try to pull focus a little bit away from the South Africa, and Nigeria and Kenya, and try and see what's going on in markets that people don't hear about as often like Sierra Leone - we had a couple of startups there. So it's a connecting publication, it was a real passion project for us but also just another thing to keep our minds busy during COVID. And now it's got a life of its own, which is really exciting.

Brendan Le Grange 5:56

Yeah, it's great to see the growing venture capital interests in Africa. And yeah, lovely work to to hear going on. You spoke about coming together with complementary skill sets, but how did you find the actual process of getting the business up and running? What was the market response like, the investor response like when you rolled out the business to the public?

Simon Ellis 6:19

II think to start, we set out to make an impact. So we were lucky to find investors who were interested in the value proposition - five or six years ago, we wouldn't have been able to do it because of cloud infrastructure, but now, the proliferation of the internet technology has come so far, that we can offer these. So that's was the starting point, we've also got a lot of use cases for what we were doing in alternative markets. So there was a lot of proof that the model worked and that employees needed it.

Brendan Le Grange 6:47

You're listening to How to Lend Money to Strangers, with Brendan le Grange, if you're enjoying it, I'd love you to hit that little plus button to follow. Now, time for a quick ad break and then we'll get right back to the show.

Simon Ellis 7:01

We did hit a stumbling block, and that led to the to the pivot - which is that employers in South Africa have so many other problems when it comes to HR that giving their employees a financial wellness tool, ultimately, wasn't the top of their priority list. So while a lot of them believed in the concept, there was no urgency to move forward. So we would have sales conversations, which took months to close. And it was incredibly frustrating for us to know that these employers could make a real tangible impact on their employees, but because it was low on their priority list, they would just put it off for months.

Though we found that it's not a South African centric thing. Most companies offering earned wage access were having the same problem, long sales cycles and a lack of urgency. And then once you got in very difficult to implement, all of the things we learned on the initial part of that journey actually led us to understanding the problem we now solve much, much better.

Carolyn vd Merwe 7:54

So when we started the business, right, we started with this concept of on-demand pay. But what happened was, we discovered this other need in the HR space: a big part of what HR is, is an extremely practical communication between employers and employees. You have to think about it as a kind of hierarchy of needs. And the first need is just to be able to connect with your staff member.

So if you have a retailer, for example, that has 10 stores, how does that retailer communicate with their staff? Well, you can have a big Whatsapp group with those staff members and then you have to try and maintain that, you have to make sure that people aren't posting inappropriate content on that group, etc, etc. And this is a massive gap. And of course, in Europe and North America, they've got an app for that. But in South Africa, we don't have enough space for apps on our phones, we also don't have enough data on our phones to deal with that. So who is solving that problem?

Really, we're just coming in the beginning of a value chain of HR, which is just connecting. And then, after that, the possibilities are endless. This is extraordinary what we've learned in this journey, and we found a much bigger niche than our original on demand pay solution.

Simon Ellis 9:00

If you think of what we were trying to do we were giving employees access to their earnings, we'd get into a company and then we would say, right, how do we tell your employees about our product, and so we can't communicate with our employees, because there's no way to do it. And that was the aha moments where we said, 'hold on, there's maybe something more we can do here'.

Carolyn vd Merwe 9:16

So Simon talked a little bit earlier about us being impact focused since day one, and our pivot to our expansion into this HR space has expanded that value to include the actual employer. So we know that employees have this issue with cash flow, and that on demand pay can help them a lot. And we need the employer on board in order to do that, we have to go through the employer. And what we were finding is that, as Simon said, the employer wasn't seeing any direct benefit in it for themselves.

But if you actually just talk to the payroll team - the very people that you're trying to sell this on demand pay product to - very quickly you find out that they are really inundated with manual processes, and they spend their lives doing repetitive tasks. One of the biggest ones we found is payslips. So in the very early stages of this product idea, we came across a corporate that prints 18,000 payslips every single month, carrying them around the country to the various branches. And it just completely blew our minds that this was the case.

So here you had a market where we needed a little bit of cooperation from payroll in order to offer an on demand pay product, but we had the ability to save payroll literally days of work every single month by taking those payslips and offering them on our exact same channel, which is via WhatsApp. And so what we found was that these two products were actually really complimentary, they could sit comfortably in one sale together.

And they could help the payroll drastically, but also they could help employees.

And so that was one of the sort of wedge products that we went in with. The second thing is just the ability to send a communication. So in South Africa, we have the need for crisis communications, quite often we have things like load shedding, we have things like rioting that goes on every now and again, and employers have no way of reaching their staff. And so just a simple broadcast on WhatsApp is something that's hugely valuable to them. So if we build that on top of our existing platform, then you're able to, in a very scalable way, communicate with your employees.

And the thing about WhatsApp is it's meeting employees where they already are. South Africans are obsessed with WhatsApp and we're looking at it every single day - so what better way to provide HR services, financial services and communication to employees than to do it on a platform where they already are.

Simon Ellis 11:27

Maybe to add, if you think about the the environment in which South Africa operates, the on-demand pay is such a strong product in the hands of employees: payday lenders are typically incredibly predatory, API's can be as much as 2,000%, and so to borrow R100 for three days can cost you R200. When I think, as Caro's rightly noted there, we realised that in order to give employees access to a more affordable form of credit, we needed to build a value proposition that was much stronger for employers, rather than just employees.

Brendan Le Grange 11:59

And as you say, working within the constraints that are common to developing worlds like expensive data and the limited bandwidth for taking onboard more apps on a phone. So yeah, I can see why it's doing so well, and why you've got so many big names already on your list of clients.

As we are lending show, I think, particularly with South Africa's legacy, there's always a moment where if we hear payroll, and we hear something that sounds like a loan, being used together in the same sentence, we maybe start to get a little bit nervous about is this just another way of doing payday lending? So when you talk about on-demand pay, what are we really thinking about?

Simon Ellis 12:41

Well, I think the first thing we'll say is, thank goodness, you didn't check out first name, which was Purple Payday, which would have been horrific!

So really, what we do is we integrate with an employer's payroll system to give employees access to what they've earned, when they've earned it. If you think about what happened 100 years ago, 100 years ago, you work today, at the end of the day, you stood in line, and you got given a bunch of cash, and then, over time, it became too expensive to run payroll every day, or every week, and so payroll systems are run every month. Now employees can't get access to their money and have to rely on predatory lending. So essentially, an employee is working for an employer for an entire month but only gets access to what is rightfully theirs at the end of the month.

And it's very difficult for them to go and get access prior to that. So they've got to go hat in hand to ask the employer to do it. With technology today, we can give employees a percentage of what they've already earned. Obviously, you know, most financial products are centred around a monthly pay cycle, and so direct debits and deductions and rent all come off on a monthly basis. So what we've done is built a product on the lending side, that is really not lending, but just giving people access to what is already there is in an efficient way. And in a way that is 10 times cheaper than it was when it was done previously. So we do the South African Reserve Bank is guidance rate of 25%. So we can't actually deduct more than 25% off someone's payroll. So we give people access to 25% of what they've already earned at any stage in the month. If you earn R10,000 a month and it's halfway through the month, you've earned R5,000 , we give you access to 25% of that time (R1,250).

Brendan Le Grange 14:15

You know, the whole payday lending industry, it's obviously got a bad reputation for a number of good reasons. But there are times when towards the end of the month, you might be running short of money, maybe the car needs repairs, maybe somebody's sick, maybe it's school fees are due, something that you need money for that, if you took the old approach, consumers might borrow R500 and suddenly owe R1,000 Rand then make it R2,000. And these would spiral so quickly that by the time you've got the courage to go and ask for some help, it would be too late.

So just by making those funds available early, we can hopefully take a lot of that demand away from the high cost short term space and just give consumers Have a bit of breathing room so that they can get back on track. Now at Smart wage, you've recently completed a very significant fundraising round. What are the pair of you looking at next? Where's SmartWage going in the next a year or two?

Simon Ellis 15:14

I think if you look at what we're trying to do as a company on the one side, we've got to continue building out our employer value proposition if we want a scalable acquisition machine. We've got to start with the employer because we connect employees and employers the opportunity for us to digitise HR, not just digitise payslips and leave, but digitise anything from onboarding to discipline and anything in between is massive. And we can do that not just in South Africa, but a lot of the emerging market economies that have a high WhatsApp penetration rates. So to start, it's continue to double down on the employer value proposition and the digitization of HR.

And then on the employee side, it is the ability to offer additional financial services that are typically more affordable than what's out there. Because we have the firstly introduction to payroll as you were talking about, we can essentially swap out consumer risk with corporate risk. So there's really two pillars, and the future is about how do we balance those pillars as we grow in a way that creates impact for both parties.

Brendan Le Grange 16:16

We know we've got a duty to educate customers that are less credit, sophisticated, maybe new to credit, using financial products for the first time, we should be educating this audience so that when they take their first loans with us, they're not so high risk, because we want to lend to them they want to borrow. However, it's really difficult and really expensive to know how to do that. And your route in through the HR organisation just really empowers that as well where you can have financial services products, but it can be wrapped around within the EHR, the employee wellness programme overall, where we can easily see how we can help educate them on what the options are, what the different products are trying to do the various pitfalls, the costs or benefits. So it creates this route that the industry has always wanted.

Simon Ellis 17:03

Ideally, we would like to build a use case where we could facilitate not just on demand, pay, but facilitate responsible lending to employees, you're educated enough to make the right decisions with that credit, not take it to a betting house or to spend it on booze on the weekend, you know, it's making responsible credit available to those who need it for productive acids and responsible lending. It's actually really, really powerful. If you do it. Well. It can, you know, build an entire economy.

But it's but it's a consistent debate that me and Caro have. And in an environment where typically the consumer is relatively uneducated, it's very difficult to do at scale.

Carolyn vd Merwe 17:42

Yeah, to jump in there. I struggle with it a little bit because I am a pragmatist at heart, right. So the idea of giving financial education to somebody living on the breadline and just trying to make it from month to month is a little bit laughable, in some sense, right, without giving that person a practical tool.

And that's where my belief in on-demand pay comes in. Because it's just a tool that really makes sense, we make a little bit of money. But the difference between credit risk in consumer credit to lending against a payroll, there's some money on the table there. And we share that money essentially with the employees so that they pay a 10th of the cost than they usually do.

Now, the stats in South Africa tell us that 80% of South Africans make use of payday lenders. And so if we really just look at the heart of the issue, we're offering a pragmatic substitute to that. So that is something that's really powerful in tandem with better financial education and other support. But if you're just trying to educate somebody on how to budget better, and the entire financial system around them is designed to extort them with really crazy interest rates, then that's not going to work.

So I believe in on demand pay as a tool to move away from reliance on payday lending. And it can be used in a toolbox of other interventions to improve the situation.

Brendan Le Grange 18:54

I think that's a powerful message about budgeting - low income families are the experts on budgeting, that's not where the problem is. The problem is whether enough money comes in. And so you're right, I think there is a pragmatic solution where there's a proper alternative, there's not just slightly cheaper, there's a different way to access funds you need and to avoid falling into a debt trap.

So I'm sure many people listening may be interested in learning more, what's the sort of ideal path for them to contact you or to find some more information.

Simon Ellis 19:25

So the website is www.SmartWage.co.za We're undertaking a rebrand at the moment, so there could be a new name, which is a difficult path to go through but we'd obviously love to hear from anyone who finds this space interesting, or who recognises the impact that we can make not only in a South African context, but on a global scale. We're incredibly open to having conversations with new people and I open to trying to kind of take some of the learnings that we've had on this journey that we both have thoroughly enjoyed as hard as it's been, you know, and share them, share them with others.

Brendan Le Grange 20:00

And I'll put links for those in the show notes as well. Simon, before I let you go, though, I've seen you on LinkedIn, publishing a lot of great content. But amongst that I saw you publishing a list of recommended podcasts. Since we're on a podcast now, have you got any tips for shows they might want to check out?

Simon Ellis 20:17

I've had many shows I've got good benefits from my favourite one is probably The Knowledge Project by Shane Parrish. He interviews anyone from a professional sportsman to psychologists to businessmen really tries to learn the tools tricks and, and habits of high performing people. And I'm a big fan of Tim Ferriss and some of his podcasts as well.

Brendan Le Grange 20:36

Right. Well, it's one I don't actually know that sounds really interesting. So I'll check that out. Caroline Simon, thank you so much for joining me today.

Carolyn vd Merwe 20:43

Thanks, Brendan. Thanks for having us. Thank

Simon Ellis 20:45

you so much, Brendan. Thanks for having us.

Brendan Le Grange 20:47

And thank you all for listening. If you enjoyed that, please do rate and review on your preferred podcast platform and share widely including on LinkedIn. And while you're there, send me a connection request. The show is written and recorded by myself Brendan le Grange in Brighton, England. Show Music is by and weak and you can find full written transcripts, show notes and more content at www.HowtoLendMoneytoStrangers.show

And I'll see you again next Thursday.