Realist, not conformist analysis of the latest financial, business and political news

There Is, In Fact, Considerable Economic Value In The Earnd Scheme

One of the bits of the Greensill saga that is getting considerable opprobrium is this Erned scheme. Whereby public sector employees gain access to their wages when they’re earned, not when they’re due to be paid a month in hand or whatever. Sadly, for all the shouting about this scheme it is actually one part of the saga that’s actually worthwhile.

Firstly, we can put to bed the as usual ludicrous objection from Richard Murphy. Which is his claim that this was unnecessary because of Modern Monetary Theory. He seems to think this was about factoring the payments from government to the NHS. It wasn’t, so we can put that entire nonsense in the usual round filing cabinet.

What it was about was that NHS workers – say, just as an example of a public sector worker – go to work and earn money. That is then paid out to the worker on a known paydate some weeks in the future. The worker might well like to get ahold of it before that paydate. So, Greensill advances the pay, collects it on the paydate and squeezes an interest margin out of it:

For it was not just supply chain finance at stake. Mr Cameron justified lobbying on behalf of Greensill’s Earnd scheme because it helped public sector workers access their pay daily, rather than waiting until payday. He called this an “antidote to exploitative payday lending schemes”, but it was just a posh version of the same thing. Participants would not have paid interest on their advances in wages, it is true, but Greensill would have taken a cut from their employer – which could only have come from the overall wage bill or other publicly funded budgets – and converted the future payments into bonds it could sell on to banks. When Cameron pitched Earnd to Australian ministers, they rejected it, reportedly because it was too similar to a payday lending scheme.

Yes, it is, it’s a payday lending scheme. As such it’s an excellent idea too.

Out there in the wider economy we do see that people desire access to payday lending schemes. For people do take out payday loans and they are willing to pay rather high fees and interest rates for doing so. APR isn’t the right way to measure small scale short terms loans and their costs but several hundred percent is usual, thousands possible. That’s what all the shouting about payday loans is about, their expense.

Erned considerably reduces those costs. Firstly, the risk of the pay itself not being paid – look, it’s coming from government, we know the pay will turn up. Secondly, the arrangement fees that contribute so much to those high APRs. Well, we’ve got the whole system set up already, it’s all electronic, costs for each transaction are minimal so therefore so too can be the charges. Thirdly and finally there’s the risk that the worker gets paid but goes on a toot rather than paying off the loan. By being embedded Erned collects the repayment before the workers gets it.

Risk and costs have been vastly reduced. We gain access to that time shifting of the cashflow to the worker at very, very, much lower cost. Sure, Greensill makes a cut but it’s the worker gaining access to the temporal shifting who really makes out like a bandit. This is good, we’ve achieved something desired at lower cost.

Yes, of course Greensill is a spiv, the larger firm is a disaster and all that. But Erned isn’t a rip off nor a disaster. It’s actually a pretty damn good idea.

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23 days ago

If someone can’t wait till payday, I’d argue that they’ll get further and further into debt, and eventually there’ll be huge pressure on the government to ‘temporarily’ provide some backup cash. Just for the duration of the emergency you understand.

I can easily understand why the bureaucrats running the NHS pay system didn’t want to touch this one with a million foot pole.

23 days ago
Reply to  Boganboy

If someone *habitually* can’t wait until payday, you mean. But pawnbrokers exist because a large number of people *occasionally* can’t wait until payday – if the car fails its MoT and the needed repairs are twice the guy’s bank balance, or if the kid need new shoes and the washing machine needs replacing the same week, or

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