138: Safwan Shah — An Innovative Way to Pay Your Team Right Away

Well, today's show really addresses two different areas in the world of cash, but it also addresses a novel business starting and doing something new and innovative. So we're going to look at the employee employer relationship and the stresses that lead to employee discomfort around cash and a company with a unique solution to that. But along the way, we want to introduce and have you reimagine the business model of your own. What's the cash flow cycle of your own business? And are you maximizing the value opportunities at all of the touch points? So listen in. If you've been listening to our podcast or you've read the book Scaling up, you might be interested in our workshop on the scaling up growth framework for your own business. We have a workshop coming soon to San Francisco and we have a few hundred dollar discounts for our loyal podcast listeners while supplies last. Just go to scalingcoach.com workshops and then enter the code sup. That's S U P for scaling up podcast when you register. We'll see you there. Hello and welcome again to the Scaling Up Business Podcast. Today's show is and our guest, our topic is is a novel business that's starting up and going through the stages of scaling. So we're going to talk with Safwan Shah today. He's founder of Payactiv. He's a engineer by background, former NASA scientist and electrical engineer, aerospace engineer. And he had an idea for something and we're going to talk about his novel business, Payactiv, and then how he's worked at growing that. So welcome to the show. Safwan.

Hi, Bill. Hi.

And so I understand you are nearby. Me in San Jose. I'm up in the northern part of the bay, actually the east part of the bay, yes.

I'm exactly a mile away from Apple headquarters.

The spaceship has landed. If you've seen that headquarters, it's cool, but does not look like a normal building. So you're down there. We work with companies down there all the time and you, like many folks, have a novel business, you saw an opportunity for something. So we're going to talk about Pay Active today, that business and what you've experienced in growing it. And I think anytime we look at the growth of a business and a novel business, we have insights into the development of strategy and then all the things that challenge it as we try to grow and scale the business. So before we get into that, tell us a little bit about the background, your background. People hear from your accent that you probably didn't grow up in San Jose. But as we spoke getting ready for the show. You came here to go to college and have done some really interesting work here. So talk to us a little bit about your evolution, your career, and how we get to this point.

Yes, Bill, I'm originally from Pakistan and I came to the US to get my master's, which ended up becoming a PhD. So I was in University of Colorado at Boulder, where I got my master's in electrical engineering, then my PhD in aerospace and spent some time working for NASA centers and being an engineer with a ponytail and slippers to work. And as fate would have it, I ended up in Silicon Valley in mid-90s and have been here ever since. And engineering career, when you come to Silicon Valley, sometimes takes you to paths of entrepreneurship. So I always define myself as that. I'm an engineer by training, but an entrepreneur by accident. Yeah, these accidents have been quite plentiful in my life.

It's, you know, it's outstanding. Silicon Valley in the Bay Area. And probably the reason that I have the opportunity to work all over the world, as I do. I was sharing with you as we were getting ready that I've done some work leading workshops with entrepreneurs in Pakistan as well, and is because it's a place where more companies grow, where more wealth is created, where there's more launched, and where engineers who have good ideas working with, becoming entrepreneurs or working with other entrepreneurs launch things that again and again change or improve the world. And sometimes the changes are uncomfortable, but change, they do on a global scale. Right?

Exactly.

Yeah.

Change is relentless. You can't fight that one.

Well, it's constant. Right. The only thing that doesn't change is change. That is maybe one of the more ultimate paradox. So what led you to the insight of Payactiv? How did you come up with the idea there?

So, you know, of course, most of us who live in Silicon Valley, we've all heard this famous Steve Jobs thing about connecting dots from the past and to the present is relatively easy, but then connecting it to the future is what creates the most interesting products and ideas and models. So it's about connecting dots, first of all. So the way I would probably answer your question, because hindsight is 20 20, there are events and incidents sometimes that lead you to build a model or work on an idea. In my case, the big thing was, and it was always surprising to me that people work if they're working. They work every day. They get, you know, the work is tabulated as hours worked with a rate to go with it every day, but they get paid after every Two weeks or after every month in certain parts of the world. In most of the world actually. And I could never figure out, is there a reason why employees are giving a loan to the employer? It's like a credit line to the employer because you have worked but you get paid a certain way. And that leads you to another question that one may ask. That if you are, let's say a store or a juice shop or a business, you pay your landlord in advance, okay? You pay your vendors with terms or upon delivery. So if you're buying something, let's say a juice shop, you have goods and materials, you'll either have terms or you will be paying vendors upon delivery. Your customers will pay you immediately upon service. You can't go to Starbucks and get coffee and not pay them. But your employees have to wait two weeks or a month. So I kind of asked, always wondered why it is that way. And this led to many observations over my career. Once I heard a person, I was working at place and this person goes to the supervisor, the boss and says, you know, it's the 13th of the month and can I get a hundred dollars? And I get paid two days later. I've already got 1300 because I work 13 days and I get 100 every day. And was kind of sternly reprimanded that you need to get a grip on your life and so on. And I thought that. But this person has earned the money. Why is our system that way? And when, you know, these observations sometimes are heart wrenching also Bill that somebody really needs that money, they're not going to, it's not candy that they're going to buy with it. They might buy groceries, gas for their car. So all these observations were there. And being a payments guy, I've done few companies, the biggest one in that was in the payments and fintech industry. So I always thought it's a money movement issue and nobody's really built a solution because nobody's thought about this. So I started thinking very deeply almost eight, nine years ago.

Okay, pause, pause. So I'm going to have you talk about that and the solution and what it looks like. But let me have our listeners reflect on something because I think this is, it goes to all of our businesses. So a great deal of time we spend on reimagining the business model of the business and some CEO and entrepreneurs are pretty resistant to that conversation. Well, this is just the way it is in my business, my industry. But when we challenge those assumptions, we sometimes create some of the biggest, most interesting companies Vern likes to talk about Michael Dell and reimagining their cash flow story. We, we like to cite all the time Costco introducing a fee for their business, for membership in the stores and being able to come in. And that was controversial at the time, but now Costco, I don't know the latest number, but last I checked they were about $108 billion and one of the top two retailers in the world. So the, the introduction of some novel structure to the flow of money can make a big difference in all of our businesses and sometimes as a business in itself, which is where we're gonna get to. But if you think about it, there are some suppliers, like if you do business internationally, you might have to pay deposits on purchases and production, you might have to supply letters of credit, you might have to pay on shipment far less often. You get terms where you can pay 30, 60, 90 and beyond out, but sometimes you can get that and sometimes it can make all the difference in the world. My past as a CEO for flipping that whole thing around enabled me to grow and fund growth when I couldn't go to some traditional lenders on stuff or when the market was not right to attract outside capital investment and it wouldn't be the place that you would want to put equity side funding anyway. If you think about it, then the typical business terms and your regular things, you're paying, sometimes on receipt, sometimes you're paying with them, a credit card. You're our traditional US based things. You get an invoice, then you. The standard or default is often we have 30 days to pay it. Employees, you tend to pay every two weeks in most places. Some companies have weekly payrolls. And then if you think about it, if you hire occasional workers, you might call them illegal or undocumented. But if you hire cash based workers under the table, we see them around home improvement stores and things like that, you're going to pay those people at the end of the day cash based. You hire a kid in your neighborhood, you, you hire a babysitter, you're probably going to pay them cash on demand as they work each day or each shift. Right. But at some increment, I give you some work and you pay me something or I offer something up. And what you're saying is that in the workforce, right, although we might be paid better than some, that we work some time and then we wait some period for the pay.

Correct. What I'm saying is, and you bring up a wonderful point, which is vendors sometimes wait their terms 30, 60, 90 days and employees wait two weeks on the average, sometimes a month, sometimes a week. If that somehow causes suffering in the life of your vendor, let's say they cannot produce goods at a rate or at a pace or at a quality that you need, that's a problem for you as a business. So you will say to them that, listen, I want you to maintain a certain cadence to deliveries because your success is my success, because you're selling the product and they're manufacturing it in the workforce, in the world of employees and 59% of US workers are hourly, that's about 80 million people. If there is some financial stress related issue between paychecks for them, it is going to hurt the employer through distraction, absenteeism, higher turnover, lack of engagement. And that is an expense without an invoice for the employer. So that is what has to be corrected. And that is therein lies the detailed analysis of this.

And for the employers. Right, which most of our listeners are employers, then there are a couple of issues going on. One of them is for some, payroll is a very large line item. So all of the payroll expense is one of their key expenses. And not having to pay it every minute, every day, every week has some advantage to the cash model of the business. The other one though is just the sort of labor effort of running payroll. Right. There's a certain amount of our taking, correcting the reports, producing the thing. And even if it's somewhat automated, usually there's a review of managers who review and approve the time cards or their equivalent.

Right.

And then the processing of the payroll and the filing and paying of taxes and things like that.

Yeah, very good point. So if we parse this out or dissect it further, unpack this. So for the employer, as you correctly pointed out, cash flow is an issue. So it's a Treasury function. It's large company payroll is usually 50 to 70% of their, let's say it's a manufacturing company or it's big retailer like Walmart or so forth. 70% are hourly or lower income worker, they're scheduled. So cash flow is a factor. Another factor is the actual administrative process that goes into creating something which is considered sacred in business, the pay stub. And you have to conform to a variety of regulatory and other guidelines. So there is definitely that. So before an employer can just get up one morning and say, I'm going to let people access their wages in a different frequency, other than two weeks or monthly, they have to think about these things. And all these things have cost associated with them as well as chances or Likelihood of errors that could creep in, changing a system.

And that person you told me about originally who acted in O. So I've talked with employers more than once who had somebody approach them like that. Well, this person came to me and they wanted their, they wanted an early pay or an early bonus or something like that. And they were annoyed at it. And they were annoyed at it because it looked to them like the person wasn't managing their finances. But mostly they were annoyed at the effort required. It's something I've got to go handle.

And in addition to that, if they give access to one person, everyone else will demand it too.

Right. And now they've got a lot of little special transactions to do.

The lawyers don't like it. So this is, I'm going to pay.

You some money now. It's an extra payroll or a loan and then I have to document that and I can subtract that later.

Exactly. So we pretty much solved that. We've completely removed the pain for the employer in this process. That was the biggest sort of value proposition that we took to employers large and small. That your employees will be more engaged and will have better chances to stay longer in the company if they have access to their wages in a timely fashion without having them go through the indignity of asking and without having, you know, a system where some people get it, others don't. The subjectivity was removed entirely by our system.

Subjectivity, indignance, exactly.

We call it the line I use. It's actually the mission of the company. Financial security, dignity and savings. That's what we are producing, that is what we are doing for the constituents we serve.

So you come to a company, a large employer and you say, look, if you offer our service, if you integrate with us, we're going to take care of your employees. It's a value to you in terms of retention, employee satisfaction.

Yeah, exactly. So we go to. So I'll give you, if you like, I can give you like a one minute sales pitch and bill. I'll assume, I'll assume you have 1,000 employees, maybe 2,000. And you are very interested in their well being because you have three metrics. You track, you track your turnover, you track your, which is retention, you track your ability to recruit. It's a tight labor market. You are in a place where you. So retention recruitment is the second thing you track. The third thing you track is engagement with employees. And you're a good man. You run this business. I walk in and you want to do something. You've seen that These employees seem to be distracted. They will go out and on their mobile phone, they'll talk to a biller that, yeah, I'll make that payment. They'll get a text from their wife that, you know, back to school has come, we need 100 bucks. And you notice all that. You see presenteeism, which is being at work, but being absent mentally and absenteeism not turning up at work. You've got those stats. You're also an analytical guy.

Yeah.

And you're saying, I wish there was a way I could solve this. If I change my payroll, that will create problem. I walk in and I say, sir, I have three metrics that I you can track. You can use my service. I can improve your retention by anywhere from 20 to 40%. Your turnover rate, I can improve your recruitment, every offer that you make today, and if 50% accept it, I'll make it 90%. And your employees will get engaged and you can run an NPS, a net promoter score, and it will be above 85%. You kind of say, okay, bring it on. What is it?

Yeah, it sounds, to be honest, they sound too good.

Yes. So you'll say that and you say, where's the catch? Yeah, this is how we kind of get their attention. Yeah. Once that is established, then what we do is we get access to the time and attendance data of the workers.

Okay, so you can now see my time cards.

I can see or usually it is a clock and clock out through some biometric system or paper system or some, you know, clock and clock out system. Could be paper and I have access to it. I just need read only access. Because all I want to know is that you are an employee and that you put in certain number of hours once that data is available to me. And I have a pay rate for you. By definition, I have one pay rate always, which is the minimum wage of that area. That's known, that's a fact. But if I get the actual pay rate for you, that means I know you're making $17 an hour. And if you've done overtime, I know how many overtime hours. So I have that data. Using that and using certain algorithms that we have developed, we end up with an exact amount that you've earned up to that point. So you can go to a mobile phone. So we offer the employer this service, give us access to your time and attendance data. Based on that data, we will come up with a accessible amount that the employee can access. And we have various.

You've got a formula that allows for the reserves and Withholding taxes, things like that.

That is correct, yeah. So we take the, let's say somebody's earned $1,000 up to that point. We know that somewhere between, you know, 15 to 25, maybe 30% is various taxes and so forth. There could be garnishments in some cases. Right. There could be statutory deductions in some cases. So we will come up with a number which is somewhere half of their net earned salary. So if you've gross earned is thousand, your net earned is 700. Your accessible amount, just for the sake of this discussion, could be 350. So there's a guardrail built in it. So now from that 350, your employee will access whatever they want. They want 100, 200, 300, they can take that. What that means is they can, through their mobile phone, they can move that money to their bank account, put it on their prepaid payroll card if they have one, or in our case, there's also ability to pick it up as cash and they can pay their bills. So we are like a bank app. We have 85,000 billers. You can pay the bills. So this will make the employee very, very happy for sure, but engaged that my employer actually understands my pain. And that's the beginning of a healthy relationship. It improves retention recruitment. Because now you're competing with the gig economy, the task based economy, where people say, I'd rather drive for Uber and get paid for the task than to wait two weeks. So you suddenly have a mechanism to attract new talent and the engagement will go out of the, you know, it just skyrockets because now you have. The purpose that you work for is to make ends meet. And now you have access to your money.

Cool. So you found a way to connect, get visibility to that, then factor it and tell me how much I can give and then you can give that money to me. The employee benefiting the employer by making life easy without having all of that other interaction.

Exactly.

And you figured out that financially you can make that work for a $5 fee, is that right?

That is correct. So the value proposition for the employer, if that is established, so employer does not have to put up that money, we don't ask the employer. We use our balance sheet or our relationships with a variety of financial sources to give that 150, 200, $250 and we get reimbursed. Essentially, we have assumed the two week cycle for ourselves. And between paycheck, the employee has access to money they've already earned. So we created a link with salary, which mitigates the risk because it's not a loan. So hence the fees can be brought down to a level that it is acceptable. It is so socially responsible and it is long term sustainable.

So for five bucks I get my money once I've earned it. I'm not borrowing against the full val. I'm not borrowing against what I will earn next week. But I'm getting paid now for the work I've done this week.

Let's say you're paid in arrears. So you're always paid in arrears. You're paid in arrears.

You're not, you're not really borrowing money. But I'm being advanced on the expected payday for the next thing. I'm using the money that's there in the future. So you're giving me that money. You have to fund that, whatever that amount is, for up to a couple weeks typically, right?

Yes.

So you're getting essentially a $5 fee to provide some money for a couple weeks.

That is correct. And it's not just for access to money. You can pay 10 bills in it too. You can pay, you can get an Uber ride and use that money to get an Uber ride as well. So it's like a bank, which is your bank, but it is backed by your hours worked. We made time fungible. If you had to describe it.

So that money, then I can provide, I can put that into Uber, I can. You use that with bill pay, I can use that onto a credit card, I can put that into my bank and I can even withdraw that as cash by taking a code down to a Walmart and taking some cash.

Yes, that is something we launched a few months ago.

Now it seems to me all of those things provide some opportunity to improve the financial value to your business for that. Like if I put it on a Visa, then there are some merchant fees that come back and improve that. If Walmart's probably really interested in having people in their store, this type of person in their stores with cash, because they might need one or two things more Pampers or something while they're there, it seems like. And bill pay has a certain amount of float with it and some people want to get paid electronically versus cash or check. Exactly.

Bill, you hit the nail on the head. Any great business model will create a virtue for all participants.

Right?

That's how it becomes a great business model. And for our model, no cost to the employer, no additional cost. They can take money which is theirs. They can pay bills so they save money there. They can do Uber and not have to go and figure out and beg for help. They can go to Walmart and get the cheapest and the best price price they can buy on Amazon too. We've got that capability. And we also sign them up for a savings program and we also give them a Visa card if they need it. If they want somebody, if they have some other Visa card they can use that. We don't mandate any kind of change in their financial life.

No, but everybody that you interact with probably has some interest in that whole thing. And all of those touches that you provide are driving some value and help to make your business a viable business.

And it's a virtuous circle that is created.

And the flip side of it is, as the employee, my alternatives if I need and want money sooner than the two week pay cycle that the company is set up for, are payroll loans. Right. Payday loans which have a much higher cost. Or like late fees, bounced check fees, NSF fees, which people do with either on purpose or by mistake all the time where they write a check and they cross their fingers that it's going to cross by the time their account gets funded.

Exactly. So we already established a value for the employer in recruitment, retention and engagement. We established value for the ecosystem that connects to us in the value they get. Now on the employee side, what is the value? And it turns out today each employee is paying up to 150 to $200 a month. It's like lost wages. To either take two overdrafts can cost them 35, 35, $70. One late fee can cost them 10, 20, 30 and higher. If it's a rent and a title loan which will get them some money against a car can cost them hundreds of percent. A payday loan can be 30, 40, 80, $100. So average in the US today that a lower income worker is losing every month is 150 to $200. PayActive comes into that workplace where such employees are working for $5 a pay period or $10 a month. You have suddenly got a financial stimulus. You have avoided all your overdrafts because you don't need to. Anytime an overdraft is coming, we'll tell you that you need to make an overdraft. You can take money and we will tell you that based on the pattern that this is something you can avoid. So suddenly you have about $200 additional every month. And on their paycheck that's like getting a 5 to 7% raise.

Do you also work with any staffing or peo firms?

Yes, we do.

So it seems like that would be really good because they have a lot of folks who will be more cash sensitive and maybe not even in consistent employment and want to get money really quickly.

Exactly. So we work with a lot of entities now and when we created this category six, seven years ago, 2013, as I said, there was a lot of miss people couldn't understand this. Now that we have very major users and the world's largest company by number of employees is Walmart. They are using it for more than a million employees. There is a lot of knowledge. So staffing companies, PEOs, contracting, various entities which provide contractors on site, lot of industries. It is really a horizontal solution. Our problem really now is, you know, where do we go first? Yeah, yeah.

So let's finish with a couple of things then since we, we've talked a lot and I think it's really an interesting conversation that the thing that I want to most draw people's attention to is thinking at, at your own cash flow. Of course the obvious thing is on the surface like are you taking care of your, your staff and your team? But then thinking more broadly, how could you improve your cash flow and how could you expand the value opportunities of the business? Where could you integrate with partners or find value cash profit in other pockets that are part of your whole sort of supply service business cycle? I think that's really interesting. And some of our more clever teams figure that kind of thing out and then get a massive advantage on others.

Exactly.

And of course reimagining your cash flow cycle is huge. I remember an apparel company that, that we wanted to scale rapidly and they were doing quite a bit of online sales and they, they essentially outsourced and privatized their manufacturing and then they got terms from the manufacturer, they got immediate payment from their suppliers, they tightened up the delivery times and now they, they were essentially infinitely self funding or had made the business, the customer and the suppliers all fund the parts of it. So now they didn't have to go raise any money. They could grow as because they were getting paid before they had to pay for the goods and services. Right. And that anytime you rethink the cash model of the business and then find more ways to touch and improve the whole value chain. Like you've done something unique and different.

Exactly. So as you put so well, actually what we have done is there is no change in the employer's cash flow. They have complete comfort that their employees are satisfied and they're getting what they need when they need it. So they've got higher productivity, soft metric, but a real metric. And they can hire more people so they can grow. So all those values have now suddenly come into their ecosystem. Another thing which from our side, as we look at it, see, we see hundreds and thousands of employers. Then we ask the question when what is the network effect we have created? Because at scale you see certain things emergent which you don't see at, you know, 10,000 and 20,000 and 100,000 people, you see it at scale. And what we have discovered is that just like, you know, membership should have its privileges. Like, just like American Express is a brand which caters to a segment of the market. And they say, you know, there is a well defined branding going around in American Express experience that membership has its privileges. So now in the world that we serve, we find hundreds of thousands of people. There is no mechanism today in our society and globally where anybody or any business had tried to aggregate a workforce at scale that do they need retirement planning? Do they need savings? Right now you have millions of people, they have millions of many challenges. How do they find jobs? They have very high turnover. Yeah. So there is a whole world of how do they bank? Where do they bank? We know that there is a huge class of people, which is in the US I call the financially excluded. They were in the banking system. 2009 happened, 2005 happened. They can't have a bank account. It costs 10, $12 to have a bank account if your balance is below 1500.

So let's ask, maybe. Well, let's see. What would you say has been your biggest challenge to date in growing this business?

So there have been quite a few. The biggest one was that why do you want to take a problem which neither the banks want to solve? Banks don't particularly want to solve a problem for the lower income people who barely make 2,000, $3,000 a month. They're not a viable depositor for them. Why do you want to solve a problem for them? To me, the biggest challenge was to communicate and cost in concrete, measurable terms and ROI of treating your employees with financial wellness. And simultaneously, luckily for us, as we built our model, the tailwinds supported us and the entire country started recognizing paycheck to paycheck, that financial stress was a disease, perhaps without a name in the country. We don't want to question why and how, but we have a huge swath of people who are financially stressed.

Well, just in the last week, right, we've closed a major visible event that was noticed all over the world. The shutdown of the federal government and all of the stress of people. And as I went in and out of airports, I saw air traffic controllers and TSA people handing out leaflets saying, look, you should know we're not working, we're not getting paid, and we're having to work. And that's a problem.

Yeah. I wrote a blog for that. For that reason. And my title was actually what does that teach us about financial. What the government shutdown Teaches us about financial stress. Because there was light shining on this issue for a few weeks, right.

And we had a major administration official saying, why doesn't everybody just get a loan?

It reminded me of Mary Antoinette saying, why don't they eat cake?

Let them eat cake. It was insensitive and tone deaf. Right. Like, completely not in the world of the average person who might be. And then ultimately, we have people calling in sick because they just are stressed and they can't work.

Exactly the words we talked about. Absenteeism, presenteeism. You know, collateral damage is lot. And I actually had a thought that I'd write. I don't do much of tweeting and all that. I stay to my, you know, focus and roots, but I thought maybe I should tweet out I'd rather be working for Walmart than the federal government because at least they'll pay me.

And. And we saw people doing a little bit of both. They were keeping some of their other things, but then. And then we also saw an impact in other places where, like, parks had garbage piling up. All right, so I think that's a show. I so appreciate hearing about a new business, carving out something new in a new approach in a new place, novel way. There's something innovative there. But there's a broader lesson for us, not only in taking care of employees and providing some value there, but in finding value chain and reimagining your whole cash flow cycle. Cash conversion cycle is the tool if you want to download it from our site and look at conversations and other shows around that. But we need to think about the cash flow cycle in our business as well. Just like we're thinking about it from the employee and the employer perspective. There's a lot to chew on there. Thanks again so much for coming on the show with us today, Safwan. I've enjoyed a great deal hearing your story and learning about your business.

Thank you, Bill. Much appreciated. Thank you.

Don't forget to register now for our next workshop on scaling up to get one of our limited $100 discounts for our podcast listeners. While supplies last, just go to scalingcoach.com workshops and then enter the code. Sup. That's S U p for Scaling Up Podcast when you register. We'll see you there. Well, special thanks to our original growth guru, the guy who started it all, Vern Harnish. Thank you, Vern. Our show is produced by Crystal Carson and audio production is done by Podfly. Audio editing is done by Albert Burge with show notes compiled by Ein Kudina and proofreading by Tim McGowan. If you got some value out of this show, please share it with somebody else so that we maximize the value in our impact in the world. Let us know the parts that you love. Drop us a line in for@scalingcoach.com we'd love to hear from you, anything that you've got to say and share with us. We love to hear from the listeners. Thanks again for listening. Keep Scaling Up.

That.