The Money Issue: Want a Steady Income? There's an App for That

Heather Jacobs, a chain-spa masseuse in Simi Valley, Calif., never knows how much money is coming her way. When her spa charges $99 for a 55-minute massage, she makes $18. But if she books just two massages in a six-hour workday, the spa must raise her day's pay to minimum wage, which is $9 an hour. Jacobs, who is 28, can't be sure how many hours she will get or how many walk-ins will choose her -- a 5-foot-2, 96-pound masseuse who looks as if she could manage only a 1 on the four-point pressure scale, though she is really a 3, verging on a 4. Her paychecks, which come every two weeks, have been as high as $700 and as low as $90. She also freelances for a gym, offering passers-by free massages on the chance they might join; the gym doesn't pay her, so for that she earns only tips. She seeks out private clients too, especially around the 27th of the month, when her credit-card bill, with its $90 minimum payment, is due."That's when I'm desperate," she said, "going everywhere I can, just to find people to rub."Jacobs, in her habitual bright pink lipstick and matching headband, was explaining all this via Skype, from her "little box of a house" in Simi Valley, to Jane Leibrock, 33, who had the more muted look of the fortunate and was sitting in the Oakland headquarters of Even, the start-up where she works. Leibrock -- an alumna of Yale; a onetime Beijing resident and Mandarin speaker; a street-fashion blogger; a tweeter of first-world problems ("My personal hell would be having my earbuds pulled out over and over throughout eternity") -- used to study the user experience of privacy settings for Facebook. Now she is a researcher for Even, which proposes, for a fee, to help solve the problem of income volatility.Continue reading the main storyLeibrock wanted to know everything about Jacobs's financial life. Jacobs gamely obliged, though at times she became flustered or teary. Thinking about money gives her a jolt, "like you're about to get into a car accident," she later told me. There's the $3,700 for massage-school tuition that she still owes on her credit card; the $60 a month for drugs for her anxiety and bipolar disorder, which she might skimp on again; the old debt she is paying down for her husband, a student and part-time delivery driver for a Red's BBQ. Splurge on Walmart groceries this week or stick to the dollar store? Because bills come like clockwork and income does not, Jacobs never knows.Income volatility has been called America's "hidden inequality." The economists Karen Dynan, Douglas Elmendorf and Daniel Sichel estimated in a Brookings Institution paper that American household incomes became 30 percent more volatile between the early 1970s and the late 2000s, and that in recent years, more than one in 10 American households took in half the annual income that they did the previous year. The Federal Reserve found in 2014 that nearly a third of American households experienced significant income swings. The volatility is hardest, of course, on the poor, who don't just earn less than the better-off but also earn their lower incomes more choppily, the money coming in irregular bursts, surging in some weeks, vanishing in others, always making a mockery of plans. Many poor people earn more each year than they spend, but on a given day, they don't have the cash to handle the expenses due. Payday loans, pawn shops, credit cards, overdraft fees and such fill the vacuum and make things worse, levying a vast toll in interest, fees and stress.The Federal Reserve study found that the principal cause of income volatility is irregular work hours. Employers increasingly use cutting-edge scheduling tools like Kronos to calculate the profit-maximizing head count for every hour and adjust schedules accordingly, week to week or even day to day, sometimes with scarcely any notice. Other factors contribute to growing volatility: the rise of the sharing and freelance economies, and thus the growing ranks of workers making benefits-free livings as Uber drivers or graphic designers; the absence of paid sick leave, which can turn a single day lost to illness into a financial crisis; the way employers like Staples order employees not to exceed the number of weekly hours that would give them full-time status and entitle them to benefits; the migration of salaried people to hourly work when hard times bring what the people in suits call "right-sizing."Though Even is based in Oakland, it is staffed by big brains from Facebook, Google and Instagram and is funded by Silicon Valley A-listers like Khosla Ventures. Its founders are betting, with typical Silicon Valley ambition, that a for-profit, venture-capital-backed safety net can counteract the stagnant wages, erratic hours, defanged unions, ballooning debt, nonexistent sick leave and usurious lending that bedevil lives like Heather Jacobs's and make America arguably the worst place in the rich world to be poor. Or, to put it in Palo Alto patois, they want to take the human disruption caused by disruption and, well, disrupt it.Even's "product" is an app, still in beta testing, that smooths the irregular, up-and-down paychecks of hourly workers into the steady flow of a simulated salary. On good weeks, when users outearn their Even salary, the company banks the surplus into a separate, Even-managed savings account. On bad weeks, when users fall short, they still get their salary, thanks to past surpluses or to interest-free credit from Even. The app won't do anything for the 25 million Americans who, according to the Federal Deposit Insurance Corporation, have no bank account, nor will it help any of the many Americans who are simply too broke to get by even in the good weeks. Yet the Even founders have become something rare: innovators for the less fortunate in a Bay Area technology scene full of people who variously ignore America's historic level of inequality, worsen it with their real estate purchases or "leverage" it when they realize that the losers of the new world order they're building can at least be their Uber drivers, Instacart grocery deliverers and Homejoy toilet scrubbers.The company's founders believe that the stress of poverty flows more from the irregularity of income than from its dearth -- from the inability to make and keep plans. Jacobs and that stress are intimately acquainted. There are the minor panic attacks she suffers, the feeling of being punched in the windpipe, when a financial matter crosses her mind. There are the full-on panic attacks that come when she skips her medicine to save money. There's her teeth-grinding at night and a recurring unsubtle dream in which a relative is holding some money and judging her. There is the weight she puts on, and the morning body aches, when she gets the salt- and sugar-rich dollar-store groceries instead of the pricier Walmart ones. And she sees no escape. She told Leibrock, "I'm pretty much working every day for the rest of my life."Leibrock most likely isn't, not least because she is so good at her job. "Right there with you," she said.Jon Schlossberg, 28, came up with the idea for Even after solving what he calls "the ultimate first-world problem": the agony of typing in a password every time you awaken your laptop. Knock to Unlock, a $3.99 app he helped develop, solved the problem using smartphones and sold "a couple hundred thousand copies," he says, giving him a stretch of time last year to think. What could he solve next?The thing that kept coming to him was his childhood obsession with the reality-television show "Cops," and specifically the sad subset of perps who would show up again and again. How could some people, he had always wondered, make such "dumb decisions" as to be arrested not once but twice by the police unit that happened to have a TV crew riding along? "I didn't get it, and I wanted to," he told me. That curiosity about decision-making fueled a boyhood fantasy of being a forensic psychologist for the F.B.I., and in fact he went on to study psychology at Skidmore. When he became interested in money in his 20s, he took a job as a product developer at Bonobos, the men's-clothing website, where he became fascinated by how tiny tweaks to the checkout process could alter customer behavior and lift sales.Schlossberg, now the chief executive of Even, is an improbable, almost reluctant champion of underdogs. He is a self-described son of privilege ("I came from New England. I have good parents. I'm a reasonably attractive male"), and his early profile seemed to foreshadow a more conventional kind of tech-world success: introvert; party avoider; quoter of "Star Trek" and "Brave New World"; declaimer of libertarian bro-isms, as in a blog post extolling "the importance of being ruthless." Growing up, Schlossberg was baffled and fascinated by his fellow humans. He read Dale Carnegie's "How to Win Friends and Influence People" 15 times, he says, to learn how to relate to others. Still today, when speaking of a start-up whose ostensible purpose is humane, he has a tendency to drain the humanity from it. He says that making poor people's lives easier is merely a means to a greater end: reducing what he calls "cognitive waste."Schlossberg might have gone the usual tech-world way but for an academic study he read during his thinking vacation last year. Published by a team of behavioral psychologists and economists in 2013 in the journal Science, the study, "Poverty Impedes Cognitive Function," sought to explain evidence of the "counterproductive behavior" of poor people: being late to appointments, parenting less attentively, mismanaging money. It rejected the usual explanations -- the left's structural theories, the right's theories about character -- in favor of neuroscience. The 11-ball juggle of poverty hampers the ability to focus on other problems, the authors proposed, "just as an air traffic controller focusing on a potential collision course is prone to neglect other planes in the air." And merely thinking about money can throttle poor people's brains.The researchers tested this theory with an experiment. They approached people in a New Jersey mall and asked them a hypothetical financial question: "Your car is having some trouble and requires $X to be fixed. You can pay in full, take a loan or take a chance and forgo the service at the moment." While the subjects considered the financial question, they were given unrelated, nonfinancial cognitive tests. Among those subjects randomly given a small X -- say, $150 -- people who reported a low income performed about as well on the nonfinancial cognitive tests as people who reported a high income. Among those randomly assigned to a larger X -- say, $1,500 -- the poor did much worse on the tests than the rich. The authors concluded that the mere thought of financial peril could tax poor people's smarts. The drop was equivalent to 13 I.Q. points, comparable to the effects of losing a night's sleep or becoming a chronic alcoholic.The study stayed with Schlossberg and led him to other research, about how poverty's stresses alter hormones and bias people toward short-term rewards over long-term ones. Soon he was dreaming of start-up ideas, he told me: "How could I succeed in building a company that reduces stress for poor people?"Continue reading the main storyLast summer, Schlossberg read a blog post by Quinten Farmer, an entrepreneur in New York, about a project called Stellar, which would use Bitcoin to help migrant workers send money home. Schlossberg was struck by the post: a potential co-founder! Soon Farmer and Schlossberg were in a conference room, brainstorming.If Schlossberg is intense and inward, Farmer, 24, is the laid-back friend you might ask for thoughtful advice or marijuana. A more important contrast is that Farmer knows about hardship. He grew up on Whidbey Island in Washington State, his mother a homemaker, his father a mechanical engineer who provided a solid middle-class life -- until their divorce. Soon his mother was waiting tables and cleaning houses. At 15, Farmer began working to chip in, first as a dishwasher at the Oystercatcher restaurant, then as a farmhand, spending days knee-deep in dirt, cleaning garlic, the scent of which never seemed to leave him.Amid their brainstorming, Farmer scribbled "income volatility." He discovered the term in the 2009 book "Portfolios of the Poor: How the World's Poor Live on $2 a Day," which studied families in Bangladesh, India and South Africa. But now, discussing poor people closer to home, Farmer's own experiences came back to him. "This isn't just something that happens with day laborers in Bangladesh," he told Schlossberg.Schlossberg had never heard of income volatility. Farmer told him about choppy income and how the timing of money could be a bigger problem than the quantity."I don't know what it is," Schlossberg remembers saying, "but that's what we're going to do."A few thousand people will be using Even in limited release by summer's end, Schlossberg says, and it will be available to all comers by January. In the latest version of the app, new users are prompted to share their bank details. After analyzing the accounts, the app informs them of the smoothed "Even pay" they will receive from now on, which it refers to in the frequently-asked-questions section as "your average paycheck." The word "average" here is, as Schlossberg acknowledges, "a gross oversimplification." It takes into account many factors: how long users have worked at their jobs, how widely their paychecks vary, how much they spend versus save. The app then holds back an "Even cushion -- a savings account it manages for the user. In the demo I saw, the app, drawing on a sample bank account, reported that "if you earn less than $380, Even will automatically boost your paycheck. If you earn more than $380, Even will automatically pay back boosts and save the extra to your cushion." The F.A.Q. section also discloses that your "Even pay" already reflects the $3 a week you pay the company for its services.An annual fee of $156 might seem like a lot to shrink big paychecks and swell small ones. For a single person living on the federal poverty line, that's 1.3 percent of income. On the other hand, America's poor already spend billions each year smoothing their incomes -- including $3.4 billion in fees on payday loans alone. Those loans, in which people write, say, a $350 postdated check to get $300 now, so saturate the lives of the poor that as of 2006, there were more payday lenders in Ohio than outlets of McDonald's, Burger King and Wendy's combined, according to the advocacy group Policy Matters Ohio. In Oklahoma, a 2012 report by the Pew Charitable Trusts found that "more borrowers use at least 17 loans in a year than use just one." Because people often borrow a second time to pay off the first loan, and a third time to pay off the second, and so forth, a $300 loan easily snowballs into a $1,200 calamity. The Pentagon in 2006 found that payday loans and their cascade of debts and stress had become a threat to military readiness, and Congress soon passed a law tightly restricting loans to military personnel. Now the Obama administration is backing an effort by the Consumer Financial Protection Bureau to shield the rest of the population in similar ways; the heart of the bureau's proposal is a new requirement that lenders carefully verify a borrower's ability to repay.Schlossberg argues that Even is different from predatory lenders, because it has only one revenue stream: the $3 weekly fees, which it stops earning if a user goes too far into arrears and is suspended. He says that Even will never invest people's deposits to earn additional money and that it has no plans to make money in any other way. But investors crave only growth, and a $3 weekly fee may not satiate them. Jacob Hacker, a political scientist at Yale who literally wrote the book on income volatility, "The Great Risk Shift" (2006), says he finds Even "deeply attractive." But he worries that future investors, seeing in it the next Uber or Amazon, might pressure it to cross-sell other financial products, "steering vulnerable consumers to products that weren't ideal for them."The company is now seeking partnerships with large employers who might offer Even to their part-time employees as "a subsidized benefit, akin to health insurance or financial wellness programs," Schlossberg says, allowing them to stabilize their incomes, if not their chaotic hours or day-care plans. Schlossberg says this is all still up in the air, but another Even founder, Cem Kent, the son of Coca-Cola's chief executive, Muhtar Kent, has taken on the task of hobnobbing some partnerships into being. In such cases, would Even still be a service devoted to helping the working poor? Or would it just be helping companies more easily and guiltlessly employ workers erratically?Schlossberg asks, "Because some might do bad, does that mean we should not do good?"There are also questions about Even's own financial health. What happens when users lose jobs, start earning less or just skip out? Schlossberg says Even chooses users carefully and, with its nonaverage average, has a buffer. The hope is that most users will be lending themselves money in bad weeks, not borrowing from Even.Lisa Servon, a professor of urban policy at the New School, has done extensive research on payday lenders, including working undercover for more than four months at such establishments in Oakland and the Bronx. I asked her about Even's prospects. She said its success would depend on its skill in distinguishing between two kinds of users: those who use "payday and overdraft and other forms of expensive credit because of income volatility" and those who simply don't "have enough money to make ends meet -- period." Payday lenders make a fortune from those without enough money, but such users would be anathema to Even's self-insurance model. "The key for Even will be to have a good filter," Servon told me.In other words, for Even to thrive, it will probably need to avoid the truly needy: those who don't have enough ever, not merely right now. Picking winners also means picking -- and spurning -- losers. Even's purpose is hardly to change the distribution of wealth in society. It is simply to redistribute one person's own limited wealth across time. People in Silicon Valley may believe there's an app for everything. That's their hammer. But improving the lot of the poor will require other tools, including an old one the valley often wants to wish away: politics. href='' - -