Most of the baristas employed by the Brooklyn Roasting Company now take home $40 to $60 more a month than they once did. Not by working more hours or getting a raise, but by keeping more of the money they earn. The coffee-shop chain uses a service called Alice, which lets employers offer pretax spending benefits without any setup costs and enrolls their employees via text message.
Pretax spending benefits let workers deduct expenses like commuting, child and adult care, glasses, and contact lenses, as well as certain dental care and medical expenses, from their taxable income. “If you have eyes, teeth, and kids, these are the things that you can spend pretax on,” says Avi Karnani, cofounder of Alice. If you spend $100 pretax, $100 of your income becomes tax free and that adds roughly $35 to your paycheck. Employers save money too, since every dollar that an employee spends pretax is a dollar on which the employer does not pay payroll tax.
Most employers of white collar workers offer pretax spending benefits as a matter of course, but Alice is aimed at employers like restaurants, retailers, and nail bars who are much less likely to do so.
“There’s like 35 million Americans who work at Fortune 1000 companies that have benefit cultures where all the benefits are provided,” says Karnani. “And there’s 80 million Americans who are hourly workers, middle-income workers, and low-income workers who don’t have any of these benefits. They are the ones who are spending the lion’s share of their earnings on commuting, healthcare, and childcare.”
In 2017, about 1.8 million hourly workers earned exactly or less than the federal minimum wage of $7.25 per hour. Two-thirds of those workers were employed in food preparation and serving jobs. In 2016, the annual employee turnover rate in the restaurants and accommodations sector was 73%. Constantly replacing workers costs money, so employers in the hospitality sector are interested in anything that might help them to hire or retain people. That made hospitality an ideal first market for Alice.
“If you are a barista at Brooklyn Roasting Company and you take a MetroCard to get there, you’re going to get about a 25¢ an hour raise,” says Karnani. “If you drop your child off at daycare on the way there, it goes up to $1.50 an hour. It takes an act of Congress to get $1.50 more per hour for people.”
To offer pretax spending benefits, employers must navigate an administrative obstacle course of HSAs (Healthcare Spending Account), HRAs (Health Reimbursement Arrangements), CRAs (Commuter Reimbursement Account), and FSAs (Flexible Spending Accounts). Alice hides all those accounts under the hood, hooks into the payroll system of an employer, automatically tracks the pretax spending of each employee, and deducts that spending from payroll.
Even when employers invest in providing pretax spending benefits, employees often don’t use them. “Most of the industry has enrollment rates at like 5% to 10%,” says Karnani. “Fifteen percent is a good day for those people.” This is because there are hurdles for employees, too. Employers often issue a separate card that employees must remember to use when buying their glasses or their mass transit card. Hourly workers living paycheck to paycheck must pre-select how much money to set aside for glasses or childcare or commuter costs in the following year. “You are asking an hourly employee, ‘Hey, would you rather get your paycheck today, or set aside $400 for the year to cover things that you might not buy?'” says Karnani.
Alice hooks up to an employee’s existing debit, credit, and prepaid cards–no additional cards are necessary–and examines their spending history to select the benefits for which they may be eligible and how much they could claim. The service then uses text messages to ask workers a few questions about how they get to work or whether they have kids in childcare, automatically tracks spending on each relevant benefit, texts employees to confirm their eligible transactions, and deducts them from payroll. Along with offering a stand-alone version, the startup also partners with Square to offer free automated pretax benefits in that company’s payroll product for small businesses.
“What Alice has done is take all of these products that are inherently difficult to use, and stuff them under the hood,” says Karnani. “Our brand promise is no forms, no math, no acronyms.”
The origin of Alice
In 2014, Karnani was a fellow at Brooklyn’s Blue Ridge Labs @ Robin Hood, which builds technology products for low-income Americans. He was already the founder of a financial services startup and was interested in how technology could increase financial inclusion. Karnani and his Alice cofounder Paul Barnes-Hoggett noticed a common thread among the low-income New Yorkers they interviewed during the fellowship.
“Everybody was using a seven-day MetroCard,” says Karnani. “If you pay for the weekly transit pass, you pay 15% more in New York than if you buy the monthly. In Chicago, it’s like 20%, and Philadelphia, depending on which line you ride, it’s potentially 50% more expensive.”
People with low incomes often pay more for products and services than those who can afford to invest more up front or have a better credit score. A minute of call time or a megabyte of data costs less with a monthly phone subscription than with a prepaid phone. A yearly or monthly travel pass costs less per journey than a weekly one.
Karnani and Barnes-Hoggett started lending people 30-day MetroCards as a first step toward building a microloan infrastructure for hourly workers in New York. Monthly cards were mailed to users who paid weekly and would hook their credit, debit, or prepaid cards up to a software system that tracked their payments.
“We ended up having a 97% repayment rate, which is higher than Capital One,” says Karnani. “And we learned how to have a conversation over messaging about things like loan payments with hourly workers who are not especially financially sophisticated.”
In the meantime, New York City passed a law requiring companies with more than 20 employees to offer pretax commuter benefits. “Out of nowhere, a bunch of employers called us up,” said Karnani. “They said, ‘We heard a bunch of our workers are borrowing their MetroCards from you guys. Can you turn that into some kind of commuter benefit thing that would make us compliant?'” Karnani stopped lending MetroCards and started building software for pretax spending benefits. One of his first customers was the Brooklyn Roasting Company.
Tiia Hyrske manages the accountancy team at Brooklyn Roasting Company, which roasts coffee locally for its eight stores in Brooklyn (plus one in Manhattan) and many wholesale customers. The company employs around 70 hourly workers, most of whom are baristas.
Brooklyn Roasting Company uses Alice to offer commuter benefits. New hires get a flyer that explains how they can use Alice to enroll. “Ninety-eight percent of the new hires do enroll with Alice,” says Hyrske. “It’s almost everybody. It couldn’t be easier and it’s tangible money.”
Alice charges employers 50% of the money the software saves them on payroll tax. “It’s completely free to us besides the percentage of tax savings that Alice bills to Brooklyn Roasting Company,” says Hyrske. “Alice does the deductions in the payroll. It’s a benefit not to have to invest time administering it.”
Karnani declined to disclose exactly how many customers use Alice, but said that the number is in the hundreds, and that those customers employ anywhere between two and 5,000 workers. In the long term, he wants Alice to build user-friendly financial services that are tailored to the needs of low-income workers.
“If you are someone who is an hourly worker in the United States, you don’t have a good experience with banks and financial services,” Karnni says. “They do not meet you where they are. Their forms are complicated and scary. Benefits are weird. They’re designed by people who make more money than you and think about their financial lives differently.
“We are not helping people buy more stuff they don’t need. We are not taking people’s data and pulling it out from under them. We’re helping a barista get a raise. We’re helping somebody changing bedpans keep more of her money. Tech that does good–why we all got into technology in the first place.”