A Better Way to Democratize Finance?

You've probably never heard of Aaron Shapiro.

Unlike the founders of other higher profile FinTech startups, Shapiro hasn't been on the front page of any major business publication. He hasn't testified before Congress. Yet Shapiro is an innovator committed to "democratizing" finance. And he and his company, Carver Edison, arguably are doing as much to make wealth accumulation possible for people "left behind" by the wealth gap over the past few decades than online trading platforms or digital currencies. 

What business is he in? The decidedly unsexy business of employee stock purchase plans. 

Known as ESPPs, employee stock purchase plans were created in 1964 as part of President Lyndon Johnson's "war on poverty," 14 years before 401(k) plans were born. The idea was to give people who work for public corporations (there are 35 million of them today) the opportunity to grow their wealth by investing a portion of their pay (up to $25,000 a year) in the stock of their employers at a discount (usually 15%) – with favorable tax treatment. 

About three-quarters of the public companies in America offer ESPPs, but participation is low. According to current survey data, 62% of companies with an ESPP reported participation rates of 40% or less of eligible employees. 

One reason for this is that employees who might benefit the most feel they can't afford to do so. Which is what happened to Shapiro's mother, who worked at UnitedHealthcare for a time and couldn't afford payroll deductions to participate in the company's ESPP. She missed out on the stock's skyrocketing ascent over the recent two decades. Motivated by his mother's misfortune, Shapiro set out to reimagine and retool ESPPs. 

Shapiro pioneered a unique program called "Cashless Participation" that, in essence, lends money short-term to employees at no interest cost (though in some cases with a small fee) to enable them to buy more stock in their company's ESPP than they could otherwise afford. 

Here's how it works:

An employee signs up for their ESPP. They select how much of their income they want or can afford to contribute. That contribution comes out of their paychecks every pay period. 

So far, that's no different from traditional ESPPs. 

The innovative part is this: On or before the date on which stock is purchased, Carver Edison sends the company an additional amount equal to the difference between what the employee has contributed and the maximum purchase permitted by the company. On average, employees can own 50% to 150% more than what they had deducted from their paychecks. 

What makes this all possible is a private letter ruling Carver Edison applied for and received from the Internal Revenue Service that affirmed, " ... a participant's ability to obtain a loan from its employer or a third party to purchase shares under a plan does not prevent the plan from qualifying as an employee stock purchase plan."

Importantly, Carver Edison offers education materials to companies who sponsor ESPPs because, like any investment vehicle, ESPPs are subject to risks like concentration in a single stock and price declines. Purchasing stock at a discount both increases the potential for return and cushions the risk of downside volatility. But leveraging stock purchases through cashless loans dials up the risk and return in opposite directions. 

Concerns about America's growing wealth gap and about income inequality have increased interest in financial services tools and strategies that expand market access to non-traditional participants – those who haven't been able to participate in the rising value of financial assets since the Great Financial Crisis. 

The most famous of these, of course, is Robinhood's commission-free online brokerage platform. But Walmart just hired two senior Goldman Sachs executives to help deliver financial services through their more than 4,700 stores. And a little-noticed proposal in former U.S. presidential candidate Michael Bloomberg's policy platform was using the U.S. Postal Service to deliver basic financial services. 

As is always the case, there can be a downside to financial innovation. A classic example was the recent short-term trading in GameStop stock on online trading platforms, which had very little to do with constructively "democratizing finance" or building long-term wealth for investors. 

Which begs the question: What might the ESPP equivalent of GameStop be? Possibly employees flipping out of their plans and selling their leveraged positions for quick gains. 

"Cashless Participation" certainly demonstrates the potential inherent in reengineering old-school, low-tech programs like ESPPs to overcome barriers to broader and more financially meaningful employee stock ownership. The key, as always, is to make sure this and other innovations remain true to their original purpose and achieve their intended outcomes.