Traditionally, many US workers haven’t had the luxury of options for planning their financial future. Sure, employees have always decided where they did daily banking, but when it came to other financial instruments employees’ options have been limited to a handful of options selected by their employer. Retirement savings. Financial planning. Disability and other insurance options. Healthcare savings.
In nearly all cases financial institutions have negotiated the best options for the financial institution and the employer. That is very different from negotiating the best option for the financial institution and the employee.
This was a viable approach for decades. When a company needed additional resources, it simply hired more people. The traditional model for supplying financial service worked. For Financial Institutions. For employers. And it met the basic needs of employees.
The employment market is shifting. The largest reliably stable component of this market—baby boomers—are now retiring. The needs of the worker are changing, as are the options for employers needing skilled talent.
As of August 2018, over 29 percent of the U.S. workers are considered part of the gig economy. They are drawn to it by the flexibly in hours and opportunity to make additional income. The skills to participate in the gig economy are largely undifferentiated and widely available. The services are more important than the person delivering it. Uber Drivers. Food Delivery. Pet Sitting. Home Sharing.
While the Gig Economy may not represent a major opportunity for financial institutions, it has opened the door for the next major workplace shift that does. The Talent Economy.
The desire for flexibility, combined with long term low unemployment levels, has created an opportunity for highly skilled, high wage professionals–computer programmers, designers, accountants, and even attorneys and medical professionals—to shun the traditional office model.
According to one survey More than 75 percent of business leaders consider the ability to add the right talent to their organization to be one of the primary risks to their company’s success. More than 90 percent of these business leaders use already use external talent in some capacity, and most forecast that their use of external professionals will grow significantly over the next five years.
This war for talent is real, and it represents a significant opportunity for financial institutions. Highly skilled professionals are choosing to participate in the talent economy, but the growing numbers in this sector of the economy work full time but are not traditional full-time employees. By choice, they don’t get conventional employer-sponsored benefits.
Changing workforce dynamics are creating new financial needs
These in-demand professional are not considered full-time employees. They don’t have traditional benefits such as corporate-sponsored retirement savings accounts. They could have multiple sources of income instead of just one specific employer and may still have significant fluctuations in income. Many professionals in the talent economy may even use their personal credit card or bank accounts for business transactions instead of having separate ones.
Why do that, though? Because they do not fit in the typical model of a bank customer.
These unmet needs are driving tech-savvy entrepreneurs to launch FinTechs such as Qwil and Joust that explicitly target this segment. These vendors provide services ranging from protection against delayed or non-payment from customers, credit/debit card processing and loans.
Major areas where FIs can naturally add value for their existing customers in the Talent Economy are retirement (wealth) and capital (loans or receivables factoring, real-time payments).
In addition to retirement savings vehicles, Talent Economy workers also need education and advice on setting up retirement accounts that meet their individual needs. Many banks already have wealth departments, but they need to expand their offerings to target and reach these professionals. Digital platforms are essential particularly for onboarding of retirement accounts. As these professionals tend to be more digitally native, the mobile or online onboarding experience must be designed for minimal customer friction with immediate account creation.
Additionally, this group expects minimal cost or even no fee options. Many investment firms use artificial intelligence (AI) to manage retirement accounts for a fraction of the cost of traditional investment advisory firms. These advisory services gather personal information such as age, lifestyle, budget, risk preferences, and retirement goals. This information is fed into an AI platform that provides investment options targeted to that individual’s needs. The platform continues to monitor the investment results and rebalances where AI indicates necessary.
By providing access to new and existing capabilities such as AI and Machine Learning (ML), banks can combine human and machine touchpoints to customize a service or solution targeted to individual savings needs.
In the talent economy, managing day-to-day cash flow can be challenging. Unlike salaried employees, these professionals need to balance paying their personal bills such as rent, mortgage, or utilities with all self-employment expenses (taxes, equipment, or other operating costs). Having a two-day lag in the availability of deposits with traditional ACH payment and settlement exacerbates short term cash-flow issues.
Real-time payments (RTP) combines final settlement, instant confirmation, and immediate access to funds when a payment is made. However, the U.S. has been slower in adopting this capability that is widely available in the UK and in other countries.
As of 2017, the RTP® network from The Clearing House (TCH), a real-time payments platform, has been adopted by many of the largest banks in the U.S. An estimated 50 percent of the U.S. accounts are currently set up for RTP®, projected to reach 100 percent in 2020 as targeted by the task force of the Federal Reserve.
FIs that have not yet connected to RTP need to make this a priority especially if they want to build strong relationships with this target market. If banks’ systems and processes are not readily able to run on the rails of RTP, then they should look to partner with a FinTech to promote and provide real-time payments or risk losing their customer to rival banks.
Despite a lucrative income on paper, many of these professionals struggle with their creditworthiness because of income verification or consistency. Pay stubs, W2s, and job verification through the HR department were typically used to measure creditworthiness. As an alternative worker, though one can make a combined six-figure income, it’ll be from multiple sources or from agencies that do not provide a pay stub.
Additionally, since a large portion of this group comprises debt-averse millennials, credit history may be extremely limited.
Banks usually rely on FICO scores for credit, but they also have access to detailed transaction information on their customers. With customer consent, an AI platform should be able to mine the existing account information to provide a better picture of a customer’s creditworthiness. And with all financial services, any loan or capital platform should provide instant access to funds. The longer the banks wait to implement quick and affordable loans, the faster their competitive advantage erodes.
This shift in the workforce will continue. Traditional FIs not able to meet the financial needs of this growing segment of the economy miss an opportunity to grow their own business. Nimble startups are already re-writing the rules target high-income professionals in the Talent Economy. Is your financial institution prepared to keep up?
Susan McLaughlin is a Senior Manager in the BFS Division of Virtusa. She is a Certified Business Analyst Professional (CBAP®) and MBA. She can be contacted at www.linkedin.com/in/susan-mclaughlin-cbap