What Do Financial Services Look Like When Everyone is Self-Employed?

big-ideasSelf-employed contract work is becoming the new normal.

News headlines point to Uber, Lyft, DoorDash, Handy, and the rest of the “On-Demand Economy” as spearheading this shift. But, while they are a very visible embodiment of the trend (Uber has hundreds of thousands of contract workers while employing a few thousand full-time staff), the shift has been going on for decades across much of the economy.

Fortune 100 companies like Microsoft have nearly two-thirds as many contractors as full-time employees. Appraisal management companies often employ just a few dozen employees while providing work to a network of hundreds or thousands of appraisers. Even the simplest business structures, sole proprietorships, have increased their use of contract workers nearly two-fold since 2003.

Why is this happening?

Four trends are converging to make contracting more attractive for both employers and workers. The risks of contract work are real, but being mitigated. And soon, the flexibility it offers will outweigh the benefits of being an employee. That’s why over 40 percent of the workforce will be made of contractors just five years from now.

Trend #1 – Platforms Find the Customers

The greatest risk to any business is getting enough customers. Historically, contractors have needed serious hustle to get early customers, referrals, and a stream of repeat business.

For local services, platforms like Handy and Thumbtack upend that dynamic.

These platforms take on much of the marketing cost necessary to bring potential customers through the door. Local service contractors join the platform and are quickly plugged into a stream of business.

For knowledge workers, platforms such as Upwork fill a similar gap. A worker signs up for the platform and gets access to a pool of potential customers. On top of that, payment collection and reporting are handled by the platform. Contractors can focus narrowly on doing the work they do best while the platform handles the less glamorous parts of the business.

Knowledge workers have an additional advantage: they can work from anywhere. Thanks to ubiquitous internet access, a designer can make a web page from her kitchen. Or from a beach in Thailand. As long as the work gets done and the wifi is strong, location is increasingly irrelevant.

Trend #2 – Benefits Decoupling from Employment

People are terrified of losing their health benefits. And rightly so. A single accident could be financially catastrophic. The risks of going without health insurance are just too dire to stomach. So many would-be entrepreneurs delay leaving their employers. They stick around for the insurance.

The Affordable Care Act (ACA) is changing that. While getting coverage is by no means easy, it is far easier than before. Contractors can go to their state’s marketplace and apply for coverage. They don’t need to be dependent on an employer for that benefit.

“The ACA is a good thing for independent workers, especially those with low-to-moderate incomes,” said Steve King, a leading researcher on the future of work and the small business economy. “It will lead to more people becoming independent and fewer independent workers without health insurance.”

Trend #3 – Shifting Generational Preferences

The people entering the workforce today value flexibility and autonomy. They choose location over career; job rotation over promotion. The idea of lifelong employment with a pension no longer applies (and those pensions aren’t sticking around, either).

According to the Bureau of Labor Statistics, the average 55-year-old spends 10 years on a job. A typical 25-year-old spends three.

This younger cohort will even choose flexible schedules and remote work over increases in salary.

Recognizing these trends, Google and Facebook offer rotational development programs specifically designed to attract young talent. Reid Hoffman, cofounder of LinkedIn, advocates for employees to sign up for two-year “tours of duty” to accomplish something significant for the company before moving on to the next thing.

It’s unrealistic for these companies to believe they’ll hold on to these folks for long, so they’re creating structures that appeal to this talent. They need to get the most out of these workers in a short time.

And the way they do that is by creating jobs that look more and more like self-employed contract work.

Trend #4 – Filling the Missing Gaps

But it’s not all sunshine and roses. Contractors don’t have many of the legal protections that employees have. They’re vulnerable. Wages can be suppressed. Individuals can become little more than cogs in the machine.

Fortunately, dozens of services are popping up to fill this void and support the growing contractor class:

This burgeoning ecosystem is closing the “benefits gap” between employees and contractors. When a person can get insurance, community and financial help without traditional employment, it begs the question: why be traditionally employed?

Financial Services: What’s the Impact?

For consumers, the financial system is entirely geared around full-time employment. Need proof? Think about what’s needed to get a loan. The first thing asked for is usually employment verification and a paystub. That’s a tight spot for a self-employed contractor.

At Payable, we specialize in making payments to contractors. About a year ago, we added the ability to download completed payments as official looking PDF documents. Within days, we were floored to find out that people were using these PDFs as proof of income for loans and rental agreements.

And, that’s just one slice of the financial services portfolio.

How should a contractor get a mortgage? Set up a retirement plan? What is the creditworthiness of someone who works 3 “gigs” simultaneously? How should wealth management advisors approach these workers?

The list could go on, but the implication is clear —  the fundamental structure of work is rapidly evolving.

And change starts with a discussion. I look forward to diving into these topics (and more) at the Fintech Ideas Festival in January.

 

Tad Milbourn is the Co-Founder and CEO of Payable.