The rise of the self-employed BANKING S BIGGEST UNTAPPED MARKET

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Harvey Long
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1 The rise of the self-employed BANKING S BIGGEST UNTAPPED MARKET

2 INTRODUCTION In the US alone, there are 57.3 million Americans who are self-employed in some capacity; many of which, prefer not to deal with big banks 1. The majority believe big banks are not designed to service their needs and wish there were more alternatives. As a result, almost 1 in 2 do not have a business relationship with a bank 2. We explore who the self-employed are, and outline some of their unique needs. By delivering differentiated services or experiences the self-employed crave, banks have the opportunity to stand apart from their peers. Our findings point to the need for receipt management solutions tools required by self-employed professionals to live financially healthier lives, and grow their businesses. If banks offer these types of services, banks will revitalize customer relationships with the self-employed. 2

3 Breaking down the segment The booming self-employed workforce adds $1.4 trillion to the US economy annually3. The group varies in age, income levels, educational attainment, and even work arrangements. They include, but are not limited to, full-time IT contractors and creative freelancers who earn more than their 9-to-5 counterparts; individuals diversifying their income with part-time gig work; salary workers with a growing side hustle; and everything in between. Notably, this workforce shift is not generational. Instead, it s rooted in shifting economic conditions, decentralization, corporate downsizing, technological advancements, and a cultural change in how people view the 9-to-5 grind. One thing is for certain: the self-employed are here to stay. Despite the advantages of traditional employment a steady income, health benefits, and retirement plans the large majority of self-employed professionals cite superior job satisfaction, with no desire to return to a 9-to-5. In fact, more than 7 in 10 self-employed professionals intend to grow their businesses in terms of staff or revenue 4. 60% of self-employed freelancers who left traditional jobs say they are making more money. Of that group, 78% were making more money within one year of leaving their jobs, indicating that freelancing can be an even more lucrative career path than traditional jobs 5. In Australia, 92% of full-time self-employed professionals report leading happier lives, attributed to the flexibility, control and autonomy of being their own boss. They are the happiest segment among all workers nationally 6. On-demand technology platforms (i.e., Uber, Lyft, Taskrabbit, Airbnb) offer new avenues for generating income, giving impetus to the rise of the self-employed gig worker. The number of gig workers are expected to double over the next four years, totaling 9.2 million people in the US alone. According to the Bureau of Labor Statistics, there are already more gig workers than the entire IT services and information sector combined. Given the current growth rate, the number of gig workers is expected to surpass the entire workforce count in finance and construction combined by While many are self-employed out of opportunity, some are self-employed out of necessity. Self-employment rates increase during economic downturn, notably among the middle-class. American economist, Steve King, cites forces such as wage stagnation, the decline of middle-wage jobs, and higher costs of everything from healthcare to education, are encouraging people to join the self-employed economy by picking up gig work. This supplemental, and often temporary, income helps buoy people; maintain their lifestyles; or prepare for new life stage events such as starting a business or family 8. 3

4 BREAKING DOWN THE SEGMENT Who makes up the self-employed (US) 9 40% 27% 18% 10% 5% 21.1M 14.3M 9.3M 5.5M 2.8M Independent Contractors Side Job Moonlighters Diversified Workers Temporary Workers Freelance Business Owners They do not have an employer. They are professionals with a They have multiple sources of They have a single employer, They have one or more employees Instead, they work on contracts traditional full-time employment income from a mix of traditional client, job, or contract project and consider themselves both as freelancers or specialized agents on a project-to-project basis. For example, an HR consultant. for primary income, who also moonlight doing freelance gigs. For example, a corporateemployed web developer who does projects for nonprofits in the evenings. employers and gig work. For example, someone who works the front desk at an office 20 hours per week, and fills the rest of their income driving for Uber. where their employment status is temporary. For example, a data entry worker employed by a staffing agency and working on a three month assignment. a freelancer and a small business owner. For example, a social marketing guru who hires a team of other social marketers to build a small agency. 4

5 BREAKING DOWN THE SEGMENT The self-employed by country United States of America The United Kingdom Canada Australia 37% of the entire workforce (57.3 million) Growing at a rate of 2% per year. 15.1% of the entire workforce (4.8 million) The labour force that is strictly defined as Freelance has been growing at 4.57% per year. 37% of the entire workforce (7.2 million) Expected to amount to 45% of the workforce by % of the entire workforce (4.5 million) Growing anywhere from 3% to 11% YoY. 5

6 Still, the majority of self-employed people do not fit the struggling to make ends meet narrative. According to Freshbooks, most self-employed professionals are able to self-finance their operations, with only 1 in 5 requiring outside capital to start up. The top sources of capital for the selfemployed are their own personal savings (61%), followed by credit cards (32%) 10. Traditional professions are now increasingly contracted out to the self-employed. More than ever, contractor positions are in demand by firms of all sizes; including the self-employed themselves, where 2 out of 3 self-employed professionals prefer outsourcing jobs to independent providers of the Fortune 500 are already using Upwork to source freelancers 12. Reports by FlexJobs indicate that the most in-demand self-employed fields were 13 : Reports by FlexJobs indicate that the most in-demand self-employed fields were: Medical & Health Education Project Management Computers & IT Accounting & Finance 6

7 Exploring pain points of the self-employed The needs of the self-employed cannot be conflated with either traditional salary workers or established businesses. Despite their diversity, the self-employed share one commonality: they feel grossly underserved by their banks. The majority of self-employed professionals are tentative about working with big banks altogether. BANK A Freshbooks study states only 1 in 2 self-employed professionals have a business relationship with a bank. And even then, the study found that 52% of the self-employed felt big banks are not designed to service their needs; and 54% said when it comes to financing, they wish there were more alternatives to big banks 14. More than half use their personal checking account for both business and personal finances (56%), as well as their personal credit card (53%) 15. This raises the even larger issue of banks being unable to identify the self-employed among personal banking account holders. Financial services favour those in traditional employment schemes - that is, a salary worker or a corporation. But the selfemployed need different personal financial tools, advice, and skills to thrive given that their income may be uneven or diversified, taxes are complicated, and managing expenses is laborious. There are many pain points that financial institutions are best positioned to solve for the self-employed. Including long-term and retirement savings plans, card programs tailored to their needs, and more considerate mortgage and credit application processes. In the meantime, there are low hanging fruit opportunities that banks can seize. The same FreshBooks study discovered that the highest selfemployed earners demonstrated certain best practices. This allowed them to save money and be confident about their financial well-being, personally and professionally. 7

Best practices for the self-employed 16 1 2 3 4 5 6 7 Regularly reviewing finances Maximizing tax write-offs and deductions Establishing an optimal business structure for liability & taxes Saving an

8 Best practices for the self-employed Regularly reviewing finances Maximizing tax write-offs and deductions Establishing an optimal business structure for liability & taxes Saving an appropriate amount for taxes Proactively reducing debt Paying themselves a salary from business earnings Maintaining a budget Four out of these seven best practices require proper receipt management. Banks eager to win over the self-employed need not look further than receipt management solutions for a guaranteed quick win. 8

9 Diving into receiptrelated pain points Not knowing what can be deducted as a business expense. They are eligible to take advantage of hundreds of income tax deductions including those specific to home-based businesses, and charitable contributions. However, many, especially in their first year of operation are not aware of the breadth of opportunities. Other times, itemizing receipts is too time-consuming when focused on growing their venture, so tax credits are forgone. earnings. The self-employed with gross receipts of $100,000 or more are 6-8x more likely to be audited 18. The outcome? The self-employed forfeit 30% of claims on their business expenses due to lost receipts. The inability to back up claims can lead to disallowed tax relief, and heftier tax bills. Moreover, it is a top cited emotional pain causing undue stress hunting for receipts and recalling their exact business purpose. Administrative inefficiencies with monitoring cash flow. Many self-employed professionals rely on credit card statements to manage business expenses and monitor account balances. The administrative effort to manually reconcile receipts to card transactions costs them valuable time. One company estimates that transaction matching features in software saves his billing team +40 hours/month 19. Not maximizing tax claims due to poor receipt management. Just one in five (22%) of micro-business owners said that they claimed back all of the expenses they incurred for their business 17. On average, the self-employed are 3x more likely to be audited by the IRS. These chances increase for those who report higher Furthermore, in this method, cash purchases are entirely undocumented in budgets and deductible expense accounts. Productivity hits from not separating business from personal expenses. This group spends up to 2 hours per week separating business expenses from personal expenses. According to Intuit, 75% entangle their business & personal finances, because they use personal banking accounts for work-related activities 20. 9

10 t Not having a good system for expense tracking. This segment does not have the luxury of an accounting department reviewing expense reports and managing the books. 46% employ tedious, manual methods of data entry into a spreadsheet 21. This time away from their projects adds up. The majority of self-employed professionals & small business owners spend more than 40 hours per year dealing with federal taxes. 40% report spending in excess of 80 hours two full work weeks per year on federal taxes 22. For the self-employed professionals who do outsource this, nearly half spend $5,000 or more annually on the administration, and 28% report spending more than $10, On the upper end of the spectrum, software solutions can cost up to $40/month, and mere receipt scanning software can start at $9.99/month. According to the National Society of Accountants in the US, accountants charge between $150 and $400+ per hour, and bookkeepers charge $30 to $50 per hour. Alternative providers Up starts and tech giants have seized the opportunity to better service the self-employed. Research by McKinsey & Co. identified two major effects from these digital entrants: 1. The loss of the customer relationship 2. Margin erosion across segments The first mobile only business bank. Live in Europe, Australia, and coming to the US in Financing for the gig economy, built to support the Airbnb and Shopify community. Not surprisingly, a study by WBR commissioned by Sensibill, surveyed major banks and found that 65% have a receiptpowered service already or are considering it on their roadmap 24. A likely cause, as indicated by the same study, is that a chief digital priority for these banks is to be ever-present in their customers' financial lives. If implemented properly, these services can attract new self-employed customers, and bolster loyalty with existing ones. The bank account for freelancers and self-employed people, launching in the UK in January Their business bank account works out taxes, tracks expenses and helps with accounts receivable. 10

11 How Sensibill helps Sensibill makes it easy for banks to offer receipt capture and management to their retail and business banking clients. Free with their banking account, your customers can: Effortlessly capture paper and receipts in revenue agency accepted formats Automatically record important information about their purchases, such as the expense category, merchant, tax, total and more, with no data entry required Separate business expenses from personal ones via tags Add notes about the business purpose of each expense View itemized receipts automatically reconciled to card statements Export receipts to their bookkeeper, accountant, and accounting software If you want to learn more about how Sensibill can power your Business Banking service, contact us at contact@getsensibill.com

12 References 1 Upwork and Freelancers Union, Freelancing in America: 2017, Freshbooks, Self-Employed Professionals & Small Business Owners in America: Embracing the Rewards and Challenges of Career Independence, Upwork and Freelancers Union, Freelancing in America: 2017, Freshbooks, Self-Employed Professionals & Small Business Owners in America: Embracing the Rewards and Challenges of Career Independence, Freelancers Union, Elance, and Odesk, Freelancing in America: A National Survey of the New Workforce, Upskilled, Survey, New York Post, More people will work in the gig economy than finance by 2021, Forbes, On-Demand Work: The New Social Safety Net, Freelancers Union, Elance, and Odesk, Freelancing in America: A National Survey of the New Workforce, Freshbooks, Self-Employed Professionals & Small Business Owners in America: Embracing the Rewards and Challenges of Career Independence, Freshbooks, Self-Employed Professionals & Small Business Owners in America: Embracing the Rewards and Challenges of Career Independence, Upwork and Freelancers Union, Freelancing in America: 2017, FlexJobs, 5 In-Demand Career Fields for Freelancers, Freshbooks, Self-Employed Professionals & Small Business Owners in America: Embracing the Rewards and Challenges of Career Independence, TD Bank Surveys and Research, Freshbooks, Self-Employed Professionals & Small Business Owners in America: Embracing the Rewards and Challenges of Career Independence, YouGov for Freeagent, UK micro-businesses at risk from ignoring their expenses, Marketwatch, What are your chances of getting audited, Vatbox, Corporate Travel Trends, Intuit Quickbooks Study, Certify, CFO Study, NSBA, Small Business Taxation Survey, NSBA, Small Business Taxation Survey, Future of Digital Finance and WBR, Grappling with GAFA: A 2017 Future Digital Finance Report The Need for a Data Revolution in Financial Services, 2017 Copyright 2017 Sensibill Inc. 12

The gig economy. Achieving financial wellness with confidence.

The gig economy. Achieving financial wellness with confidence. BMO Wealth Management Insight U.S. Edition JULY 2018 Achieving financial wellness with confidence. in the United States is growing at a phenomenal rate that shows no signs of slowing down. Over time, the