Earning: Future of the Paycheck

co-authored by Robert Li and Francis Wilson

A key trend shaping young people’s relationship with money is just how little of it they are earning compared to past generations. Not only are millennials making 20% less than the baby boomers did at the same stage in life, they are also leading a wave of change in the labour market—namely, the gig economy. With 57 million workers, or 35% of the economy employed in 2020, gig work now employs a large swathe of Americans. Accelerated by COVID’s impact on small businesses and the downtrend of in-person interaction, the gig economy is projected to comprise half of all US labour by 2023.

Facing barriers to getting a decent education and steady jobs, younger generations are much more likely to take up gig work, with 53% and 40% of Gen Z and Millennials involved in some capacity, respectively. The need for on-demand food delivery and rides has created large opportunities for unskilled labour. Similarly, contract work marketplaces have emerged for high skill, specialised professionals ranging from video game developers to part-time executives. Additionally, the rise of platforms like Substack, Patreon, and Twitch has transformed content creation from a hobby to a viable career path.

The flexibility of gig work is appealing, but those who rely on it as their primary source of income are financially vulnerable due to volatile earnings and a lack of employer benefits like health insurance, worker’s comp, and unemployment benefits. To match the reality of the modern gig economy, we expect to see new kinds of fintech services tailored to meet the needs and lifestyles of freelancers.

Getting Paid. Now.

Because many gig workers are strapped for cash, the ability to get paid instantly or on a more granular basis is highly desirable. At companies like Uber and Lyft, drivers can cash out earnings with a small fee at the end of a work day rather than waiting for a distant payday. Freelancers and contractors, from plumbers to journalists, could also benefit from the same kind of on-demand earnings experience offered by the rideshare platforms. To serve this need, Clair enables companies that employ gig workers and freelancers a way to offer this perk without needing to change their own payment schedules or contending with additional cash flow or operational burdens.

Given that the typical payroll cycle is 2 weeks in the US, full-time employees also are asking for Earned Wage Access. Instant and Even make it easy for employers to offer Earned Wage Access as an employee benefit. At the same time, Gusto is bundling instant pay functionality alongside its numerous SMB product offerings. Neobanks have integrated this much-needed feature as well: Chime and Varo now offer their direct-deposit clientele the ability to access paychecks up to 2 days early.

Bridging the Benefits Gap

We also expect that as the gig economy continues to grow, certain gaps between the experience of being a full-time employee versus a gig worker will disappear. One of the main drawbacks today of freelancing is finding and having to pay for an affordable health insurance plan. There is a business opportunity for startups to bridge that gap and extend the benefits enjoyed by full-time employees by default to self-employed workers. Examples of startups doing this include Catch and Abound (contractor benefits packages) and Starship (HSAs for gig workers).

Financial Toolsets for the Independent Worker

The unusual financial profile of gig workers also begs the need for offshoot financial health products better suited to this target market than the array of existing offerings generally designed with W-2 employees in mind. Startups rising to serve this need include Keeper Tax, which helps 1099 contractors save money by finding potential write offs in their tax bill; Level, which gives a credit line that flattens earning volatility for contract-based small businesses; and Archie, which is building financial tools for creator economy freelancers. Verticalised neobank Lili provides a whole host of core banking products that are designed to suit workers in all manner of freelance work, catering to a new modality of employment that has become a substantial segment in our economy today.

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