The Future of Work Needs Sound Retail Financial Services to Support it, and the Numbers Back it Up
Usman Ahmed is the Head of Global Public Policy, PayPal. Ivy K. Lau is the Social Innovation Manager, PayPal
The future of work debate has sparked a set of important conversations about how to change fundamental institutions like health care, pensions, and labor organization. PayPal recently released a research study looking at how retail financial services must similarly adapt to changes in the way in which people will be earning an income in the future. The research study generated new insights on the intersection between the future of work and financial services, based on (1) proprietary PayPal data, (2) results from a 25-question survey in 8 markets, with 1000 working age respondents per market, and (3) over 100 half-hour phone interviews with experts from over 25 countries around the world.
Fintech products will be an important part of reforming financial services to meet the needs of the future of work by lowering costs, broadening access, and improving experiences. But there will also need to be changes at the ecosystem and institutional levels of financial services due to the tremendous labor market shifts that are likely to occur in the future. Below we provide an overview of the forces impacting the landscape of work, and our view of necessary changes to engage it.
4 Major Trends Impacting the Labor Market
There are several forces at work that seem to be driving the discussion around the future of work. Our own research has focused on 4 factors:
(1) automation, machine learning, and artificial intelligence;
The precipitous drop in the cost of computing power, the rise of data collection, and the continued development and precision of algorithms are leading to incredible technological developments across a number of industry sectors. There is much debate about whether these technological developments will replace human jobs. There is far less debate about technology causing and accelerating job churn. A recent McKinsey study found that 30% of “work activities” could be automated by 2030, and 75 to 375 million may need to switch occupational categories and learn new skills
(2) growth of the platform economy;
Over 90% of net employment growth from 2005 to 2015 in the US was in the alternative work category. Independent workers have always been part of industrial economies, but the Internet, and the pervasiveness of mobile technology, have transformed the scope and scale of alternative work. Already, nearly 1 in 4 Americans earn money from the “digital platform economy”, according to a Pew Research Study.
(3) socio-demographic changes; and
By 2030, millennials will make up 75% of the workforce. Women’s earnings and their subsequent contribution to household income have been increasing steadily in OECD economies over the last 40 years; women’s earnings, however, globally continue to be below their male-counterparts. Data from the United Nations Population Division shows that 54.8% of the world’s population lives in cities in 2017; up from 34% in 1960. These three trends – age, gender, and location – are having a major impact on the labor market and are driving a demand for increased flexibility in work arrangements.
As “steady jobs” become less common due to automation, platform economy, and demographic changes, the risk associated with entrepreneurship becomes more palatable and acceptable. And, there are already billions around the world that earn a living through entrepreneurship. In the EU, Small and Medium Enterprises contribute 57% of value added in the EU overall, and countries within the EU with higher SME prevalence, experience higher economic growth.
Technology is at the center of many of these trends – whether it is automation that causes job churn and displacement, or digital platforms that enable work to be broken up into small individual tasks and distributed to a nearly limitless supply of workers. Socio-demographic changes related to age, gender, family, and urbanization also seem to be driving the trend of increased demand for flexibility in work. Moreover, the uncertainty created by the future of work seem to be propelling a new wave of entrepreneurs attempting to take more control of their financial future through the deployment of new technologies and technological solutions for consumers and workers alike.
Impact of Future of Work on Retail Financial Services
Retail financial services was designed for a labor market characterized by mostly nine-to-five employment, with single-source predictable lump sums paid at regular intervals. However, as the labor market is shaped by increased job churn and growth in the platform economy, we will be shifting to multiple streams of variable, unpredictable, and likely smaller incomes, which has implications on all aspects of retail financial services, such as the need to update the mode of underwriting and assessing creditworthiness, and to pay attention to the intertwining of personal and business accounts. Changes in the way money is earned ought to be accompanied by changes in the way money is paid, managed, and intermediated, in order to adaptively optimize people’s capacity to build a stable life and seize opportunities in a world of new work arrangements. The report provides an analysis of the impact of changes in future of work on payments – both inflows and outflows, short-term and long-term savings, personal and small business credit, and general financial management.
For example, automation could result in increased job churn, episodes of unemployment, and the need for upskilling/retooling throughout a career. It is important to note, however, that only 38% of survey respondents in jobs that are at a high risk of automation report they have savings to cover 6 or more months of expenses if they lost their primary source of income.
Another example concerns workers in the platform economy and their preference on payment frequency. Over 50% of workers in the online platform economy in the survey dataset have paid a bill late and incurred fees over the past 12 months, and 63% of them would prefer receive income more frequently (i.e. daily, weekly, or as soon as the work is complete). This preference and trend are reflected in the growth of real-time payments to platform economy workers through PayPal’s recently acquired Hyperwallet platform, which have increased by more than 200% year-over-year.
Reforming Retail Financial Services
The future of work presents an opportunity for retail financial services around the world to reform and innovate.
The research study provides recommendations to reform every level of retail financial services: (1) ecosystem, (2) institutions, and (3) products.
The report calls attention to an ecosystem-wide opportunity to address the trust deficit that currently plagues financial services. Digitization presents an opportunity for unprecedented transparency but also increases the exposure related to data privacy, security, and dignity, and the financial services sector must lean into this opportunity to mitigate risks and align with the public sector around the goal of universal financial health.
For institutions, the reimagination of financial services will hinge on their ability to focus on people’s multifaceted needs that may or may not fit existing siloed product categories as the institutional basis for innovation. The structure, process, and outputs of problem discovery, solutions development and delivery ought to embody and reflect a deep empathy for what best serves and empowers customers. Interoperability and portability between financial providers may also help enable a comprehensive understanding of customer needs.
As for product solutions, in addition to being secure, convenient, reliable, transparent, and affordable, financial products and services will need to be far more flexible and intelligent to help manage some of the complexity and volatility that are likely to come in the future of work. The nature of work will become more flexible, so too will financial services need to flex to match the levels and timings of inflows and outflows of the modern worker. More tailored tools such as micro-savings, can help overcome short-term uncertainties. There are also opportunities to develop intelligent nudges that suggest the right product for the particular need at the right time, and provision the appropriate balance of flexibility and structure.
Technology will continue to drive the future of work and the future of financial services, but it is important to remember that it will be human beings who will make choices about how technology is built and utilized. With massive reforms occurring in the labor market, the time is ripe for equally transformative changes to be made in the field of financial services.