Even before the COVID-19 pandemic, the rise of self-employed, contract and freelance professionals (or gig workers), helped drive growth in electronic payment methods over more traditional options like checks or cash.
Now, with numerous workers struggling to manage their cash flow, and businesses and consumers alike practicing social distancing, digital payments are becoming a must-have option for gig workers. The good news is that there are straightforward ways for most businesses to expand the payment options they offer to these critical self-employed workers without totally reinventing their business backend. Letting these workers choose between checks, ACH, electronic checks, push-to-card and other digital payment choices can be a game-changer for them in our COVID-19 economy.
Digital transactions are valuable for both gig workers and businesses because they:
- Eliminate the need for physical touch and any corresponding risk of germs
- Accelerate funds availability and settlement, helping payees get their much-needed funds faster
- Demonstrate that businesses care by offering payment choice and flexibility to their workers
Gig workers are a large and growing workforce
According to Webster, as many as one-third of the population have worked in the gig economy. Payments to these individuals totals $1.4 trillion. “Gig workers really have become the label for everything, from an Uber driver to an Instacart delivery person, to a web designer, a tutor and consultants who are 1099 workers,” said Webster.
Chevlin shared other examples from those paid through his company’s platform. “We have a whole range. Real estate brokers paying off commissions. Direct salespeople working for marketing companies. The gaming industry. It really runs the gamut of anybody who’s not an employee, who needs to get paid,” he said.
Gig work can be full-time, part-time or a just few extra hours to generate income outside a day job. The last category, often known as side hustles is one of the fastest growing categories in the space. In these instances, speed of payment is vital. “They have an immediate need for cash to make up the gap of their daily living,” Chevlin explained. “Faster payment is not necessarily an expectation, it’s a need. They don’t have the luxury of having money in the bank to fall back on when things go wrong.”
Gig workers’ payment needs are different
Chevlin recalled his own experience as a consultant where he learned firsthand the pitfalls of intermittent cash flow and the challenges of gig work.
“I was getting paid by paper check,” he noted. “Sometimes, I was not at home and I couldn’t get my checks to cash . A lot of companies didn’t want to onboard you into their ACH platforms because it is just too cumbersome. I thought to myself, ‘There’s got to be a better way.’”
Both experts were quick to challenge some conventional wisdom. First, most gig workers do hold bank accounts. Second, employer payments to them are typically recurring, rather than one-time transactions.
IRS compliance requirements are a final difference between gig workers and full-time employees. For any individual or company who receives annual payments of $600 or greater, employers must file a 1099 with the federal government. The process for collecting this data, via a W-9 form, is often arduous for the worker and the employer, with incorrect or incomplete data leading to delays, rework and even IRS penalties.
Obstacles to adding digital payment options
With so many digital payment methods available today, why do many employers stubbornly cling to checks? Chevlin and Webster shared their perspectives.
“Checks persist because companies have grown up with that infrastructure,” Webster explained. “They don’t really need to collect a lot of information from the payee in order to fulfill their obligation of making that payment.”
Other obstacles for employers include limited internal resources and the perceived strain of managing multiple payment channels, such as checks, e-checks, ACH and card-based payment methods. Others hesitate to collect and store sensitive data needed for payments like ACH, which require a payee’s bank account and routing number.
Chevlin compared the gig economy to the retail sector, illustrating how the collective power of consumers helped push stores and online merchants to accept new payment types.
“When enough of those consumers make that statement at the point of sale, merchants take notice,” he said. “They do have the power. But does a payee have the same power in an organization to establish preference? To say, ‘I really don’t want to be paid by a check anymore?’”
As the gig economy continues to grow, Chevlin anticipates a tipping point, especially in fields with high demand for talent, and with employers who want to burnish their brands by using payment speed and choice as a differentiator. “If you’re working in a very competitive area, trying to find the best people, then those types of things matter,” he said.
That tipping point may have been reached with the COVID-19 pandemic—although for different reasons. Attracting talented workers will remain important, but now the added benefits of physical distancing for payments and payment processing give businesses even more incentive.
How to add digital payment options for gig workers
Chevlin noted that many payment networks and platforms exist to alleviate these issues, making it fast and easy for payers to adopt electronic payments and offer recipients more options. In these instances, employers and their payees simply enroll in a pre-built payment platform. Interchecks and Deluxe Payment Exchange are two examples of these powerful tools.
These platforms securely store payee contact information, account numbers, payment preferences and even 1099 compliance data. Employers can then tap into the database, executing digital payments without adding workload for in-house accounts payables (AP), human resources (HR) or IT teams. Gig workers can enroll once and elect to share their information with multiple companies.
Large organizations, such as Uber, have developed their own payment platforms and even branched into digital payment vehicles, such as Uber Wallet. However, such technology is out of reach for most small and mid-sized employers. That’s where payment networks and bank platforms provide value.
“There’s a lot of friction with smaller players,” Chevlin explained. “It’s not like they can just start sending you an ACH. They have to find somebody who will process it for them. They have to get approved by those folks. They have to move money sometimes into a separate account. They don’t have the technology, the infrastructure, the resources to manage all the different ways to pay.”
Payment platforms eliminate the need for payers to collect and store their workers’ data directly. They also make it easy for payees to adjust their preferences. Webster sees tremendous opportunity for banks and businesses in this space. “All the innovators are looking at places where they can take inefficiencies and frictions out of the payments system,” Webster said. “Everybody is jumping onto that bandwagon. The competitive marketplace is very broad.”
Gig workers increasingly expect payment options
Webster and Chevlin only see demand for electronic options growing—and that was prior to the dramatic growth in demand that is now surfacing with COVID-19. One growing trend is paying gig workers at the end of each shift, rather than once a week or at set pay periods. Workers also expect choice, such as checks versus electronic transactions. But those choices are rarely static—and often surprising.
“The progression we usually see is check, e-check, ACH,” Chevlin said. “It depends on how much they trust the payer initially. On a first-time recipient, we may see a large percent go to check, but over time, maybe in the second or third payout, they may move to an e-check or to an ACH.”
ACH direct deposits may settle faster and require less intervention by the recipient, but until there’s a solid relationship with the employer, many gig workers prefer to trade speed for information security and opt for paper-based methods. Switching between multiple payment types is another trend the experts observed.
From one payment to the next, individuals often vary their payment method to suit their circumstances. Such movement would be impossible for AP or HR teams to facilitate with traditional vendor payments or payroll. It’s another way that payment platforms provide value. “We have a unique capability. You can take one payout and split it into two methods. I want to spend the money right away, so I take it onto my virtual wallet, but put the rest in my bank account.”
Many assume that Millennials and younger workers are leading the charge for payment options. However, banks and employers should not count out other demographics. “We had a client hire actors for advertising,” Chevlin said. “They hired 75 grandmas over the age of 70. They took our standard package: check, e-check, direct deposit. Five percent took direct deposit. About 40 percent took e-check. We were extremely surprised.”
How businesses are monetizing payment options
Fast electronic payment certainly yields benefits for individual workers. But what about for banks and businesses? Both experts agreed that numerous opportunities exist to remove friction in the payments system, increase efficiency and even monetize parts of the process. Webster referenced a recent PYMNTS.com study of 10,000 gig workers that demonstrated one potential revenue model.
“We tested the thresholds of payment,” she explained. “’How much would you be willing to pay to get your money instantly?’ And it’s amazing. People will pay as much as three percent of the face value of their check to get the money right away.”
She added, “It shows that there’s an opportunity to monetize instant [payment]—and an opportunity to monetize choice, because people have the choice of not getting it instantly.”
Chevlin’s platform already proves this point. With nine different payment options available, including checks, e-checks, ACH and push to card, payers can select which methods to make available. Some keep it simple with two or three payment types; others offer a broader menu. The only requisite is that at least one option remains free to recipients.
How banks and businesses determine where to charge varies. Checks, for example, are free at some companies because they already have that business model established, while others charge for paper in order to migrate recipients to more efficient digital options. Webster encouraged banks and businesses to think carefully how they will incent participation, using a carrot or a stick. Both have ramifications for brand reputation, retention and overall satisfaction. “It depends on how you’re going to ignite your platform,” she said. “You can either think of it as a penalty for doing something we don’t want you to do, or an incentive for something we want you to do and can potentially monetize.”
Easing the employer’s compliance burden is another revenue possibility for banks and payment providers to pursue. As more companies rely on independent workers, the more time and effort they will need to manage data collection, validation and reporting associated with 1099 filings. Some platforms collect this data as payees enroll; others extend as far as generating the employer’s paperwork for their annual tax filings.
Accuracy is paramount, Chevlin noted. “If you do file a bad W-9 or you file a bad 1099 with the government, they’ll charge you $260 per bad submission,” he explained.
Success comes with keeping it simple
In the end, it’s all about removing friction from the system and helping companies and gig workers both find efficiencies and satisfaction.
Chevlin calls it leading with simplicity. “The way we look at the market is a little different,” he noted. “We look at the payouts themselves as being a commodity. Our long-term view honestly is not how to deliver the payout; ours is really where are you delivering that payout?”
He continued, “Do I want to deliver [the payment] in two pieces? Do I want to put some money away into a savings account? Do I want to allow individuals to invest in a solo 401(k)? Do I want to let them buy into benefits of some sort? We think that the next horizon is not necessarily the how, but the where, and being able to accommodate that.”
Banks and employers must also look for systems and processes that make it easy to add payment options, as new methods continue to launch. “When you develop a platform of choice, you have to do it in such a way that your architecture can assimilate new methods; otherwise, you are not future-proofing your platform.”
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