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Summary of "Rise of the Alternative Workforce: How Banks Must Respond"

Core Content

This report discusses the growing trend of the alternative workforce—comprising temporary, contract, freelance, and gig workers—and its implications for the financial services sector, particularly banks. The alternative workforce is expected to expand significantly, driven by cost pressures, technological advancements, and evolving workplace cultures. This shift presents both opportunities and challenges for banks, requiring them to innovate in product and pricing strategies to meet the needs of this customer segment.

Main Points

Trend: The Rise of the Alternative Workforce

• The traditional employer-employee model is being replaced by a more flexible and diverse workforce.
• In the UK, the alternative workforce reached 15% of the employee base in 2017 (ONS, 2018), with 43% increase in freelancers between 2008 and 2016 (IPSE, 2017).
• Alternative workforce members typically earn less and have more volatile income than traditional employees, which affects their access to financial services.
• Segmentation of the alternative workforce by income level and security shows varying degrees of difficulty in accessing traditional banking products.

Implication: Banks Must Respond with Innovation

• Product innovation is critical for banks to cater to the alternative workforce, particularly in credit and savings products.
• Pricing innovation is also essential, as the alternative workforce may not be able to afford or prefer cost-plus pricing.
• Traditional lending models, which rely on income history and credit reports, are unsuitable for many alternative workforce members.
• Regulatory risks are a key concern, especially around customer vulnerability, conduct risks, and liquidity and credit risk management.

Profitability Risks

• Banks face long-term profitability risks due to the shift in customer base and the potential loss of market share.
• Payments and deposits are the products most at risk, followed by personal loans, overdrafts, credit cards, and mortgage lending.
• The alternative workforce may not be able to meet traditional lending criteria, leading to increased competition from specialist lenders, FinTechs, challenger banks, and P2P lenders.

Innovation Imperative and Regulatory Risks

• Product innovation should include:
  • Adapting behavioural credit scoring to account for income variability.
  • Developing flexible products that cater to different segments of the alternative workforce.
  • Enhancing affordability assessments and credit-building tools.
• Pricing innovation should focus on:
  • Usage-based pricing to better align with customer needs and usage patterns.
  • Competitive differentiation and financial predictability.
• Conduct risks must be mitigated by:
  • Ensuring price fairness and avoiding harmful cross-subsidies.
  • Providing transparent disclosures and educational features in products.
  • Implementing early warning systems and personal financial management apps.

Key Information

• Alternative workforce segments face different levels of challenge in accessing traditional banking products.
• Regulatory bodies such as the FCA and PRA must work closely with banks to ensure that innovation aligns with regulatory standards.
• Open Banking is a trend that may affect deposit volatility and liquidity management.
• Liquidity Coverage Ratio (LCR) is a key regulatory metric that banks must re-evaluate in light of the alternative workforce's deposit behavior.
• P2P lenders have shown some success in reaching alternative workforce customers but may face increased regulatory scrutiny.

Conclusion

• Banks must act quickly to innovate in product and pricing to meet the needs of the alternative workforce.
• Regulatory risks are inherent in such innovation, particularly in conduct, credit, and liquidity management.
• Collaboration between banks and regulators is essential to support innovation while maintaining stability and fairness.
• Strategic foresight and customer-centric innovation are necessary to sustain profitability and market share in the evolving financial landscape.

Authors

• Simon Brennan: Director at Deloitte's EMEA Centre for Regulatory Strategy, with extensive experience at the Bank of England.
• Dr. Alexandra Dobra-Kiel: Manager at Deloitte's EMEA Centre for Regulatory Strategy, specializing in corporate strategy and thought leadership.

Document Disclaimer

• This document is confidential and not to be copied or shared with any other party.
• Deloitte LLP does not accept liability for its use unless agreed in an engagement contract.
• No confidentiality applies to tax or National Insurance arrangements described in the document.