The Future of Benefits? (part one)

In the U.S., we have long relied on employers to provide critical benefits and important pieces of the social safety net for their employees. But there are roughly 80 million Americans — people working in the gig economy, freelancers, independent contractors, part-time, and other non-traditional workers — who lack employer-sponsored benefits and access to key elements of the safety net such as unemployment insurance.

Not only do these workers have a greater risk of volatile or irregular incomes, and bear responsibility for 100% of required contributions to Social Security and Medicare (usually split between employers and employees. They also lack employer-sponsored health insurance, tax-advantaged retirement savings schemes, disability insurance, parental leave, paid vacation, and more.

Catch is a portable benefits platform for these people. It offers a single point from which to set up, budget for, and manage tax-withholding, retirement savings, and health insurance.

In order to offer these essential services, Catch is, in essence, building three separate startups simultaneously: 

  1. Catch Capital Management, an SEC registered robo-advisor for your retirement savings, 
  2. Catch Insurance, a health insurance agency licensed to sell qualified health plans (QHPs), and, 
  3. Catch Financial, which offers FDIC-insured banking product through BBVA.

It’s through this last arrangement that Catch helps users save part of each paycheck automatically towards state and federal taxes and set aside money for vacations, parental leave, and other future purchases and goals.

Catch was founded in 2017 by Andrew Ambrosino and Kristen Tyrrell Anderson. Catch has raised $8.1M over three funding rounds. The latest was a $5.1 million “seed” round in March, 2019 led by Khosla Ventures, Kindred Ventures, and Nyca Partners. The firm employs about 20 people and is based in Boston.

Kristen Tyrell Anderson

Q.     Kristen, building one FinTech startup is hard enough. Why did you decide to build three?

A.     We talk about this internally, and sometimes we think maybe we should just build one. But it’s important that these products that we’re building work together. Traditionally, FinTech and InsurTech have been treated as very different beasts; but for consumers, those products are related. The traditional advice is to build in one narrow vertical and then expand; but for many consumers, the value proposition is having these products work together.

For example, if you have a child — a very human event — you need to know how this affects your taxes, your retirement, and your health insurance. Right now, you would have to address each question independently, at a time when you are probably low on sleep, and probably wanting to spend your time elsewhere.

But if you are using Catch, we can change your tax withholding rate, we can add that child as a beneficiary on your retirement accounts, and we can file a change in circumstance with your insurance company so you are able to add that child to your health insurance. We can do this in one setting, which enables you to recognize how these products work together and can react to the events in your life.

Q.     What’s been going on from a societal standpoint that makes Catch critical to its users?

A.     We hold the perspective that during the second half of the 20th century, when the middle-class expanded and we created a lot of new wealth — much of that was actually due to benefits. We think much wealth accumulated by families in the growing middle-class came from the fact that they worked for employers who provided them with what we call “second-order” financial products. These products are more complex than a traditional savings account or checking account. 

In addition, financial services such as investment accounts and insurance are really critical to long-term wealth building. In the second half of the 20th century, we saw employers deliver those products directly to their employees. It was everything from pensions to health insurance to paid family leave. All of these more complex products created greater financial stability for people.

Now, for the last 20 years or so, as broadband proliferated, the internet has enabled more and more people to work without a physical office. Remote work, freelance work, independent work of all different kinds has crept into the picture. More and more people have been opting for that flexibility. There are huge upsides to being able to choose where you work, when you work, how much you work. A lot of people have found this very attractive. 

The gig economy puts this into hyperdrive — use your phone to earn income anytime you open a particular app. But benefits just have not kept up. 1099 workers aren’t technically employees, so employers don’t offer benefits to this class of workers. So, we’ve seen a weakening of the infrastructure of financial safety and stability.

The societal need is that more people want this work flexibility and freedom. But we have to make sure there’s an easy way to access the products that help build long-term wealth and protect people against catastrophe.

Q.     I worry that there is also a segment of workers who’d prefer to be full-time employees but have been forced into the contractor or gig economy.

A.     That’s absolutely right. We talk a lot about the disruptors and the disrupted. We talk about automation and the coming AI workforce, but even in the short-term, but we see a lot of companies saying to people, “this role is contract, now,” so for some people that’s not a choice. Even in that context, people need full access to these products and an easier way to manage them. That’s something we think has been missing.

Q.     Is the issue one of financial literacy?

A.     The example we always give when we talk about this is the iPhone. Do you actually understand how the microchip in your iPhone works? Yes, there are people who do, but the vast majority don’t understand its inner workings. And, they don’t have to. They’re able to successfully achieve the outcomes they’re looking for without that knowledge.

In financial services, for a number of different reasons (some of them good, many of them bad), we’ve leaned on this excuse that people don’t know enough, and that it’s your responsibility as an individual to learn everything there is to know about all of the financial products out there. If you can’t do that, then you should hire an advisor.

I think advisors play a very important role. But, as we know, hiring an advisor is not financially feasible for a lot of people so we blame the individual for not understanding how these products work.

While I do believe we need a better system in this country for financial education from an early age that introduces basic concepts of financial literacy, I don’t necessarily think the problem is ”people don’t know enough about these products”. 

The regulatory environment has prevented banks and FinTechs (or basically any financial services company) from abstracting certain things. Regulations are put in place with good intentions. But ask anyone who is using any financial product if they remember what the disclaimer said, what rights they signed away, or anything about the terms of service. It’s ended up being a place where firms can hide things that people don’t understand. Regulation has made it more difficult to create levels of abstraction because there are so many specific things you’re required to disclose. As a result, people are being told that they just need to learn more so they can understand what an annuity is. Then they’d know that it could help them in these ways. That’s like saying that if you want to use an iPhone you have to study the process of designing chips. That’s just not how we want things to work.

Instead, we have to start holding financial services institutions responsible for positive outcomes for their consumers. The reason that Apple has been able to abstract, and why they’re incentivized to do that, is that they succeed when their users succeed. In some instances, financial services institution can actually benefit when their consumers fail. We need to figure out how we align incentives because if we do that, financial services firms will start building better products.  

Q.     You have a potential market of more than 80 million Americans. How are you segmenting them?

A.     We’ve used several different filters to help us think about their needs. We started with the folks who earn only 1099 income. There’s still a variety of people within that segment. Your classic freelancers and independent contractors. Strangely enough, dentists are often 1099. They don’t have any benefits. Nothing is covered for them by an employer. They need the full suite — everything from tax withholding to health insurance and onto the long-tail benefits like disability and sometimes things like business insurance. That’s a 10 million-person market, and companies that have tried to serve this market have sometimes struggled because of the diversity within that segment — which is why we started looking at other segments, as well.

The second segment we looked at is the 20 million-person market of people who earn both 1099 and W-2 income. It could be people working a side hustle or who work retail and drive for Uber. Certain benefits may be taken care of some of the time and in some places, and there’s a lot of complexity in managing the interplay of both types of income. It’s a much larger audience and a little easier to aggregate because you find people working in specific industries like retail, food & beverage, that may provide a W-2 for part-time work.

The final segment, which we haven’t spent a lot of time on yet but which we think is really the place for long-term growth, is the 50 million people who are W-2 workers but who don’t get all of the benefits they need sponsored by an employer. This could be people at small businesses — under 50 employees you’re not required to offer health insurance. They may not have a retirement plan. Or, they may have one of these things but not both. They don’t need help with tax withholding, but they do still need the other parts of the safety net. We think it’s with this segment that you start to change the model and move from benefits as an HR department task to portable benefits that are owned by the individual.

Q.     And how are you reaching these folks?

A.     We’re talking a lot. To everybody, all the time, everywhere. 

Focusing on those first two segments, we’ve broken them down into different personas or profiles. Freelancers often think of themselves as “solopreneurs” or small business owners. You reach them through events and conferences that target self-employed people. There’s a consistent story in terms of the software they use. We can introduce Catch as part of the stack: you’re using QuickBooks for invoicing, what are you using for benefits?

The second segment we look at is the portfolio career person who may be juggling a bunch of things, whether it’s multiple platform types of income or different types of income (W-2 and 1099). The way we introduce the product to that group is through app-based advertising, social media such as Instagram, and search. People who use apps to earn their income are also looking there for tools to help them manage their earning activities in one place.

The final category is the one that’s most unusual. We’ve found that many who have these alternative work arrangements have hobbies or passions unrelated to their jobs. We’re talking about people interested in Comic-Con for instance, or classic films. There are these passion groups. We’ve found that a lot of these people tend to work in an income-aggregator sort of way. It’s partly because they’re so passionate about these hobbies that they want to preserve the flexibility to pursue them. There are a lot of opportunities for us to help people in those communities, and have those communities start talking about us. 

Here’s one real-life example. We have a user who tweeted, out of the blue, saying that if you have an unusual work arrangement like she does (she has some W-2 income and also does some freelance work), then you should check out this product, meaning Catch. Her freelance work is writing fan fiction for Dungeons and Dragons. Her community started buzzing about us, and we found that all these people had alternative working arrangements but all had this same core need — one place where they can manage their taxes, retirement, and health insurance. That segment is really interesting to us from a personality point of view because we meet some really fun characters there, and it’s an organic, referral-driven model for us.

Q.     You mentioned that Catch works for people who have full-time jobs but no benefits. Do you want to say anything more about that segment?

A.     The fully employed W-2 employee has different needs. When we built Catch, we wanted to recognize that 1) this segment exists and is very big, and 2) people often move in, out, and between different work arrangements.

The first question we ask you is how you earn income. Is it 1099 or W-2 or both? Then we allow people to migrate between those two types. Say you move from having exclusively W-2 income to a mix. We can then tell you what you need to know, given that your context has changed.

We think that over time people will come to see that the norm should be being able to have consistency in these products regardless of the type of work you do. It used to be that you stayed at your employer for 20, 30, maybe 40 years. Now it’s 20, 30, maybe 40 months.

Q.     What happens if my freelancing really takes off and I decide to hire someone to work with me? Does Catch work for small businesses, too?

A.     Only in one very specific way. Let ‘s say you have two W-2 employees. You might not be at a point where you can offer them 401(k)s or health insurance. But you can tell your employees to use Catch for those things. Maybe you even offer them an extra $50 a month to spend on these things. Early stages of a business can be very uncertain. You may not want to set up all these benefits until you know how it’s going to go. 

We’ve tried to be clear that Catch is for people, and not for companies. One of the dangers of being an early stage company is trying to serve everyone, but the small business space is where we’ve drawn the line. We think there are good products in that space already.

Q.     What is your revenue model? Can it really be that the only thing you explicitly charge for is managing retirement assets?

A.     That’s correct, so the question you’re really asking is how we are able to do this. We earn revenue from each of our products but we don’t charge consumers for each of our products.

We have two products — Tax Withholding and Time Off — that are liquid saving (cash) and we work with a bank partner that pays us on the float for that. Our incentive is to drive our users to save more money. If you’re not setting aside enough for taxes, or if you should have a bigger cushion ready for time off or a slow period, then higher savings are a good outcome for our consumers that drives revenue for us. So liquid balanced are the source of our first revenue stream.

The second, which you mentioned, is a fee for managing retirement assets. We charge 50 basis point. That’s a wrap fee. If you compare us to other robo-advisors, you should note that they may have other fees that are not based on AUM. We don’t, because we want to focus on keeping things simple.

The third revenue stream comes from the insurance products we sell. We’re a broker so we earn commissions from insurance carriers. We’ve taken the position that we want to as unbiased as possible, so our recommendation engine doesn’t take into account which carriers we have appointments with and which ones we don’t. For health insurance, for example, we’re connected to the federal health insurance marketplace. We offer every single plan that’s on healthcare.gov. We don’t want to push products that are better for us financially; we want to present products that are good for our customers.

Q.     How do you think about developing your own products versus choosing best-of-breed options from other providers?

A.     It depends on what you mean by best-of-breed. In some categories, best-of-breed is still not very good. 

For us, we wanted to make sure we had enough ownership of the user experience to be able to 1) provide consistency, which we think is really important, and 2) capture value on the business side. You could technically build a product like Catch by outsourcing everything. But you would probably have a much higher cost structure and a disjointed user experience.

On the insurance side, we have no interest in becoming an insurance carrier. It’s too far outside of what we do, so we look for partners we can work with. Health insurance is a bit of a different beast, but if you take something like vision or dental, (and we’re looking for a vision partner right now), what we’re looking for is an API and products that are good for consumers.

Q.     Are the products Catch offers on equal footing with the products large employers can offer? Is there a way to quantify it so that gig workers and freelancers can see how their benefits compare to those of someone in a comparable role with a full-time employer?

A.     In an amazing display of trust, we’ve had users come to us and describe two offers they’ve received and ask us which they should take. That’s not really covered by our advisory service, but it’s really important to them so we try to help them navigate.

Freelancers need to recognize that they need to make up for their lack of benefits with significantly higher pay. Many don’t realize this when they’re first starting out. There’s the additional tax burden, since an employer would typically pay half your contribution to Social Security and Medicare. As a freelancer, you pay both halves. Then there’s retirement, and often employers will match part of your contribution, so you need to think about what that additional cash would look like. Where this is most obvious may be with health insurance. Group plans are just cheaper. Being part of a group means you get more affordable premium prices.

We’re not an insurance company. We’re not redefining groups (though maybe that’s something we take on in the future). Right now, we just offer individual plans, and those are, on average, much more expensive than the group plan you’d be getting from an employer.

The state of the industry for benefits means that being on your own requires significantly more cash. Anyone who’s thinking about going out on their own should know that right off the bat. A company like Catch can help you direct that cash toward products that then start to create that equity. But you need to charge significantly more because you need to purchase your own health insurance, etc. Once you are charging more, we can help you acquire the benefits that put you on that equal footing. 

Q.     According to Catch, “Misclassifying an employee earning a little over $43k a year could save an employer nearly $4,000 in labor costs.” Do you any sense of how common misclassification is, whether it happens deliberately or by accident? (I could argue that this is how, in part, Travis Kalanick became a billionaire.)

A.     There is some federal research. What we know is that it happens a lot. The question of intent is a little bit tricky because we see, working directly with 1099s, individuals who prefer that structure. They want the flexibility. 

Now, I think the most dangerous thing is when you have a 1099 who should be a W-2, who is still required to abide by W-2-type rules: show up at this time, show up in this place, etc.

There are folks who know they should be a W-2 but have an agreement with the company to keep things on a 1099 basis. Maybe they have a child or a parent who needs special care. That happens but it works for both parties.

I think the intentional misclassifications happen at scale. When you see hundreds or thousands of employees moved to 1099 status, that’s when you can say it looks like skirting the rules is a way to make your bottom line look better.

The conversations around AB 5 have been really interesting, the California law that basically makes employers treat gig employees as full-time employees. You’re starting to see push-back in some industries. Again, this is a diverse group of workers and freelance journalists, for example, don’t want to become employees. 

This is a messy issue and the classification problem is partly due to not having two worker classifications but having just one. 1099 is an income type, not a worker classification. We only have one employment type, and that’s W-2. Part of the problem is caused by trying to put everyone into that one bucket rather than exploring what a more fluid system might look like.

Q.     Do gig economy workers and permanent freelancers who come to Catch feel secure in their financial positions?

A.     No. The short answer is no. We’ve done a lot of research with users as we really want to understand, and everyone’s situation is different: the reasons why they pursue 1099 income, how they do it, and the sorts of things they’re looking for are all different. 

We interviewed a freelance software engineer in Seattle who makes between $125K and $150K a year. When you consider taxes and the cost of living there and the cost of benefits, it’s not a crazy high salary but it’s still well above the medium income for the country. But he described in very personal terms the stress he feels around income volatility. Even for people who are making good money, income volatility is exceptionally stressful. People can feel as if they’re one contract away from disaster. Freelancing requires hustle, is a grind, is a very challenging way to work, and I have huge respect for people who choose to do it. A lot of people do feel insecure with the financial solutions that they have in place.

There are a couple of reasons for that. Automation doesn’t solve income volatility. The way a company like Wealthfront will automate your investing is by taking, say, $100 each month from your account. For people who earn different amounts from month to month, that’s actually really dangerous. The alternative is for people to not set up a regular investment plan because they don’t want, one month, to not have the money there. We designed Catch instead to take a percentage of each paycheck, so we’re adjusting your investment to your income.

On the insurance side, if you miss some premium payments because of income volatility, your insurance policy could lapse. If it’s a life insurance policy you’ve had for five years and you apply again, you pay higher premiums because you’re now older.

The problems of income volatility will take a long time to solve. Our objective in the short term is to help people with their buffers, taking income volatility into account. Longer term, we need more agile products that acknowledge that people have multiple income streams and the volatility that comes with that.

# # #

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.