The Future of Benefits? (part two)

This is the second half of our interview with Kristen Tyrell, co-founder and CEO of Catch, which is building a portable benefits platform for workers who don’t receive their benefits from an employer. (Find the first half here.)

Q.     Can you measure the financial health of your customers? Would that be useful to them?

A.     We’ve done a couple of things. In my background, I worked at a company called Commonwealth, focused on developing financial products for the underserved. We actually hired someone else from Commonwealth a few months ago. I think that mentality, of researching, identifying, and creating metrics of financial health is very much in our DNA here.

There’s complexity involved in not being too paternalistic about it, recognizing that different things are okay for different people. What we’ve started with is measuring liquid savings. We’ve all seen the finding that approximately 40% of Americans couldn’t come up with $400 if they needed it to cover an emergency expense. Our users have, on average, $663 saved in their accounts with us. It’s set aside for things like tax withholding and time off. But at the end of the day, it’s just cash and could be used for anything. In an emergency, they have the ability to use that cash. So our average user is better positioned than most of the country.

In the short term, we look at average balance, and how our users are behaving with that balance. Are they letting it sit there? Accessing it regularly? We think about how we can help them save more. In the longer term, there’s still some work to do on measurement, particularly regarding insurance. Health insurance is a legal requirement, and we know there’s a life insurance gap, but beyond that, I’m not sure yet how exactly to relate that to financial health. Because more insurance for everybody isn’t always the right decision. 

On the retirement side, 21% of Americans have $0 saved for retirement. And we know that 40% – 50% of our users are using Catch to save for retirement right now. Even if it’s a small dollar amount, we encourage people to start by setting aside even 1%. We’re going to be working on some really interesting auto-escalation features, similar to what people have been testing with 401(k)s. The goal is to help overcome inertia and move them toward saving more. But they’ll remain in complete control.

Q.     Are the retirement accounts you offer tax deferred?

A.     Yes. We use IRAs right now. We have the capability to offer SEPs but we haven’t yet because there’s some additional complexity, especially as people move in and out of this work status. On the IRA side, we’re meeting with members of Congress to encourage them to raise contribution limits more than usual. We’ve been to Washington twice this year and I’ll be back again in two weeks. We’ve been meeting with the Joint Committee on Taxation, we’ve met with the finance committee in the Senate, we’ve met with a number of different representatives directly.

We want them to know that while employer-sponsored benefits are great — the limit on 401(k)s is $19,000 — the limit on IRAs is just $6,000. They sometimes counter that SEP contribution levels are higher, but them we get back to that question of financial literacy. Other tax-advantaged retirement plans, like SEPs, are more confusing. IRAs can be run via APIs with an interface to a smart phone app. We want people to use these products, so they have to be easy. We’re hoping to get the limit raised and we expect there will be a bill introduced to do that in the next two months.

Q.     What are the investment options and how are you making investment decisions within the retirement portfolios?

A.     We’ve tried to make our retirement products as simple as possible because the majority of our users have never saved for retirement before. Right now, this is not a product for sophisticated investors. It could be one, for folks who just want to set something up that will run by itself. But our main target is people who know they need their money working for them and want to put it somewhere and feel good about the fact they’re saving for retirement.

We have three portfolios right now — aggressive, moderate, and conservative. Again, we’ve tried to keep it really simple. We make a recommendation based on age, risk preference, and a few other things. The portfolios are made of Vanguard ETFs. 

Q.     This interview will be published during open enrollment for health insurance marketplaces. To me, this is the most confusing decision for people to make. How are you helping them choose the right plan?

A. The health insurance offering that we have is a connection directly tied into the Center for Medicare & Medicaid Services, or CMS. Right now, we only cover the federal marketplace states, which is 38 states. We’re able to show people all of the plans that are there. The application process is very tightly controlled by the government; all of the requirements are set by CMS. That includes how people get tax credits. We ask every consumer if they want to see if they qualify for tax credits. If they say no, they skip a whole bunch of stuff. If they say yes — which they should, because 87% of people qualify for tax credits — they go through an additional income and identity verification process, and then CMS calculates, through their API, what the person or family qualifies for.

When people are picking plans, some of the things we need to know are their individual preferences and health status. Our system is entirely software based and you could go through the whole process without talking to us. However, not everyone knows what to base their decision on, so 50% of our team members are licensed health insurance agents, including some of our designers and backend engineers, and my co-founder and me. We want to make sure that someone is always available to walk you through this. We want this knowledge to filter through the company. We have a support team of licensed agents as well.

Q.     You recently announced you’ll be working with BBVA to offer banking and payments services. What made you choose BBVA as your banking-as-a-service partner?

A.     It’s a difficult decision and we put so much effort into it. It’s something that can kill FinTechs because you’re making those decisions so early on when you barely even have a product. 

When we looked at the providers out there, the thing that we liked about BBVA is that the technology team was part of the bank. BBVA has an open platform team inside the bank that manages their APIs and works with all the clients who use their APIs.

A lot of the other solutions out there have disaggregated those two pieces where there’s a technology company and there’s a separate bank. Our concern with that model was sort of existential, which is to say we feel it’s challenging to ensure compliance when the tech company is the one making the sale.

If the API company isn’t on the hook for compliance the way that a bank is, our concern is that there will be shortcuts taken on compliance. Sure, they may move faster and their documentation may be cleaner, but if that company is making mistakes on compliance or not telling you things you need to know, the FDIC might come in and shut things down. Then every single FinTech using that technology provider is SOL.

Our choice was to maybe move a bit slower in partnership with BBVA because we’ll be sitting much closer to the compliance center at the bank. Their goal is to avoid taking on too much risk. That’s important, and that helped us learn a lot of things we might not otherwise have been exposed to. It really leveled up our ability to understand the risks in our own operations.

The other thing is that BBVA is obviously a massive institution, so we believe we can scale with them in a way we couldn’t with some of the smaller institutions that are relying on the Durbin exemption.

Q.     What is the next benefit you plan to offer?

A.     Health insurance launched on November 1.

Next, we’re going to be stepping up some of the features between our benefits. We’re going to launch a health expense account to allow people to set aside cash for medical expenses. A liquid savings account and not a Health Savings Account, yet, but we’re working on that, too.

We’re also going to launch a payments feature that allows users to enable autopay through our system for all of their insurance products — for their existing vision, for their existing dental, for all that sort of stuff. The goal is to start to get people to centralize their benefits life on the platform. That’s the next two to three months. 

The next major benefit is probably going to be life insurance. We’re also doing some back-and-forth on student debt solutions that I’m pretty excited about, but life insurance looks like it will be a little bit easier to implement.

Q.     You participated in the Y Combinator winter 2019 class. What did you get out of the experience? Is it the right format for an early-stage FinTech? Do you recommend it to other startups?

A.     Y Combinator is awesome. The partners are incredibly smart. 

When we joined, we had already launched an MVP; we had 4,000 users on that MVP. We weren’t trying to figure out what we wanted to build, so I think that made it a little bit different for us. 

On the one hand, that meant that some of the advice didn’t feel as relevant or as timely. We weren’t worried about how to get our first customer. We’d already done that. We wanted to know how to get more good customers.

On the other hand, I think that early stage when you’re a FinTech lasts a lot longer than it does in a lot of other industries. Early stage is like two to three years for us. Y Combinator is only ten weeks long.  

We saw some other companies in the batch that were earlier than we were using their time on things like setting up a bank account. I think that in regulated industries, going into Y Combinator a little bit later is actually better. The original purpose of Y Combinator was to sit down over a weekend and hack-out something that you could put in front of users. But in FinTech, no matter how fast you code, the regulatory and licensing requirements are going to take a certain amount of time.

So if you’re thinking about Y Combinator, and you’re in a regulated industry, whether that’s insurance, or FinTech, or those sorts of things, then waiting a little bit longer than you otherwise might means you’ll probably get more out of it.

Q.     You mentioned lobbying and made it clear how it fits with your mission. As a startup, how do you approach lobbying legislators in Washington, D.C.?

A.     It’s been a fascinating process. Any entrepreneur will tell you that founding a business is like getting an MBA education times ten. You learn everything about everything and it’s all coming out of the firehose at once.

We knew this would be important exactly because of the question you asked earlier, which was, “How do these products compare to employer sponsored benefits?” The answer is that when you look at them, there are gaps. The products aren’t equivalent, and we know we can’t make them equivalent overnight. This is a long-term play; we need to involve the people who are responsible for crafting policy that creates these products.

We were actually really lucky because we have a user who is a lobbyist in Washington who reached out to us. He said he loves our product and he could help us.

We approach it by saying we’re here to represent the independent workforce. They can’t be here individually. We’re here to be their voice.

It’s a powerful thing to have our mission heard. When we align our business interests with things that are good for consumers, our lobbying looks more like advocacy, which is the nonprofit term for lobbying where you represent a cause.

When we were talking to people about IRA limits, it’s something that they’d never really thought about. They’d never really thought about the fact that employer-sponsored benefits only cover 160 million workers, and not all of them.

For us, it’s been an interesting adventure, but I also think it’s good for Washington. I’m very proud of our product, but we’re still early stage, we’re working on it but there are definitely gaps. But, man, we showed it to people in D.C. and their minds were blown. They don’t understand what technology looks like now. Being able to expose them to what’s possible can shift their mindsets and helps them think about the role they can play in clearing the way for this. 

We talked to people about the questions surrounding portable benefits, about H.R.4016. Sometimes they don’t have a concept of how things could be, so exposing them to what a modern technology product looks like is, I think, incredibly powerful.

A lot of early stage companies would benefit from going to Washington sooner. We’ve all seen what happens when they become too big and then try to figure out what to do in Washington. 

Q.    What should people know about H.R.4016, the Portable Benefits for Independent Workers Pilot Program Act?

A.     It’s a good first step but it’s a smaller first step than I would like to see. It clears the way for funding of some pilot programs. It’s a good bill. It’s not a tremendously large amount of money. It should pass and we should move on. 

The challenge is that a lot of pilot programs like this tend to put their money into non-profits government organizations, and I’m not sure that non-profits and government organizations are the ones to solve this problem. The existing benefits infrastructure has been built by for-profit companies, so the challenge is ensuring that this pilot program also considers for-profit as an option.

The downside with pilot programs like this is that they can take five-plus years. The workforce can’t wait. The workforce is changing, and people need these products. We would like to see next a more aggressive bill that provides opportunities for employers of 1099 contactors to offer contributions at tax-advantaged rates. That’s what makes portable benefits. Companies might say we’ll just offer you more cash, but if a company can say we’re going to contribute to a retirement account on your behalf and there are tax benefits to doing so, you’ve changed the entire model. That’s the push. 

Obviously, there are revenue questions for the government, but we have to support this workforce. We can’t say that this workforce has to be the one not getting tax incentives. So let’s get H.R.4016 done, but let’s not wait five or seven years for data and results. The workforce isn’t waiting. People are sitting without benefits and they’re very vulnerable. 

Q.     You’re a Boston-based startup but you raised your most recent round of capital from VCs in California and New York. Any particular reason?

A.     Yes. I don’t know if I am shooting myself in the foot for future rounds, but I will say that the attitude toward our approach was more conservative here in Boston than it was in San Francisco. That has been echoed to me by many other founders who maybe haven’t been as public about their sentiments. In general, here in Boston, people wanted us to raise less money. I understand their reasoning, I understand what they believe the purpose of that is. 

Everyone here wanted significant proof points. By the time when we got into Y Combinator, we’d been struggling to raise money in Boston for four months. We had a working product, we had it in market, and we had 4,000 users, but we hadn’t been able to raise at all. People told us we didn’t have enough proof. 

Now, I know it’s a combination of valuation plus proof. If we’d been trying to raise $500,000, we probably could have gotten that in a second, but the difficult thing with FinTech is that it’s an expensive industry — especially when you’re doing banking, and investments, and insurance. Our compliance costs are significant. We paid six figures for an audit for our health insurance product. You can’t raise $500,000 if you need to spend $100,000 on an audit. We knew we needed to raise more money. We tried, we failed to raise the money here. Our concern in raising less money was that it wouldn’t get us far enough to merit the next round. We wouldn’t be able to justify it.

We found that in San Francisco, the general approach was to start by believing that it will work. Then they’d start to get into it. Whereas in Boston, it was a little bit flipped.

We actually really love being based here, because it does help keep you grounded a little bit. We don’t want the $100,000,000 valuation with zero revenue. We don’t think that that’s appropriate, either. The need to have traction, the need to prove you’re doing things for users, the need for real revenue, those things are important, but — especially at the seed stage — it’s tough to have people whose first instinct is to point out why your company won’t work. So, for us, San Francisco was a greener pasture and produced more competitive offers.

Q.     I’m disappointed to hear that, because that is similar to my experience raising capital for two FinTechs based in Boston more than ten years ago. I was hoping things had changed.

A.     When I talk about this on Twitter, there’s a lot of criticism, and people will point to individual investors who’ve backed certain companies that have done well. That misses the point. There are good investors here. There are absolutely good investors here. But from the founder’s perspective, we see patterns across these meetings. And the data speaks for itself in terms of how much people raise and where they are able to raise it.

Again, none of this is to say that there aren’t good investors here or good firms here. But across the board, the attitude is more conservative, and the offers are smaller. And in Fintech that’s pretty critical.

Q.     This is your second Boston-based FinTech startup. What other thoughts do you have on the Boston FinTech scene? And what would improve it, other than a change in the things you just mentioned?

A.     We love being based here. We think there’s a great pool of talent. We think there are great founders, that there are great VCs. Conservative ones, but they’re great.

The Boston FinTech scene for us has been a little bit challenging because it’s so B2B focused. Boston as a whole is more focused on B2B. People point to Wayfair, but I would ask what their split is between B2B and B2C revenue. Wayfair makes a lot of money selling to offices and from government contracts and stuff like that. People will mention Lola, but I would argue that’s the same thing — B2B and B2C — and DraftKings, but I don’t know that that should be the top of the best we have to offer in terms of consumer tech.

For us, especially in FinTech, a lot of things feel a little inaccessible to us because we take the approach that consumers drive everything we do, not companies.

Q.     I think it goes back to the VC question. We don’t have a lot of B2C FinTech investors who can do the larger rounds you need to support B2C marketing at scale.

A.     Marketing is a very different cost. People here have a very good understanding of B2B cycles. There’s a lot of expertise here in building B2B and building it really well. Our B2B portfolio as a city is incredible. Even in FinTech, it’s very, very, good. But B2C is more challenging. There are fewer of us.

Q.     Are you hiring?

A.     Yes. You can see job postings here

Q.     Any concluding remarks?

A.     In summary, we know that the world is changing and that the way people work is different now and will be different ten years from now. For at least 50 years we had a fairly stable model. This new model is coming, if it’s not already here. 

There’s a lot of opportunity that comes with that — all of the gig economy plays, all of the startups that are marketplaces for people who do X or people who need Y. That’s great, but we have to start thinking about what the secondary consequences are.

Part of the reason we lobby in Washington is that I would rather see this problem solved than have Catch be successful by taking advantage of people. I want to get it into people’s heads that we need lots of people solving this problem. Work is changing, and as a result, people are financially vulnerable. People don’t have the benefits they need. They have all these vulnerabilities, but they don’t have the right products. 

I think we need more people in the space. It may be weird to call for competitors, but I am calling for competitors. This problem is huge. It’s massive. We can’t solve it by ourselves. We need people who are involved in academia, and policy, and non-profits, and other types of startups to start thinking about how the financial health of workers experiencing this shift in the employment model can be shored up. 

As the structure of the workforce changes, rather than blaming workers — you should work a second job — we really should be able to create a system that allows people to succeed financially.

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