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Financial Services Marketing to Start-up Businesses and the Self-employed Market Assessment
Key Note Publications Ltd, Jan 2000
Introduction
This report reviews developments in marketing financial services for the self-employed and start-up businesses in the UK.
It will focus on these questions:
What special financial needs do the self-employed have?
What changes are likely in demand for financial services from the self-employed and from new businesses in the new millennium?
Coverage
The principal products referred to under the umbrella title `financial services' in this report are:
current accounts
savings accounts
pensions
mortgages
personal loans
general insurance, such as property, contents, motor and accident
long-term insurance, such as whole life, endowment, and income protection.
A self-employed person is responsible for paying his or her own National Insurance contributions, and pays tax under Schedule D. A self-employed worker must be free to accept or reject assignments must provide and pay for their own tools and equipment should work for more than one client and should not be under the direct management control of clients.
Self-employed people can be sole traders or in partnerships. If they set up a limited company and take an executive position within it, they become an employee again, because the company has to pay all the standard costs associated with having employees. A small business can be a sole trader, a partnership or a limited company. A small business, according to the Department of Trade and Industry's (DTI) definition, has up to 49 employees.
Strategic Overview
This section is intended as a summary of the salient points as identified in Chapter 4 of the report.
Demographic impact on self-employment
The growing number of self-employed over-40s is a challenge for the financial services industry because of the need to allow for fluctuating incomes. In 1961, around 12% of the UK population were aged 65 and over. By 1994, this figure had increased to 16%. By the year 2031, it is estimated that nearly a quarter of the population, 23%, will be aged 65 and over. The expansion in older age groups is likely to increase self-employment of those past retirement age, especially if their pensions are inadequate for their living costs.
By 2003, almost one household in three in England will consist of just one person, up from one in four as recently as 1990. While single people without responsibilities often enjoy self-employment, for those with regular demands on their income - for example, the divorced with children to support - a regular salary is more practical.
Growing proportions of the self-employed will be either single or cohabiting, and less likely than the married to be enmeshed in strong family networks. Banks and financial service organisations are of lower significance in communities where the family is the dominant form of social organisation, and where important family members act as bankers.
The environment for small businesses
The UK economy's relative strength is largely due to the painful restructuring forced on a reluctant nation by Margaret Thatcher's Conservative Government in the 1980s. The flexible labour market attracts inward investment. Action has been taken to restrict the costs of pension payments to the state, and the economic base has shifted from under-mechanised labour-intensive industries such as mining and metal manufacture, to electronics, communications and financial services. On the negative side, exports to the euro zone have been hit by the weakness of the euro against the pound. Barclays Bank (Barclays Economic Review, First Quarter 2000) is predicting a slowdown in growth of household expenditure and average earnings, as well as a slight rise in unemployment, in 2001 and 2002, while the current account deficit is further reduced.
Finance for small businesses is still hard to obtain. The Enterprise Fund has £180m over 3 years to help companies expand, but this is only £16 a year for each of the small and medium-sized businesses in the UK.
The Small Firms Loan Guarantee Scheme, part of the Enterprise Fund, underwrites between £5,000 and £100,000 for new businesses, and up to £250,000 for businesses over 2 years old. Regional Venture Capital Funds and the UK High Technology Fund are the other components of the Enterprise Fund.
The Late Payment of Commercial Debts (Interest) Act 1998 allows businesses to charge interest on invoices unpaid by the due dates specified in the relevant contracts. The DTI, in a helpful initiative, has announced a National Business Debtline which will run initially for 3 years. There is some New Deal funding for unemployed young people to start their own businesses, augmented in some areas by Employment Zone grants from the Department for Education and Employment (DfEE). A government grant scheme for research and development, the Smart scheme - Small Firms Merit Award for Research and Technology - is open to individuals as well as to companies.
Numbers of self-employed and small businesses
Around 10% of the UK workforce is self-employed, according to Deparment of Social Security (DSS) statistics for 1996/1997 from Households Below Average Income 1996/97. There has been considerable growth since 1979, when DSS figures suggest that only 6% were self-employed. The Office for National Statistics (ONS) suggests that in winter 1999/spring 2000, 3.175 million were self-emp1oyed. The DTI suggests a higher figure, 3.6 million, which includes the 300,000 to 400,000 who are self-employed but who also have a paid job.
NOP survey figures suggests a higher level of self-employment, 9% of all those aged over 15, which equates to 4.4 million plus or minus 500,000, and thus a minimum level of 3.9 million. Virtually all the counts of the self-employed are based on survey data, and the differences between survey results emphasise the volatility of self-employment. It is also likely that some of the 17 million who are economically inactive 1 class themselves informally as self-employed - for example, if they make some money from a hobby - and that some are engaged in the black economy. This could account for the difference of between 725,000 and 1.75 million between official estimates and Market Assessment's survey findings.
In the UK, each year almost 500,000 people start-up in business, 68% of them for the first time. 2 More than half of new businesses are in retail and wholesale trade, catering and hotels. 3 The high failure rate of new businesses means that there is normally room for newcomers. Between 1996 and the start of 1999, 39% of businesses started had failed.
Nearly a quarter of new businesses are set up at home. Home-based businesses have, on average, only a quarter the turnover of those in separate premises, and only one proprietor in five expects to grow enough to move into business premises.
Self-employment is not always a deliberate choice. In the recent past, it has often been a response to redundancy, to a spell between short-term contracts, or to an employer's proposal. In the current more buoyant labour market, self-employment is less attractive. This is likely to make `push' factors more significant.
The self-employed sector is very volatile, a great difficulty for marketing because that hard-won self-employed customer may be in different circumstances as an employee within a few months. The number of zero-employee financial intermediaries rose by over 47% during 1997/1998, from little more than 29,000 to nearly 43,000, and the number of businesses in this dynamic sector rose by 28%, to nearly 66,000. During 1998, 100,000 workers in the construction industry left self-employment, but numbers rose in retailing as more people opened small shops.
Small businesses' ratio of deposits to loans has improved each year since 1992. By September 1999, deposits equalled 94% of bank lending. This suggests that small businesses are on a sounder footing than at the start of the 1990s. It is important to remember, though, that `small' businesses have up to 49 employees. Bankruptcies are another indicator of the viability of self-employment. In England and Wales, bankruptcies have fallen during the 1990s. In 1992, 19,525 self-employed people were declared bankrupt, 24% of them in construction and 12% in hotels and catering. By 1998, the number of bankruptcies had fallen to 10,420.
Problems of self-employment
Almost two-thirds of all businesses have no full-time employees at all, i.e. they are run by an individual working on their own account. Their average turnover is less than £38,000. When the costs of trading are deducted, the modest incomes of the majority of self-employed are very apparent. Although they need financial services such as insurance and pensions, by and large their incomes are too low to finance adequate cover.
The self-employed in health and social work, such as therapists, have the lowest average turnover, less than £20,000 a year. They are closely followed by the self-employed in education, people such as tutors, music teachers, sports coaches and school inspectors, with less than £23,000 a year. Financial intermediaries have the highest average turnover, nearing £100,000.
One-person businesses are approximately a third as productive as the average. Why do one-person businesses earn so little, on average? The self-employed work very long hours 4 , so the answer, generally, cannot be that they do not work hard enough. The reasons include:
Lack of time and often expertise to undertake all the facets of running a successful business - for example, financial planning, developing new business, quality control, marketing, performance analysis.
Non-existent or weak brand names, little recognised by the public.
In competitive markets, the need to pitch prices low to secure any work or sell any products at all.
Where set-up costs are low, constant competition from a flow of new businesses.
Solutions to these difficulties include franchising and co-operatives.
The Bank of England reports annually on the performance of small businesses. The 1999 report points out that trade credit is twice as important as bank loans as a source of finance. The proportion of firms using factoring and invoice discounting doubled between 1991 and 1999, indicating the continuing problems of late payment.
There is an equity gap for companies needing more than small-scale loans but less than the amounts handled by merchant banks. Business angels - individuals prepared to invest in return for tax concessions - reduce the equity gap but do not fill it completely.
NatWest's quarterly survey of small businesses in December 1999 found that low turnover is their most significant problem, mentioned by 25% of respondents, followed by compliance with regulations and paperwork, a nuisance for 14%. Lack of skilled employees was third, mentioned by 11% of respondents. In April 2000, NatWest reported growing concern among small businesses about the costs of the uniform business rate.
Legislation and tax regimes to protect employees are now making self-employment less attractive, and will increase the importance of redundancy - the push factor - as a recruiting ground for self employment.
Features of financial services for business
Bank accounts for businesses have the same features as accounts for personal customers but, until very recently, they almost always cost more. Banks' preference for employees as clients is another example of the difficult environment for small businesses. Abbey National has made a striking attempt to cater for the self-employed with indefinite free business banking if transactions are kept within specified limits. This account is a real breakthrough for sole traders and two-person partnerships who want to keep their business and private finances separate.
Pension planning is crucial for self-employed workers, because the state retirement pension withers every year. A pension is not the only way of planning for retirement - any effective capital appreciation strategy will do - but it is tax efficient, especially for higher-rate taxpayers. Mis-selling gave pensions a bad name from which they have not yet recovered. Indifferent performance by several pensions funds in 1999 emphasised the problem. The downward trend in pension fund returns is very important for the self-employed, because they are by definition no longer contributing to a company pension scheme. The best final-salary company schemes are far superior to personal pensions, but are now rare because of their cost.
Stakeholder pensions will be available to the self-employed. The low maximum charge means that companies will be reluctant to manage stakeholder funds actively, and so tracker funds are likely to be common. The DSS is far more enthusiastic about the new pensions than the intended providers are.
Flexible mortgages are ideal for the self-employed because they remove much of the worry of not being able to make a payment in a poor month for cash flow. Flexible mortgages are growing at an astounding rate. In 1999, they accounted for just over 10% of new mortgages in 2000, the Council of Mortgage Lenders expects them to exceed 25% of new loans. The rapid development of flexible mortgages has been forced on the financial services industry by the explosive expansion in temporary contract work, as well as by continuing high levels of self-employment.
Repayment insurance is one key to personal loans for the self-employed, although such insurance rarely covers inability to pay because of problems in one's own business. Personal loans are far easier to obtain than business loans, but are intended for domestic purposes - another example of the way in which domestic spending is encouraged more than business spending.
Insurances needed by the self-employed include cover for business equipment and stock, public liability, and professional indemnity. Health insurance is helpful for those who could not cope with their financial commitments if they were unable to work because of illness. At present, it is time-consuming to search for a suitable range of cover. One-stop shops such as Home Workers' Services are an excellent idea. There are still opportunities for companies to offer modular insurance products to meet the needs of individual businesses, and a requirement for insurers to remove the anti-business exclusions in the majority of domestic policies.
Endowments are not ideally suited to the self-employed because they require a fixed regular premium set for the whole term of the policy. Falling returns on endowments have set the consumer market against them anyway.
The introduction of insurance ISAs in 1999 was intended to help revitalise the savings market. It is too soon to assess the impact of insurance ISAs, although early sales have not been promising.
The big insurers, like the banks, are succumbing to takeover and merger pressures, and thus the self-employed have fewer choices of provider. In February 2000, CGU and Norwich Union announced plans for a merger, to create an insurance company twice the size of its nearest UK competitor, the Prudential. The largest insurers based in the UK in spring 2000 are CGU - the result of a merger - Prudential Group, the combined Royal and Sun Alliance, AXA Group and Norwich Union.
Accountancy services help small businesses to stay on the right side of the numerous regulations by which they have to abide. Small businesses are attractive clients, generally, only for small accountancy firms, which often find that the best advertising is by word of mouth. Self-assessment for income tax is a marketing opportunity. Companies such as `i.e. taxguard' are compiling databases of the
self-employed in preparation for direct mail campaigns. A significant accountancy business which specialises in services for one-person companies 5 is JSA of Watford, Hertfordshire. The firm has more than 7,000 clients who are one-person service companies, mainly IT contractors. JSA does not cater for partnerships or for sole traders.
Consumer Dynamics
This section is intended as a summary of the salient points as identified in Chapter 5 of the report.
Market Assessment commissioned NOP to undertake consumer research for this report in 2000. The research suggests that a core of around a third of adults of all ages are in permanent jobs, with the attendant benefits, including a pension. Almost one person in ten is self-employed, and one in 14 is on a temporary contract. For every 20 workers who feel they are in secure jobs, there are nine who are either working for themselves or temporarily for employers.
On a national scale, the findings suggest that in the UK, in March 2000:
17.0 million plus or minus 500,000 were in 'secure' 6 permanent jobs and expecting to receive a pension.
3.4 million plus or minus 500,000 were working on temporary contracts. 7
4.4 million plus or minus 500,000 were self-employed. This is higher than the DTI's estimate of 3.6 million, which relates to 1998, and also higher than the ONS's figure of 3.175 million for winter 1999/2000. 8
Thus, a total of between 23.3 million and 26.3 million people are working for themselves, or are in what they feel are secure jobs for an employer, or are on temporary contracts.
These figures are more narrowly focused than the Government's official ones, which suggest that, in December 1999, 27.56 million people were in work. The official figures include those in casual work and on work-based training schemes, who were not specifically identified in Market Assessment's survey. In addition, Market Assessment qualified its question about permanent employment by asking if people were in a secure permanent job, and thus the survey is likely to exclude those who think their job is insecure. Taking these points into account, the survey figures accord reasonably well with the Government's own.
Market Assessment did not ask those currently self-employed if they intend to revert to employment within 5 years, but in recent years this has not been a frequent occurrence because they have stepped off the career ladder. The survey suggests that the numbers of self-employed could expand to more than 7 million by 2005, although a more likely level, in the absence of major policy changes, is just under 5 million. 9 This allows for natural loss as the currently self-employed retire, and for around one in three of those considering self-employment actually doing so.
At the same time, the numbers on temporary contracts could rise towards 7 million, although a total of between 5.2 and 5.6 million is more feasible, allowing for retirements and changes of mind - if economic conditions allow. Temporary contracts give employers flexibility, which will be increasingly prized as the European Union (EU) legislates to protect employees. By 2005, for every 10 workers who think they are in a secure permanent job, there could be three self-employed and four on temporary contracts. This shift from steady incomes to fluctuating and impermanent ones is a huge challenge for individuals and for the financial services industry. The Government requires individuals to shoulder increasing responsibility for their own financial welfare, but planning for this is difficult when incomes are uncertain.
The self-employed, according to the NOP survey, are twice as likely to be male as female are typically aged over 35 in the C1 and C2 socio-economic groups and live in London or the Midlands. The sample suggests that 9% of the population are currently self-employed.
Those intending to become self-employed within 5 years, 8% of the sample, are again mainly male, but otherwise there are important differences in the profiles of the potentially and currently self-employed. Those who think they will become self-employed are mostly under 35, are marginally more likely to be ABs than any other socio-economic group, are single, and typically living in London, the North East or South West.
Temporary contract work is much more evenly distributed between men and women. The sample suggests that 8% of men and 6% of women are currently on temporary contracts, 7% overall. Equal proportions of men and women, 8%, intended to become temporary contract workers within 5 years. At present, contract working is most common among the under-35s, but more than 5% of the 35s to 64s expect to be on contracts before 2005. More than a fifth of under-25s think they will have temporary contracts within 5 years. The proportions of contract workers are greatest in Scotland and the South West.
The true extent of self-employment and temporary contract work can be gauged from the finding that only 35% of the sample are in a secure permanent job with a pension, and only 36% expect to work for their current employer for at least 5 more years. Personal pension contributions are being made by only 35% overall, 41% of men and 29% of women.
Only one person in two thinks there is a good range of financial services for the self-employed. These perceptions are held fairly evenly across the whole sample. The self-employed themselves have long felt that, in the eyes of banks, they are poor relations of salaried private customers. The gradual spread of self-employment up the socio-economic scale is at last changing banks' views. Still, barely more than half the sample think that banks are keen to support new businesses, and the ABs are more pessimistic than other socio-economic groups.
Almost six in 10 say that banks are unsympathetic to self-employed people who are in financial difficulty. One particular problem here is banks' reluctance to support small businesses actively, for example, by pressurising debtors. 10 Small businesses working for large companies often fail because invoices are unpaid, or paid too late, and the bank often blames the creditor, not the debtor, when pulling the financial plug. If the banks are unsympathetic, so is the state, at least in the perceptions of the sample. Only fractionally over a quarter think there are sufficient state benefits for the self-employed who fall on hard times.
Anxiety is a major brake on self-employment and setting up small businesses. Two-thirds think it is less stressful to work for an employer than to be self-employed. This applies particularly to the 25 to 34s, who are likely to have heavy financial commitments. More than half the sample, and two-thirds of the 25 to 34s, would not consider self-employment because of fears of financial insecurity.
Self-employment is seen as a second-best option for older people by two-thirds of the sample, who think that self-employment is often forced on older employees because their job disappears and they cannot find another at a similar salary. Often, self-employment is a response to push rather than to pull factors.
Men are much more likely than women to be self-employed. Potential explanations include:
men's greater willingness to take risks
the increasing availability of employment for women in service-sector jobs
narrowing job opportunities for middle-aged male executives, who form the bulk of self-employed consultants.
In the 5 years to 2005, male and female middle-aged executives will continue to see their jobs disappearing, as employers seek greater flexibility. This has a greater impact on men than women because of the predominance of male managers. Retail, sales and `customer service' jobs will increasingly continue to employ more women.
More than one in six of those aged 25 to 34 think they will become self-employed within 5 years, compared with fewer than one in 10 of the 35 to 44s. This would be interesting to follow up, to see if the younger age group are more confident and entrepreneurial, or more pessimistic about the prospects for long-term employment. The presently single are much more enthusiastic about the prospect of self-employment than the presently married. As the younger single people marry and take on more financial responsibilities, their predilection for self-employment could decline.
Marketing Developments
This section is intended as a summary of the salient points as identified in Chapter 6 of the report.
Leading advertisers
The Lloyds TSB Group (including Scottish Widows) was the highest-spending organisation in financial advertising in 1999. In 2000, first place is likely to go to Royal Bank of Scotland, following its purchase of NatWest. Lloyds TSB and Royal Bank of Scotland spent around £67m in 1999 on advertising financial products, according to ACNielsen's data. NatWest was by far the major advertiser of financial products and services for business - and specifically small businesses. The distance between the leading groups and the rest, in terms of advertising expenditure, is growing wider. In the first half of 2000, the leading advertisers are likely to be the Royal Bank of Scotland Group and Lloyds TSB Group, followed by Barclays, Hsbc, Abbey National and the Halifax.
Standard Life, which caters for small businesses with the Direct Access account, and has been battling against pressure from members to float on the stock market, has been increasing its advertising, and spent around £16m in 1999. American Express invested over £16m on advertising its credit cards, for personal and business use.
NatWest spent nearly £3.5m on advertising banking services for small businesses in 1999, plus over £1.1m on advertising for business services generally, and £425,000 on advertising for direct business banking. Hsbc put over £1m into advertising its business start-up service, compared with Barclays' nearly £600,000 for business accounts, and Lloyds TSB's £753,000 for business extra and business start-up. Only one of the former building societies, Abbey National, features as a major advertiser to businesses.
Despite the large sums spent, advertising is an industry in some danger. The analysts Plimsoll found that a quarter of their large sample of over 1,700 agencies are at high risk of failure, and that every new agency is counterbalanced by one shutting up shop. 11
Local advertising of financial services is very important for the small business sector. If financial organisations cannot offer local service or advice, small businesses suffer. Nearly half of all people in small businesses work at least sometimes at home. The numbers working at home have doubled in 15 years, according to the Economic and Social Research Council. Work is becoming more dispersed. People working at home generally need easy access at least to a Post Office and bank, yet the financial services industry is busy centralising activities and closing branches.
Trade media for occupations with high numbers of self-employed, such as building, decorating, hairdressing and finance, are logical choices for promoting targeted financial products. The monthly magazine of the Home Business Alliance, Working from Home, is a useful medium for reaching committed home workers. Mind Your Own Business, published monthly by Market Place Publishing, deals with business management and procurement of goods and services. Reed Business Information publishes Freelance Informer fortnightly, a controlled circulation title for IT contractors who are self-employed or work through personal service companies.
Direct marketing
Commercial e-mail is building as a threat to postal direct mail. The worldwide annual value of this new medium is forecast 12 to exceed £4bn by 2005. Commercial e-mailing is a promising way to reach the self-employed, who tend to use a PC for many purposes, including Internet access.
Consumers are more inclined to accept direct mail, in all forms, than they were at the end of the 1980s. Response is highest for tobacco, pharmaceuticals, and household goods and toiletries, and lowest for utilities and financial products.
If response rates to financial direct mail are to improve, products and services must be seen as desirable and essential purchases rather than as boring commodities. This is a huge marketing challenge.
The Electoral Roll is widely used for direct mail at present. The Home Office intends to allow all voters to refuse to allow their name to be passed to third parties, but this is unlikely to happen before October 2001. Those who opt out are likely to include those who already suffer a surfeit of direct mail, generally those who have high transaction rates.
Technology - changing the power balance
In 5 years, the number of telephone banking customers in the UK has risen more than eight-fold, and they now represent fully a third of the adult 13 population. The rise of telephone banking has fuelled the expansion of call centres, which has in turn created hundreds of thousands of jobs, mainly for women, and has helped to perpetuate the gender imbalance in self-employment, where men predominate.
Online banking offers another communication choice for customers. Internet bank transactions cost around a penny each, compared with $1 or more (61p) for a phone transaction. By July 1999, there were 10.5 million Internet users at home and at work in the UK, according to Durlacher. Faster access is promised by BT, which launched a £40-a-month Adsl service in spring 2000. Internet companies are working with financial companies to offer finance supermarkets such as www.moneysupermarket.com. Mobile internet connections are the next great growth area. From 2002, smartphones using wireless Internet access are likely to become standard.
The Inland Revenue is accepting tax returns over the Internet for the first time in 2000/2001 (for the 1999/2000 tax year). This is a financial service of a sort, because users should save a little time.
Each year in the UK, more than 10,000 businesses go under because of unpaid invoices. An online debt collection service was launched by the Credit Protection Association in March 2000. Payments will be quicker and easier for businesses taking part in Apacs' digital certification scheme, which is being trialed by eight banks: Barclays, Bank of Scotland, Co-operative Bank, Lloyds TSB, National Australia Group, NatWest, Hsbc and Royal Bank of Scotland.
The US market research company, International Data Corporation, calculated that large companies spend around $3.1m a year on hardware, software and services for customer relationship management (CRM). The companies estimate that their investment increases their revenue by 8%. CRM is growing by around 25% a year, creating big new business opportunities for the leading companies such as Siebel Systems, Valex, IBM and Oracle. Technology is rapidly changing the traditional power balance between customer and supplier, and puts the customer in the driving seat. This means that suppliers must be highly visible to customers, and need to invest in maintaining relationships. Regular catalogues and magazines with personalised offers are used extensively by office supplies and computer companies, but the self-employed do not appear well targeted with information on relevant financial services.
The Future
This section is intended as a summary of the salient points as identified in Chapter 8 of the report.
Banks need to improve their image
The inquiry into the banking industry, headed by Don Cruickshank, reported in March 2000 and recommended that banks should do more for small businesses, and that customers should be able to complain more easily. A combination of better banking services for the self-employed, reform of the Uniform Business Rate, and compensation for administering Paye would improve significantly the environment for small businesses. Market Assessment's NOP survey supports the findings of the Cruickshank inquiry: almost six in 10 say that banks are unsympathetic to the self-employed who are in financial difficulty barely more than half think that banks are keen to support new businesses.
Customer relationship management is the current way ahead for marketing, but the self-employed customer universe is unstable, and this means that customers' financial needs often change. Companies need to market online, and to keep up with innovative Internet technology. Financial marketing to women is difficult. Self-employed women are likely to be more computer-literate than women overall, because of the need to cope with administration and accounts, but they do not search the Internet to the same extent that men do. Often they suffer extreme time pressures, so do not make extensive searches for the most appropriate products.
The adverse publicity from pensions mis-selling, and from bonus rate cuts on with-profits endowments and bonds, remains a problem for financial companies. One result is a greater willingness among savers and investors to take charge of their own strategies - to be their own fund managers. Companies will have to be very persuasive indeed to convince experienced investors that their professional fund managers can do better. Fund managers will have to become more visible and accountable. Transparency will become a key marketing point.
Self-employed numbers heading towards 5 million
Market Assessment's NOP survey suggests that the number of self-employed people could expand to more than 7 million by 2005, although a more likely level is just under 5 million. 14 This allows for natural loss as the currently self-employed retire, and for around one in three of those considering self-employment actually doing so.
The survey found that the self-employed are twice as likely to be male as female typically aged over 35 in the C1 and C2 socio-economic groups and living in London or the Midlands. The sample suggests that 9% of the population are currently self-employed.
Those intending to become self-employed within 5 years, 8% of the sample, are again mainly male, but otherwise there are important differences in the profiles of the potentially and currently self-employed. Those who think they will become self-employed are mostly under 35, are marginally more likely to be ABs than any other socio-economic group, are single, and typically living in London, the North East or South West.
These are promising targets for financial services companies - but they have a lot of persuading to do. Only half the sample thought that there is a good range of financial services for the self-employed, and a little over half thought that banks are keen to support new businesses. More than half the sample, and two-thirds of the 25 to 34s, would not consider self-employment because of fears of financial insecurity. This, too, suggests that the UK is still a long way from being an entrepreneurial society - despite the fact that more than one in six of those aged 25 to 34 think they will become self-employed within 5 years, compared with fewer than one in 10 of the 35 to 44s.
Which way will the economy go?
The DTI itself has prepared several scenarios for directions the economy could take between 2000 and 2015. 15 They include the following:
'Gangland'
Around 40% of the workforce is self-employed or on short contracts. Cash has made a big comeback, because people do not trust online transactions. There is a huge grey and black market. Criminal activity is rife.
'Death by a Thousand Regulations'
Only around 5% of the workforce is self-employed or on contracts. Existing companies become more monopolistic because it is so difficult to start new businesses. There is little investment in learning, and unemployment is rising. Contributions to the EU are a major drain on public funds. Britain is becoming more xenophobic.
'Wired World'
Self-employment and contracting account for 40% of the workforce. There is an effective system for safeguarding intellectual property rights. Social problems are developing, though: the army of self-employed are prone to mental illness caused by stress and lack of social contact.
'Built to Last'
Self-employment and contract working are rare in the more productive sectors of the economy. Companies take on many welfare responsibilities: insurance, healthcare, family benefits, childcare. On the negative side, multinational companies are so powerful that they are not really accountable to local populations.
These forays into the future suggest that the DTI has no expectations of a utopia round the corner. Whether one of these models is dominant, or another entirely, there will be conflicts between security and criminality, company dominance and state dominance, fragmentation and centralisation.
Advantages and drawbacks of self-employment
The self-employed have very little bargaining power, but have to pay the same basic living costs as employees. The self-employed, on average, have lower incomes than employees per hour worked 16. Will the reasons for self-employment alter in the early years of the 21st Century?
Flexibility. By 2000, EU and UK government initiatives are reducing the advantage of flexibility in self-employment because employees have more rights to take time off for family emergencies and to care for children. In addition, the Government urges employers to help their staff gain more qualifications.
Insecurity in and loss of employment. The Government's current concern to get older people, especially the over-50s, back into paid work, highlights concern that too many of this age group are self-employed on low incomes, unable to make sufficient pension contributions and likely to end up on benefits. The declining number of 25 to 45-year-olds suggests that employers may, in time, react positively and engage older staff - even if on temporary contracts.
Hope. The hopeful are often taking to self-employment for positive reasons, and are thus likely to create more dynamic businesses than those who are pushed into self-employment by negative factors.
Company policy change. When a large company restructures or seeks to withdraw from a country or market sector, there are often opportunities for management buy-outs. These are at the top end of business start-ups, and the financial requirements of directors have little in common with the needs of the mass of self-employed.
How many self-employed will there be?
Analysis of Market Assessment's survey suggests that there could be up to 6.2 million self-employed people in the UK by 2005. The likely range would be 4.9 million at minimum and 7.5 million at maximum. Another 5.4 million could be on short-term contracts, with a minimum figure of 4.1 million and a maximum of 6.7 million. This would mean that only around 14.4 million would be in secure permanent jobs - with a top estimate of 17 million and a bottom estimate of just 11.8 million.
For the purpose of its forecasts, Market Assessment is accepting an initial trend towards the `Built to Last' scenario, which would lead to a temporary fall in self-employment and contract work. From 2002, however, Market Assessment believes that the pressures of global competition will lead employers to move rapidly to the greater use of temporary contracts. This will be accompanied by a rise in self-employment, particularly among the over-50s, right up to people in their 70s who need extra income to augment their pensions. Were it not for government policies encouraging employers to retain older workers, the rise in self-employment would be steeper.
For 2000, Market Assessment suggests that there are 3.9 million self-employed. This is at the bottom end of the range as indicated by the NOP survey. In 2001, there could be a small fall in self-employment, because of government action favouring employees, such as parental leave, and anti self-employment, such as IR35. Market Assessment believes that, from 2002, the need for businesses to react extremely quickly to technological advances and changing environments will overcome the current initiatives in favour of employment, and lead to a steady rise in both self-employment and contract work. By 2005, 10% of all those aged 16+ - including the retired - could be self-employed, and over 11% could be on temporary contracts, compared with just over 8% and 6% respectively in 2000. The rise in temporary contract work is thus likely to be much more marked than the rise in self-employment.
Challenges to companies
Challenges to financial organisations include:
Helping the self-employed to increase their turnover. Unless this happens, too many will be unable to afford the financial services they need to give them security. The average turnover of businesses with no full-time employees is less than £38,000 a year, and so the average incomes generated are considerably lower.
Development of franchising and co-operatives, to help small businesses grow.
Provision of more low-cost loans, including loans backed by government guarantees, to finance growth.
Pressure to change planning regulations, needed to recognise the reality of people working from home.
Tiered business rates with a low starting amount, to help businesses make the very difficult transition from home to separate premises.
The likely expansion in numbers of contract workers will fuel the demand for flexible products of all kinds, so that customers can increase and reduce or postpone payments in line with their fluctuating incomes. At present, Virgin is particularly well geared towards the needs of higher-paid contract workers.
Companies have to take the self-employed and contract workers seriously, because by 2005 they could have increased from around 14% of all those aged 16+, to over 20% - far too large a segment to ignore.
A key feature of the following three financial companies is their rapid response to changing circumstances. They are developing products required by the self-employed and small businesses. These companies are among those which give the impression of high capacity to respond to change. They are:
Abbey National: Accounts for micro businesses, a segment ignored by the majority of its competitors.
Hsbc: Good incentives for new businesses, combined with a wide range of useful services for business customers.
Royal Bank of Scotland: Good service for small businesses that are intent upon rapid growth.
One smaller organisation which has a very good idea is Home Workers Services, aiming to be a one-stop shop for the financial requirements of the self-employed.
Three organisations are rather marking time. They are Bank of Scotland, which appear to have lost its incisive edge since it lost the battle to take over NatWest then NatWest itself, no longer in control of its own destiny and awaiting strategic direction from Royal Bank of Scotland and Standard Life, embroiled in acrimonious arguments and counter-arguments about demutualisation.
These companies cannot afford to take their eyes off the marketplace. In the fast-changing economic environment, companies offering financial services have to be ahead of trends, not trailing in their wake.
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1. The economically inactive are not in employment, or actively looking for a job, or about to start a job.
2. Barclays Bank estimate.
3. Research from Barclays Bank.
4. ONS survey figures for winter 1999/2000 indicate that the average self-employed person works 40.7 hours a week, compared with 36.1 hours for full-time employees. 40% of the self-employed work over 45 hours a week - nearly 48% of men and 19% of women. Fewer than 23% of employees work over 45 hours a week.
5. A limited company needs at least one director and a company secretary, who need to be separate people. JSA can supply the company secretary, if necessary.
6. Jobs which they feel are secure.
7. This conflicts with the ONS's calculation of 1.692 million for winter 1999/2000, but is a genuine finding of the survey. Market Assessment's figure of 3.4 million could well include people classed as `economically inactive' in official statistics.
8. Again, some of those in Market Assessment's survey who said they were self-employed could be classed as economically inactive in official statistics.
9. The Government's efforts to increase employment among the over-50s may reduce self-employment in this age group. Market Assessment's figures include those currently `self-employed' in the grey and black economies.
10. Invoice finance is generally not available to the smallest businesses.
11. 'Ad industry is at saturation point' in Marketing Week, 13th April 2000.
12. Investigation by Jupiter, published in Marketing Week of 11th May 2000.
13. Aged 16 and over.
14. Including those in the grey and black economy who may be classified as `economically inactive' or even `unemployed'.
15. Published on the DTI website.
16. The average turnover for the self-employed in health and social work is less than £20,000 a year, and for the self-employed in education, less than £23,000.
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