How Labor Marketplaces Can Unlock Instant Payouts with Embedded Banking
With record low unemployment and hangover effects from the Covid pandemic, the US economy is experiencing a very tight labor market, according to the U.S. Chamber of Commerce. This is especially true in professions such as nursing, construction, and long-haul trucking.
Vertical labor marketplaces
Vertical labor marketplaces have stepped up to provide a steady source of skilled workers to employers, essentially matching employers with qualified professionals in a specific industry. Vertical labor marketplaces typically tailor their services to satisfy various hiring needs of an industry — think onboarding, scheduling, upskilling, credentialing, etc.
Labor marketplaces are in a fierce competition with one other to attract and retain skilled workers. And compensation is a huge driving factor of contractor satisfaction — platforms that pay the most, pay the most efficiently, pay the fastest have a leg up in retaining and attracting those workers.
The state of instant payouts in vertical labor marketplaces
While instant payouts are already a feature of some vertical labor marketplaces, these solutions often rely on push-to-card transactions or Real-Time Payments (RTP), which can be costly or inconvenient.
With push-to-card transactions, labor marketplaces use a payments provider to “push” or credit the funds into the employee’s bank account via debit card rails. A debit card connected to the contractor bank account is required to execute these types of transactions. Because the payment provider is generally making funds available to the contractor before the underlying card transaction settles, instant payouts via push-to-card can cost on average between 1%-1.75% of the transaction value, a cost which must be absorbed by either the contractor or the platform. In addition, in order to opt-in to instant payouts via push-to-card, contractors may be required to create a separate account with the payment provider so that they can manage their payout details. It is also important to note that this use case has the potential for fraud if the payment provider is not placing a hold on funds prior to settlement.
RTP, as the name suggests, enables employers to send payouts instantly via a proprietary payment rail owned by the Clearing House. RTP has an advantage over push-to-card payments in that it is comparatively cost-effective, with each transaction costing between $.01 and $2 per transfer. However, in order to send and receive Real-Time Payments, both employee and payout accounts must be held at a financial institution that participates in RTP. As of the publication of this article, only 65% of US demand deposit accounts are able to utilize RTP. In addition, users of RTP also need to understand fraud risk associated with this payment rail, as a transaction cannot be reversed once initiated.
Advantages of embedded banking for instant payouts
While the previously mentioned instant payout methods have their merits — short implementation time and low startup investment cost to name a few — their design and availability present hurdles to scale and adoption.
By contrast, embedded banking, also called embedded finance, offers vertical labor marketplaces a scalable and cost-effective method to execute instant payouts for contractors. Embedded banking enables vertical labor marketplaces to partner with chartered banks to offer FDIC insured bank accounts directly through their platforms — furnishing accounts to both employers and employees. Since these accounts are at the same bank, this setup enables marketplaces to facilitate instant, free transfers from account-to-account via a method of funds movement called “book transfer.”
Embedded banking can also drive adoption of instant payouts as the onboarding and account management functions can also be embedded directly in the marketplace’s onboarding process and UI respectively. In addition, embedded banking lays the foundation for other embedded financial services the vertical labor marketplace may want to implement at a later stage such as neobanking, a budgeting feature, benefits administration, discount programs, and more.
*Free book transfers describes the cost of payments as described in the program setup described below. Depending on how the embedded banking program is ultimately set up, costs may vary.
How to offer instant payouts with embedded banking
Before we explain how to build this offering, let’s first walk through how the users of a vertical labor marketplace might use the instant payouts feature.
The user experience flow might look something like this:
- Employer organization onboards with labor marketplace - receives platform employer bank account which it funds using ACH
- Contractor onboards with labor marketplace - receives platform contractor bank account + debit card
- Contractor books a shift with the employer organization on the labor marketplace - Funds move from the employer's platform bank account to the marketplace payout bank account
- Contractor and employer confirm shift is completed - Funds moved instantly via book transfer from the marketplace payout bank account to the contractor's platform bank account
Let's take an in-depth look at this flow. Please note that the companies and people mentioned in this example are completely fictitious.
BestRN is a staffing marketplace that connects hospitals with contract nurses. In order to issue instant payouts to nurses directly on their platform, BestRN enters into a partnership with an embedded banking provider.
Coastal Care, a network of healthcare facilities, selects BestRN to find qualified registered nurses to pick up shifts at its facilities. Coastal Care signs a contract with BestRN and begins the onboarding process.
As Coastal Care is completing the onboarding process via the BestRN app, they are also prompted to sign up for an FDIC insured BestRN employer bank account* which they will pre-fund to make wage payments to nurses they hire via BestRN. Coastal Care’s bank account is opened in seconds. Coastal Care then decides to fund its account, making an ACH transfer of $100,000 from its external operating account to the BestRN employer account.
Simultaneously, on the other side of the marketplace, registered nurse Cameron, is looking for an app to book shifts. Selecting BestRN because it offers free instant pay, Cameron downloads the app and starts the onboarding process. The onboarding flow is very similar to other apps Cameron has used — it asks for credentials and other information so a background check can be conducted, but the app also prompts Cameron to sign up for an FDIC-insured BestRN bank account and debit card into which wages will be instantly deposited when shifts are completed. Cameron's BestRN bank account is opened in seconds. A few days later Cameron receives a BestRN debit card in the mail.
Success — both Coastal Care and Cameron both have bank accounts on the BestRN ledger! The instant payments onboarding process was seamlessly integrated into the platform onboarding process and no further steps will be required for either of these parties to use instant payouts.
But wait, why is it important that all accounts on BestRN are on the same ledger?
When all accounts are on the same ledger, funds can be moved between accounts using book transfers which are free and instantaneous. This is how embedded banking unlocks instant payouts without relying on push-to-card or Real Time Payments.
Let’s see what happens next.
As Cameron is scrolling through BestRN for available shifts in the area, they come across a posting at Coastal Care. Cameron uses BestRN to book the shift. On the other side of the marketplace, Coastal Care accepts Cameron’s request to staff the shift. Funds then move from Coastal Care’s employer BestRN account into a payout account managed by BestRN.
The day of the shift arrives, and Cameron checks in for work using the BestRN app. At the end of the shift, Cameron checks out, again using the app. Coastal Care confirms Cameron completed the shift and the funds are moved instantly from the marketplace payout account directly to Cameron’s account via book transfer.
Cameron can now use their BestRN debit card to pay bills, buy groceries, even withdraw cash at an ATM.
*bank accounts provided by BestRN’s sponsor bank. In this hypothetical BestRN is not a bank.
How to build it
You’ll notice that the instant payouts platform described above does not rely on same day ACH, earned wage access, or loans, but simple book transfers. In order to build a payouts system based on book transfers you will need to embed bank accounts into your vertical labor marketplace.
Step 1: Embed bank accounts into your vertical labor marketplace.
There are several ways to accomplish this including partnering with an embedded banking platform like Treasury Prime.
You will need the following:
- Commercial checking accounts — required for the employer bank accounts and the platform “payout” account
- Retail checking accounts — required for the contractor accounts
- Debit card issuing — to enable contractors to use debit cards to access their funds. Note that without debit cards, contractors can access their funds by other means
- Account funding via Plaid Link or Astra — optional to enable employers to seamlessly fund their employer accounts without entering routing and bank account numbers
- Book transfers, ACH, wire transfers — for seamless money movement
Step 2: Onboard new and existing customers.
In order for your customers to open their bank accounts and receive debit cards they will need to submit a bank application and pass a Know Your Customer (KYC) check to verify their identity. To boost adoption, you’ll want to make this process as frictionless as possible. In case you’re wondering, Treasury Prime’s API makes it easy for you to embed the account opening flow into your app’s application process.
Step 3: Send instant payouts.
Now that all parties — your platform, your employer customers, and contractor customers — have bank accounts on your ledger you can execute instant book transfers from one account to another.
Step 4: Extra credit - Make your product super-sticky
The great thing about embedded banking is that it is an extendable platform. Once your instant payouts program is up and running you can design additional features to boost usage and stickiness of your product such as savings accounts, discount or cash back programs for debit card spend, benefits administration, or expense management — the ledger is your oyster!