Helping Small Business Employers Deliver Financial Inclusion Benefits

*This article was sponsored by Principal Financial Group. All views and endorsements expressed in this article are solely those of the author and do not necessarily reflect the views or endorsements of the Financial Health Network.

According to the Global Financial Inclusion Index, the United States boasts a high level of financial inclusion support from employers for their employees. It’s in many ways an outlier – especially among other developed markets in the Index – scoring well across all aspects of financial inclusion measured.

However, this headline coming out of the employer support pillar research masks a key challenge facing financial inclusion in the U.S.: the smaller the business, the less support available to employees.

Putting the Challenge Into Perspective

This is no small issue, especially since small businesses employ such a significant proportion of U.S. workers. According to the U.S. Small Business Administration’s (SBA) latest count in December 2021, there were 32.5 million small businesses in the U.S. – including about 6 million with one or more employees) – compared with just 20,516 large businesses. (The U.S. Small Business Administration classifies small employers as those employing between one and 500 employees.) These small businesses comprise 99.7% of firms with paid employees and create millions of new jobs. From 1995 to 2020, small businesses created 12.7 million net new jobs, while large businesses created 7.9 million.

Considering the number of people employed by small businesses in the U.S., the challenges this group faces in providing staff with financially inclusive support systems start to look more complex. The largest U.S. employers score far higher for providing guidance around financial issues, employee pension contributions, insurance coverage, and pay flexibility. Scores fall markedly as businesses get smaller.

The reasons for the drop-off are varied. Some of the most challenging examples include a combination of a lack of resources (whether financial or personnel-related) and a tendency to overestimate the cost to provide employee benefits. There’s also more work needed to help small businesses better understand the governmental support available and empower them to make use of these initiatives (for example, tax breaks and wider employer incentives). These issues demand more creative solutions and holistic support from our financial system and government.

These complex issues are, without a doubt, frustrating to small business owners, many of whom are understandably more focused on the day-to-day running of their business rather than employee benefits packages. Small business owners need a starting point. There are three opportunities that stand out:

1. Employees’ trust in their employers can play an important role.
According to the 2022 Edelman Trust Barometer, business is generally the most trusted global institution, ahead of non-governmental organizations (NGOs), government, and media. On top of that, 77% of global respondents trust their employer. The trust in the employer-employee relationship is incredibly strong and a driving force behind greater financial inclusion. This suggests that if employers were to proactively encourage their employees to take advantage of the benefits resources available, many would likely do so.

2. Small businesses need more information and education.
There’s an untapped opportunity to better equip small businesses with the right information to support employees in their financial security.

In small enterprises, management teams often act as employers for the first time. When beginning in this new human resources (HR) role, their first focus is payroll and then usually health insurance. As they consider additional benefits, they often significantly overestimate the cost per employee they often significantly overestimate the cost per employee and may shy away from providing more benefits as a result. Perceptions of cost, coupled with the daunting task of narrowing down which benefits to offer and which provider to work with, can deter many of these businesses from pursuing more comprehensive support.

There’s a huge education gap within the small business community that must be filled in order for smaller employers in the U.S. to become greater enablers of financial inclusion. Better professional training and support is a key solution to the problem, but there’s also a need for the financial services industry to simplify the process for employers. Simple, intuitive, and easy-to-understand solutions can help small businesses prioritize employee benefits and build a comprehensive foundational package, which combines income protection, insurance coverage, and retirement savings options.

3. Public-private partnership is key.
The public sector has a significant role to play in creating and promoting solutions which help employers bridge these gaps in the U.S. At the federal, state, and local levels, initiatives such as the SECURE Act, the American Rescue Plan Act, the Paycheck Protection Program, small business tax credit programs, the Restaurant Revitalization Fund, and SBA debt relief, along with an additional 50-plus grants, loans, and programs, offer a variety of options for the unique needs of business owners.

However, small businesses are often not fully aware of the help available and how to access it. As a result, many small businesses do not fully maximize the support that’s available and are not able to deliver the best possible benefit packages to their workforces. This is where the financial system, particularly financial services providers, can play an important role in amplifying the good work of the government to drive awareness for these programs and help facilitate uptake.

It’s only through the combined efforts of the financial system, government, and employers that employees can get the education, solutions, and services they need to build long-term financial security. The public and private sectors must work in tandem to improve the state of financial inclusion within U.S. small businesses.

Learn more about financial inclusion and security across global economies in the Global Financial Inclusion Index full report.

This article first appeared in the Global Financial Inclusion Index 2022 report.

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The Global Financial Inclusion Index is a proprietary model output based upon certain assumptions that may change, are not guaranteed, and should not be relied upon as a significant basis for an investment decision. 

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