Employee Benefits – About to be Disrupted by Technology

“In order to build a rewarding employee experience, you need to understand what matters most to your people.“

-Julie Bevacqua

When most people think of HR Tech, they imagine business models that use artificial intelligence (AI) and its subset, machine learning (ML), to harness employee productivity or decide whom to promote. In isolation, that market was USD 23.3 billion in 2021. According to a study by Verified Market Research, it will be worth USD 38.4 billion by 2030, boasting a compound annual growth rate (CAGR) of 5.7%.

Market size looked at in isolation can be deceptive

These figures are dwarfed by the estimated size of the global FinTech market (a whopping USD 7.6 trillion, with a projected CAGR of 13.8% by 2028, according to Marketwatch)[i]. Does that make HR less attractive in terms of investments? On the contrary. One characteristic of HR as a segment (and HR Tech in its wake) is that it is much more fragmented than other segments. AI and ML are not the only technological innovations that impact HR, but they often form part of different verticals. Previous investment examples presented in this blog, such as employee communication[ii] or medical staffing[iii] that would have traditionally fallen into the HR category, today are forming part of other verticals such as software-as-a-service (SaaS), or health services. As a result, one might potentially misunderestimate the addressable market of a company innovating in the HR space and move on to other leaders of tomorrow in the making.

Benefitting from exploding demand – Employee Benefits

One compelling sub-segment that could fit into different categories is Employee Benefits. Businesses use employee benefits solutions to improve their employees’ financial health and well-being. These options include coupons, vacation and gift certificates, insurance plans, and others. According to the Society for Human Resource Management (SHRM), 36% of employees expressed the willingness to change jobs for what they consider “better benefits”[iv]. In other words, in a tightening labor market, employers in 2022 are risking a third of their workforce should they fail to provide worthwhile benefits. The COVID-19 pandemic has further stimulated the demand for such services. Combined with the current labor shortage and the need for increased operational efficiency in a slowing economy with higher inflation, this trend has put pressure on companies to implement new tools to manage their workforce better while offering them better perks. Consequently, the global Employee Benefits space features a CAGR of almost 4% between 2021 and 2025[v], with Europe accounting for 35% of this market[1]. Key players in Employee Benefits today include Edenred SA (France), Sodexo Group (France), Circula GmbH (Germany), CIRFOOD (Italy), Monizze NV SA (Belgium), Spendit AG (Germany), Alelo Brasil (Brazil), Axis Bank Ltd (India), Rakuten Group Inc. (Japan), Unum Group (U.S.), Cinqo Group (Bahrain).

Europe in focus

Taking advantage of such structural growth drivers, the European Employee Benefits market is poised to grow from an estimated USD 31.1 billion in 2022 to USD 37.7 billion by 2026 (translating into a 3.9% CAGR), hence reversing the previously observed downtrend before COVID-19 (-2.9% CAGR between 2019 to 2020).

Levers for innovation

As even some of the company names imply, there are several fields where a newcomer could disrupt the current status quo and rapidly grab market share: Having mentioned AI and ML already, there are elements of banking and finance where disruptive models from Fintech (such as decentralized finance, deferred payments, etc.) could be adopted. Another field is Software-as-a-Service (SaaS), both on the B2B and B2C levels, which can remove administrative hassles. Yet another area where innovation can be borrowed is Reg Tech (think efficient tax optimization and regulatory compliance and reporting) and Insur Tech (innovative insurance solutions as a part of the benefits package).

Coverflex – Taking Europe one market at a time

One company offering employee benefits services that currently operates very successfully at the crossroads of various verticals spanning from HR to SaaS is Coverflex, a Portuguese firm founded in 2019. Coverflex streamlines employee compensation and benefits with a proprietary, all-in-one platform. With a specific focus on the small to medium-sized enterprises (SME) segment, it has built an innovative operating system covering insurance, employee benefits, meal allowances, and employee discounts on external products/services. Watch this space to learn more about why we invest in Coverflex, and why investors should closely look at its business model.

[i] https://www.marketwatch.com/press-release/fintech-market-size-2022-industry-recent-developments-and-latest-technology-size-trends-global-growth-supply-demand-scenario-and-forecast-research-report-2028-2022-09-15?tesla=y#:~:text=The%20global%20FinTech%20market%20size,13.9%25%20during%20the%20review%20period. [ii] https://www.stableton.com/insights/investing-in-beekeeper-revolutionizing-how-2-7-billion-frontline-workers-collaborate/ [iii] https://www.stableton.com/insights/investing-in-snapnurse-reshaping-healthcare-staffing-practices/ [iv] Employee benefits market outlook 2022, Hylant [v] https://www.prnewswire.com/news-releases/meal-vouchers-and-employee-benefit-solutions-market-to-grow-by–14-64-bn-in-2021–industry-analysis-market-trends-growth-opportunities-and-forecast-2025–17000-technavio-reports-301273767.html