An Underserved Segment Neobanks Are Eyeing: The Gig Economy

“Gig” – when’s the last time you heard someone use that word? Or perhaps you used it yourself, recently. Admittedly, it is increasingly common for people these days to say they got themselves a ‘gig,’ and the chances are, you know someone who has one. But did you know the origin of the term goes back to the 1920s? Coined by jazz musicians of that era, the term gig was originally slang for a live musical performance – a contraction of the word ‘engagement.’

The ‘gig economy,’ however, is a relatively new term which was created to reflect the working habits and tendencies of what we know as the ‘millennial’ generation. The term refers to a flexible working culture where its members choose to work as freelancers or independent contractors and have more control over their schedule and working hours. Generation X and the Baby Boomers before them were of the traditional economy – they were used to a single finance stream and a full-time job. The new kind of workforce, however, spends a lot of time on their mobile device and prefers to have multiple sources of income – a significantly different situation from that of previous generations. It is clear that the gig economy is here to stay, and its growth trajectory so far has been impressive. Let’s consider the projected gross volume of the global gig economy:

It’s not just a fad – the gig economy currently generates $204 billion in gross volume across the world. Furthermore, according to research by Mastercard, the size of gig economy transactions in its online iteration alone is projected to grow by a 17% CAGR with a gross volume of ~$455 billion by 2023 due to factors such as evolving societal attitudes around P2P sharing and increasing digitization rates in developing countries.

So, a couple of questions arise here:

  1. Are the payments and banking going to be different for the gig economy?
  2. Does it make sense that with such volumes, payments and banking for gig economy workers would be an area of major importance? Are banks dealing with the evolving needs of this customer segment? If not, what’s the alternative?

Traditional Banking Services: Broken for the Gig Economy

Remember how we said that when it comes to the gig economy, there’s no single, steady source of payment? There’s no single salary deposit at the end of the month in the gig worker’s bank account – and there’s likely more than one of these too. In that case, how can a traditional FinServ player create a profile for such a candidate? How can underwriting for insurance be done without accounting for what will seem – by conventional measurement – major risks? Of course, the premiums will then shoot up. Another major hurdle is the accessibility to loan services. Lack of financial history, or poor credit history, makes it hard for banks to approve loans. This, in turn, makes it difficult for the gig worker to receive access to lines of credit, or for that matter, receive loans.

The industry now faces certain glaring questions, such as:

  • Will everyone working in the gig economy be able to access and benefit from traditional FI products?
  • If not, are there any viable alternatives available for these stakeholders? If yes, what are they?
  • How can this relatively new customer segment be effectively tapped?

To put it simply, traditional banking services were underprepared for the massive growth of the gig economy, and as a result, have been failing to offer gig workers the kind of services they really need. So does that mean the gig worker is left with no support from FIs? Far from it – enter the saviors of the gig economy: neobanks.

Neobanks: Made for the Gig Economy

Today’s gig economy workers are looking for solutions that support an increasingly flexible work pattern. Neobanks, unlike the brick-and-mortar establishments set up by traditional banks, leverage this knowledge to provide solutions that can cater to this customer segment. They endeavor to integrate all of these components seamlessly, which is evident in the outcomes. Evident, how?

For one, these digital and often mobile-first/mobile-only banks offer customers the chance for self-service, education, advice, and transactions – all through a simple app.

Here’s a look at some of the chief advantages neobanks offer gig economy workers:

1. Account Opening: Obtaining a current account in their name is one of the primary challenges faced by a freelancer. While most banks deny such requests outright, there are a few who do provide this service. However, it has its share of problems. For example, most of them require you to fill up a never-ending list of KYC documents. And once the verification is done (which takes ages), the applicant will have a current account in place, post which they’ll be able to kick-start their banking.

When it comes to neobanks, one can apply for a current account in minutes, and while the verification is under process, one can still avail their services. For instance, to cite a few examples of what’s possible, one can collect payments, link one’s existing bank accounts as well as view balances.

2. Payments: With traditional banks, gig economy workers may have to wait for a long duration to receive their payments as the transfer of payments can take up to multiple days for completion. Neobanks, on the other hand, provide instant card payout solutions to their users, thereby addressing the ‘need-it-now’ expectations of the gig economy.

Note that neobanks also leverage smarter payment systems like real-time payment solutions or direct deposits for instant payments. What’s more, instead of relying on old methods like checks & DDs, they can get paid fast and easily via direct transfers via mobile – the new cash, so to speak, and it works great for cross-border payments as well.

Furthermore, some neobanks also provide a smart invoice that is integrated with a payment gateway, which is immensely useful for tax filing and accounting purposes.

3. Lending: Some neobanks have started to develop alternative means for assessing the creditworthiness of this alternative customer base. For example, alternative credit reports are now available on the basis of payment of rent, utilities, and cellphone bills; bankruptcy records; property ownership, etc.

Then, there are players in the neobanking space that have started to base decisions on lending, on future earnings for gigs which have been scheduled (but not earned yet). Payments are then deducted as the money is earned. This provides a significant advantage to gig workers.

4. Unified Access to Multiple Account: With conventional banks, one needs to use multiple dashboards and interfaces for invoices, bookkeeping, online payments, and more. What’s worse is if one is a solopreneur who doesn’t have an accountant to help them understand technicalities.

With neobanks, however, gig economy workers can link all their bank accounts and conveniently track them all in one place, while maintaining proper accounting reports.

So far, we’ve seen some of the main ways in which neobanks are proving to be a huge boon to the gig economy, but surely you are curious about who some of the leading players in the space are. So, here is a look at which neobanks are targeting this customer segment opportunity:

Neobanks Targeting the Gig Economy: Deep Dive

In this analysis, we take a closer look at the neobanks that have started catering to the gig economy as a part of their strategy. In recent times, we have been witnessing the rise of banks that exclusively cater to gig economy customers. Let’s take a look at two of them: Shine and Oxygen.

Oxygen: The startup offers free banking services along with a flat-fee, zero-interest rate credit to freelancers. For its customers, the startup tracks bills, projects income, and offers immediate short-term loans. This setup is unique to the bank. Leveraging AI, the bank also provides a payback plan, which includes both periodic cash returns and payback based on the number of hours worked. Using the same model, the bank underwrites loans for freelancers without the need to complete paperwork or visit a bank.

Shine: The bank provides an alternative for freelancers by enabling them to send and receive money using the company’s application. It provides its users with their own banking information (IBAN), which is used to receive payments and pay through direct debit. Moreover, the company reminds its users to pay taxes. To assist freelancers, they have also begun building a comprehensive knowledge base.

However, most of the other neobanks we considered started by offering banking services to the Personal and SME segments. You’ll note that these players haven’t overtly been marketing some of their services as geared towards the gig economy – it doesn’t seem to reflect in their messaging. However, it’s clear that slowly but surely, they have been moving towards providing better value propositions for gig economy customers. Here’s a curated list of these neobanks we’ve studied in this category:

Azlo: Azlo is a zero-fee banking platform for freelancers, entrepreneurs, and small businesses. It focuses on the new economy that includes millennials, underrepresented entrepreneurs, and the gig economy. The business account offers features like unlimited domestic & international payments, payment of bills, mobile check deposits, and digital invoicing. Recently, it partnered with Kabbage to offer lending products for the gig economy.

Coconut: Coconut is a banking app aimed at the gig economy in the UK. Apart from providing a bank account and Mastercard for payments, the mobile app automatically keeps track of invoices & payments and creates a tax estimate based on the user’s account activity. The target audience for Coconut accounts is freelancers and sole traders, a niche that’s growing in number as the gig economy takes off.

Starling Bank: The bank offers a Sole-Trader account for freelancers; it is provided to users who have a personal Sterling account. This account enables customers to make domestic or international payments to suppliers from the application, view categorized breakdown of transactions, and export transactions to an accounting software.

Current: Current, which started by providing a prepaid card for teenagers, has recently started to provide personal banking accounts for adults. The Slack-integrated FinTech is quite well-known within the gig economy. It offers benefits like access to wages two days early, instant payments, an ‘Insights’ feature, and Savings Pods, which help customers to save towards specific goals. The app, which currently has 4,000 users, also advises what expenses freelancers and self-employed workers can claim for.

Northone: The bank provides a mobile-first, API-enabled platform that serves freelancer amongst other players. It connects them to multiple financial management tools and provides clarity on the financial health of the customer. Its technology also enables them to automate financial management tasks.

N26: The startup offers a free bank account for freelancers and the self-employed apart from their business accounts for SMEs. It provides its customers with Mastercard as well as a cashback program. This enables its users to conduct free card payments across the globe, and earn 0.1% cashback on purchases made.

Revolut: Revolut offers an alternative digital banking platform that encompasses both personal and business accounts. Within its business account offerings, it also offers solutions exclusively for freelancers like free local and international transfers (28 currencies), local accounts in GBP & EUR, international IBAN, prepaid debit cards, virtual cards, etc.

Holvi: Finland-based banking service provider for small- and medium-sized businesses Holvi, also offers products targeting the gig economy for providing them access to financial services. It offers an integrated current account package that includes bookkeeping, invoicing, and auto expensing tools. The platform is currently present in Germany, Austria, Finland, Ireland, Italy, Belgium, France, and the Netherlands. Holvi is acquired by Banco Bilbao Vizcaya Argentaria.

Open: The company offers a gig-economy-friendly banking app for customers in India. It enables users to open a current account in less than two minutes and avail financial offerings, although the verification may be under process. Users can create smart invoices with integrated payment options, thus enabling them to avail instant payment options. The company targets those who struggle with the maintenance of multiple bank accounts, bookkeeping for their daily spending, and the creation of GST-compliant invoices.

The Future of Work: Towards a Larger Gig Economy Trend

Data clearly indicates that the gig economy will continue to grow. At a larger level, it has already reached a critical mass where western governments including the UK are having to re-determine their definitions of employees & self-employment, adjust personal tax systems, and examine qualification for and distribution of benefits payments. At a micro level, more individuals are effectively taking direct personal control of their career paths back from the hands of employers, and integrating it with a more flexible lifestyle than the previous generation was ever able to consider. They provide a vast and valuable resource to businesses of any description, who, in turn, have to understand that payments to the gig-workers cannot be a mere afterthought, but needs active consideration.

At the end of the day, both gig employees and employers have specific banking needs. Such employees need faster access to their earnings, alternative loan qualification assessment techniques, more convenient ways to deposit their income, and portable tax planning & retirement benefits.

It is evident that gig workers are already finding workarounds to the traditional systems to get payments delivered faster, in neobanks’ offerings. And while there are existing and upcoming neobanks – like Monzo, Nubank, Webank, Jenius, Kakao Bank – that aren’t explicitly positioning themselves as solutions for the gig economy, some of them still have customers from that segment – even if not to a very large degree. Monzo, for instance, is currently testing business accounts and has revealed plans for a business current account to serve entrepreneurs, freelancers, sole traders, and small-business owners.

It is interesting to observe how neobanks are proceeding, and given the current trends we’ve discussed so far, we expect an uptick in the number of such players providing services of value to the fast-growing gig economy across the world.

Note: The startup list is not exhaustive