The term ‘gig economy’ is now being used by politicians, journalists, business leaders, and more. It's important to understand what actually is the gig economy, where it has come from, where it’s going, the changes & opportunities it brings, where it would fit in the post-COVID-19 world, and what it means for FinTech.
The gig economy is defined by people in many ways; the broadest definition includes all work that is temporary and performed on an on-demand basis. Online capital platforms like Airbnb are also usually included. And their inclusion is usually based on the fact that they are designed around person-to-person interaction and exchange rather than business to person.
Although it has not always been called the gig economy, there has long been a pool of workers who have derived their living from freelance work for others, often working flexible hours based on seasonal tasks. In addition to this, many more have long undertaken additional freelance work to increase their income.
Over the past few decades, a variety of factors have contributed to the rapid growth in this sector. Such growth is typified by the rapid increase in gig work in America, especially recently: the percentage of workers working in the gig economy has risen from 9.3% in 1995 to 10.1% in 2005 before rising sharply to 15.8% in 2015, according to the US Bureau of Labor statistics. However, due to the varied definition of the gig economy coupled with gig work often being poorly documented, statistics vary significantly. As evidenced by the graph above, despite rapid growth in the UK and US markets, the gig component of emerging market economies is far greater, a factor which can, in part, be attributed to their development of firms and institutions in the digital age.
A lot is happening with regard to the growth of the gig workforce by the economic and demographic forces, and some of it is by choices of this generation. Emerging economies in Asia and LATAM have higher concentrations of the gig workforce. Some of it is driven by the limited opportunities in conventional businesses and full-time jobs that cannot consume the entire workforce. However, it is also fueled by the new tech-driven gig opportunities that are becoming increasingly attractive new norms for emerging economies.
The gig economy is usually discussed as one entity. However, within a broad definition, there are two distinct sectors: capital platforms and labor platforms.
This category describes platforms that facilitate the rental, usually on a short-term basis, of assets including, but not limited to, property, cars, clothes, and equipment. These transactions do not always involve payments but can be a sort of barter trade. The latter is likely to grow as tax rates rise globally, primarily to pay for aging populations, meaning money becomes an increasingly expensive medium of exchange while technology makes barter transactions easier.
Case Study – HURR: Launched in 2019, HURR signed 8,000 people onto its clothes rental platform within the first six months. With a variety of new startups in the clothes rental space, many cite customers’ environmental concerns as a key factor that is changing consumer attitudes toward clothes sharing and rental.
Case Study – Airbnb: Founded in 2008, Airbnb is perhaps the best-known company in the leasing sphere and has come to dominate large swathes of the global market for property rental. At the time of writing, Airbnb boasts over 150 million users, with more than 2 million people leading to a valuation of $35 billion based on a recent stock sale.
Also in This Space: Turo, Tulerie, OneFineStay, OpenAirplane, ToolLocker, Parking Panda, JustPark, HomeAway, Rentah, SpotHero, VRBO, HitchPin, By Rotation
Platforms which are designed for individuals to sell their products directly to their consumer have unleashed the potential of creative minds globally, helping them to monetize pursuits which often begin as hobbies. Many who take advantage of these platforms do so as an additional form of income, alongside a primary income stream from a traditional job or pension.
Case Study – Etsy: Founded in 2005, Etsy specializes in facilitating peer-to-peer transactions of handmade items. The substantial growth in this sector as people increasingly look for a unique product meant that in 2018 the value of goods bought on the site was $3.3 billion. However, there appears to be still considerable room for growth with the Craft & Hobby Association valuing the ‘creative products industries’ at $43 billion.
Also in This Space: ArtFire, Handmade Artists’, Folksy, Misi, iCraft, Zibbet, eBay, The India Craft House, Amazon Handmade
Case Study – Graphite: This company has sought to position itself as the leading platform for highly qualified professionals such as accountants and data science experts, requiring that such individuals have worked for top firms such as those within the Fortune 500. Since its founding in 2014, Graphite has built up a pool of 5,200 highly qualified freelancers to solve customer needs.
Case Study – Uber: With 3 million drivers globally and a further 75 million registered riders via Uber Eats, Uber is a global gig behemoth. This impressive onboarding allowed Uber to facilitate 1.9 billion trips worldwide in the fourth quarter of 2019.
Case Study – PeoplePerHour: Covering almost all jobs which can be done remotely, including marketing, writing, programming, and accounting, PeoplePerHour claims to have over 2 million freelancers registered who have earned over $165 million via the platform.
Case Study – Handy: Occupying a different sector of the labor platform market to the above case studies, Handy specializes in practical services. The qualified freelancers registered on their platform take on a range of jobs from cleaning, to plumbing, to removals help.
Also in This Space: HelloTech, Lyft, DoorDash, Rentah, Fancy Hands, Freelancer, Grab, Rover, Favour, Feastly, Ola, Udemy, Fiverr, Snagajob, Postmates, Wonolo, Gigwalk, Spare 5, Amazon Flex, Bellhops, TaskRabbit, Care.com, Hubstaff, Takl, Dolly, Caviar, Moonlighting, Deliveroo, Upwork, YourMechanic
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:
Traditional banks are still 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 need. Here, neobanks are emerging as the savior of the gig economy.
Case Study – 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.
Also in This Space: Shine, Azlo, Coconut, Starling bank, N26, Revolut, Open, and others
The issue of cash flow irregularity for gig workers is perhaps their greatest challenge. To help cater to these needs, both incumbent FinTech companies and startups are investing heavily in this area. In many cases, companies are using advanced machine learning and open data to help set rates and inform their decisions when it comes to credit offerings. Initiatives such as the European PSD2 Open Banking regulations greatly aided this advance.
Case Study – Razorpay: Founded as a payment gateway service, Razorpay has expanded into credit provision via partnerships with both traditional banks and NBFCs. To supply credit rapidly, Razorpay analyzes a customer’s past payments history using their ‘Alternative Credit Decisioning System,’ creating a unique credit score from which credit limits are drawn. This pivot toward servicing the needs of the gig economy was summarized by Harshil Mathur, Co-founder & CEO of Razorpay, as he said, “From selling cupcakes online to anyone doing home tuitions, we are targeting the freelancer market.”
Also in This Space: Slice, mPokket, Azlo, Qwil, Oxygen, SoLo, Portify, Trezeo, Starling Bank
As a way of differentiating themselves from competitors, FinTech firms are increasingly integrating invoicing and accounting features into their core offerings. This will help freelancers significantly with their compliance and tax returns, while providers hope it will help increase the relevance of their platform and help them retain customers.
Case Study – Track: US-based company Track is designed to help freelancers and small-business owners keep track of their tax liabilities and ensure they can pay these via continual calculations within the app and an FDIC-insured withholding scheme. In addition to this, they offer a more extensive package that integrates directly with the US Internal Revenue Service.
Also in This Space: Azlo, Joust, Qwil, Oxygen, SherpaShare, UnderPinned, ANNA, Albert, TaxScouts, Razorpay, Monzo, Starling Bank
The little known but fast-growing digital nomad portion of the global economy coupled with an outsourcing trend that might find a small London restaurant hiring a Filipino graphic designer is placing new demands on payments systems. The ability to make easy payments in a multitude of currencies and also switch currencies easily is becoming increasingly important, and FinTech companies are at the forefront of innovations to make this once convoluted and expensive process seamless and affordable, often free.
Case Study – Revolut: Launched in 2015, this London-based company has risen rapidly to become one of the world’s most valuable FinTech companies with a 2020 funding round valuing the company at $5.5 billion. Originally started to reduce the cost of cross-currency payments predominantly for international travelers, Revolut launched its business app in June 2017. The year 2019 saw over 100,000 business account holders take in about $15 million of payments transactions in 160 countries. The year 2019 also saw Revolut launch two new business banking products with zero fees, which they say are specifically targeted toward freelancers. Given its early lead, continued innovation, and almost unrivaled current capabilities (in February 2020 Revolut supported payments in over 140 currencies), this company looks well set to continue to expand its user base among global freelancers.
Also in This Space: Razorpay, Yes Bank, Starling Bank, Ripple, TransferWise
A significant part of the gig economy involves one-off or new customer-worker relationships. In this part of the gig economy, the improved ease of access and payment checks which FinTech innovations have provided is vital in ensuring any non-payment is rapidly spotted and can be acted upon immediately when there is the best chance of resolving the situation. Furthermore, some FinTech companies are offering debt collection services for unpaid invoices in which they pay you a portion of the money owed in exchange for the claim to the owed money.
Case Study – Joust: Joust was founded in 2017 with the express desire to ‘make finances easier for freelancers, contractors, and the self-employed.’ The company has clients across all 50 US States. Currently, it offers a business bank account and accompanying debit card and app. In addition to this, the company’s key point of difference from competitors is its PayArmour offering and the additional features of its app. PayArmour provides invoice guarantees with either guaranteed receipt of payment within 30 days on invoices up to $2500 or 50% of the invoice value up front and the rest when the customer pays. Additional services available within its app include invoicing tools and automated bill payments. Joust generates revenue via a subscription fee for its product, along with taking commissions on the PayArmour product.
Also in This Space: Azlo, Cogni, Steady, Monzo, Revolut, Starling Bank
Integration of FinTech into gig platforms to create a more streamlined customer experience has the potential to help onboard both consumers & providers, build brand loyalty, and the increasing usage of the platform, both of which are vital to retention.
Case Study – SherpaShare: This app is designed specifically for rideshare drivers to aid them in reducing taxes, managing expenses, and boosting earnings primarily by utilizing SherpaShare’s data analytics. Having partnered with companies including Uber and YourMechanic, SherpaShare already engages with a 100,000 strong community, which they claim is growing at a monthly rate of 5%.
Also in This Space: Qwil, Steady, SherpaShare, Rapyd, Razorpay
As discussed above, gaining the relevant insurance, often for short periods, is a need that has sprung from the growth of the gig economy. While traditionally firms have been inflexible and insisted on longer contracts, increasingly new firms are leveraging technology to provide a rapid service without the admin costs, which have traditionally made short policies infeasible.
Case Study – Zego: This company was founded in 2016 with the specific purpose of providing gig workers with insurance after two of the founders, working for Deliveroo at the time, struggled to onboard riders as inflexible, and expensive insurance presented a barrier for potential applicants. Partnerships with major gig economy players, including Uber, Deliveroo, and Quiqup, meant that in mid-2019, Zego insured about a third of the UK’s food delivery market. In June 2019, it was announced that the company had raised $42 million in Series B funding, of which a large portion will be directed toward international expansion.
Also in This Space: Tapoly, WithJack, Inshur, Metromile, AP Intego, Collective Benefits
According to ILO estimates, The COVID-19 pandemic could wipe out 195 million full-time jobs or 6.7% of working hours globally in the second quarter of this year, which would be equivalent to 195 million full-time workers. With significant layoffs across industries, a huge surge of skilled workers looking for jobs is bound to increase, which unfortunately, is unlikely to be consumed in the short-term. We should expect an influx in the number of gig work seekers and new entrepreneurial efforts emerging in the market. Apart from the current COVID-19 disruptions, some other factors that would drive gig economy growth include the following:
Central to the continued growth of the gig economy will be the continued spread and improvement of communications and data networks globally. This, coupled with the significant progress being made in reducing the number of global citizens who are unbanked, will be fundamental to the growth of the gig economy going forward. The World Bank estimated in a 2019 report that two-thirds of workers in emerging markets work in the informal sector – moving these workers into a formally defined and measured gig economy is set to boost the value of the global gig economy significantly. Indeed, a 2019 study suggested emerging market growth would be the primary driver in the 17.4% CAGR they forecast for the gig economy up to the end of 2023.
Looking to the future, it is reasonable to expect that people will continue to grow more familiar and competent with technology. This will be in large part due to the intake at the base of the workforce, who have grown up with significant amounts of technology in their lives. This looks likely to continue to promote growth in the gig sectors as both the absolute number and the proportion of populations will have a higher propensity to use technology platforms to solve their needs, both for employment and consumption.
The willingness to outsource both at home (in terms of employing cleaners, etc.) and at work has been growing rapidly. This trend shows no sign of abating and looks set to continue to contribute to the growth of the gig economy. Furthermore, the current COVID-19 outbreak and reactionary quarantining have led to an unprecedented experiment in remote working, forcing many who have previously dismissed the idea to enact it on a large scale. It seems likely that after this period of forced remote working is over, many firms will be more comfortable with the idea of subcontracting their needs to remote workers, potentially providing a major boost for sectors of the gig economy, including professional services and also sales.
The extent of the impact of advances in AI and robotics are unknown, and predictions vary wildly. However, there is a consensus that the impact will be large, and millions of workers will be required to evolve to stay relevant. This disruption of traditional jobs is set to provide a significant boost to the gig economy, both in terms of adding to the gig workforce and also reducing employment in the traditional economy.
Regulators around the world are catching up with the disruption which has happened over the past decade and working out what, if anything, they want to do about it. The answer will likely be that mostly, they will either leave it as it is or add regulation which is either light or easily circumvented with lobbying by relevant companies likely to influence this heavily (in 2018, Uber spent $6 million on lobbying in the US alone). However, there are signs that, in some cases, regulators are looking to substantially restrict the operation of whole sectors such as room renting via platforms such as Airbnb.
Alterations to tax laws both for the freelancers and platforms are already being discussed as governments attempt to extract greater receipts from actors whom they feel are gaming the system. Some early attempts to this end have proven indecisive so far with Uber contesting multiple cases around the world over the employment status of its drivers.
This area is the greatest threat to the continued growth and prosperity of the gig economy with excessive regulation and taxation, having the potential to obliterate large parts of this growing sector.
One thing that can be relied upon is that innovation will continue to drive this space in new directions while also countering, predominantly effectively, any cumbersome regulation which threatens the ambitions of companies. The gig economy is also likely to benefit from advances in other sectors such as transport, communications, and healthcare as the dynamism of individual actors continues to drive the world forward, creating new opportunities.
While no one can be sure when it will end, there is a widespread belief that the global glut of money looking for a project and the willingness to accept risk will, at some point, end. This will likely hit many gig companies harder than traditional companies, as many have relied heavily on cash injections and investor enthusiasm to make up for substantial operating losses. Furthermore, they generally lack the tangible assets to act as collateral for loans if belief in their intellectual property falls. Hence, changes in the funding models for these platforms are likely to occur. This is likely to usher in a new era of slower emergence of companies as they no longer have the financial backing to compete so vigorously.
The potential for short term challenges which check the growth, often in individual sectors, of the gig economy is great – regulation and changing to funding are the primary concerns in this area. However, the underlying fundamentals of an increase in demand and an increased willingness to supply the products and services which make up the gig economy combined with improvements in the underlying technological infrastructure are likely to ensure growth continues to occur in the long run.
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