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Banking the “Gig Economy”

Read the first of our new “Next Voices” blog

A new generation will take financial services into the future. In the new blog "Next Voices," being previewed here, a rotating group of bloggers of the younger generation will share what they are learning, thinking about, and doing. Proposals from guest bloggers are also invited. Please email scocheo@sbpub.com A new generation will take financial services into the future. In the new blog "Next Voices," being previewed here, a rotating group of bloggers of the younger generation will share what they are learning, thinking about, and doing. Proposals from guest bloggers are also invited. Please email scocheo@sbpub.com

The apps litter the home screens of our phones. Our neighbors use their services to rent out their homes. Our friends use them to make some extra spending money. We wonder what life was like before Uber and if we could ever survive in such a strange dystopia again.

All drama aside, the “gig economy” has revolutionized the way we think about free market economics, employment, and regulation.

However, the banking industry has yet to make strides in engaging with participants in the gig economy. Banks should pay attention to this trend, not only to keep up with this emerging market, but also to help consumers gain access to responsible financial services.

What is it? And what are the benefits?

First, what exactly is the gig economy?

Basically it’s the ecosystem consisting of:

• Companies that provide a service platform.

• Their employees or contractors, who get paid for completion of short-term, autonomous “gigs.”

• Consumers, who pay for these services.

This is not a new concept, but with the proliferation of services like Uber, Airbnb, TaskRabbit, and others, it grows increasingly clear that these businesses/jobs do not fit neatly into the traditional business or regulatory taxonomies.

Thanks to Silicon Valley and millennials, we now have the trendy appellation, “gig economy.” Other common descriptors include “shared”, “collaborative”, “on-demand”, “peer-to-peer”, and that traditional but still useful term, “freelance.”

According to a study by the McKinsey Global Institute, Independent Work: Choice, Necessity, and the Gig Economy, 20%-30% of working-age population in the U.S. engages in independent work.

Of those, 72% do so by choice, the other 28% out of necessity. Additionally, 47% of youths (under the age of 25) and 44% of seniors (over the age of 65) participate in independent work.

This could be a sign that the gig economy is providing more opportunities to those who may otherwise be unable to participate in traditional employment. Proponents of the gig economy maintain that gigs allow workers to have a better work-life balance and smooth their income when other sources are unreliable.

A recent report by Uber, In The Driver’s Seat: A Closer Look At The Uber Partner Experience, shows that 73% of their drivers choose to do so because of the flexibility afforded to them, and 71% say that their income is better since starting to drive. Consumers get places faster; have the flexibility to book and cancel reservations online; and make payments in a quicker and hassle-free way.

Not yet a market utopia

And of course, the gig economy platforms are taking a cut from both workers and consumers for connecting them in a system with more perfect information. Pretty soon, we’ll be living in an efficient market utopia, right?

Not quite.

The major source of conflict you’ve been reading about in the news is the classification of the workers for these platforms. Where do they fit? Are they employees or contractors or something in the middle?

“Employees” get the benefits of healthcare, retirement savings, and job security from their employers.

“Contractors” are excluded from these benefits.

Meeting gig workers’ needs

Many gig workers feel that their access to healthcare, emergency funds, and tax help are diminished with their “contractor” status. As a result, some gig workers have started to form unions like the Freelancers Union and the Indy Worker Guild. These organizations are providing resources on contracts, health insurance, and taxes.

Additionally, some of the gig economy platforms are beginning to provide such resources themselves. Uber has partnered with H&R Block and Intuit to help drivers with taxes and Stride Health Insurance to get their drivers healthcare.

Banks may be missing the trend

This brings us to the question: Where are mainstream banks?

Certainly, Uber drivers need bank accounts to be paid and auto loans to obtain cars to drive. Because few banks have taken on the challenge of marketing services specifically to gig economy workers, Uber the transportation disrupter is becoming a financial disrupter.

Uber is doing it themselves, a trend that we may see take off in other segments of the gig economy.

Uber has a trio of big things going that should call the banking industry to action:

1. Bank accounts

Uber has partnered with GoBank to offer drivers bank accounts, debit cards, and Instant Pay services. Other services include ordering checks, making ACH money transfers, and depositing cash at participating stores, including CVS, Walgreens, Walmart, etc.

2. Lending

Originally, Uber partnered with Santander Bank to provide auto loans to its drivers. But in July 2015, Uber dumped Santander to pilot its own Xchange Leasing program, which is already operational in California, Georgia, and Maryland. 

The Xchange Leasing program offers drivers discounts from auto manufacturers and financing options through partnerships with partner financial institutions. Uber then guarantees payments by taking the monthly leasing fee directly out of drivers’ paychecks before giving them the residual.

A major criticism that’s been made of the Xchange Leasing program is that it caters to drivers with bad credit, and therefore the program may actually support predatory lending.

3. Instant Pay/Cash advances

Fintech companies DailyPay, ActiveHours, and Clearbanc are offering gig economy workers cash advances on hours worked, instead of waiting for weekly or monthly disbursements from the platforms.

Lyft also offers drivers Express Pay for immediate cash out to drivers’ bank accounts.

Uber followed suit with its own free cash advance program, Advance Pay, in April 2016 in partnership with Clearbanc. In August 2016, Uber expanded their Instant Pay program to almost all U.S. debit cards in partnership with Mastercard and GoBank. 

With virtually no one else in the market to provide these services to gig economy workers, there is a whole swath of potential customers that banks are not serving. Yet when gig economy platforms like Uber try to fill the gap, their workers may be victims of predatory lending. From a consumer protection perspective, these auto loans originated by Uber may actually have similar effects on drivers with bad credit as payday loans have on consumers with bad credit.

Banks missing opportunities

There is a huge potential here for mainstream banks to serve these gig workers better.

Consider that the presence of a third-party financial institution would eliminate the inherent conflict of interest of a platform provider both paying their contractors and providing them with credit. It would also foster better consumer protection and responsible lending practices.

Of course, this comes with the risk of keeping lower-income consumers on banks’ books, but many financial institutions have already taken on this risk with financial products and services aimed at low-income customers. Examples include the Affordable Housing Assistance Program by Bank of America and various prepaid cards, including American’s Express’ Bluebird, Chase’s Liquid, and BBVA Compass’ ClearSpend.

Banks need to be cognizant of the market trend towards gig economics, towards consumer experience, towards fintech. Innovative banks should see the opportunity to serve this growing set of gig economy workers in an efficient and user-friendly way.

Amrita Vir

Amrita Vir, a regular contributor to the blog Next Voices, is a student in the joint Harvard Business School and Harvard Kennedy School program, where she is pursuing a career in financial inclusion at the intersection of innovation and regulation. Vir is also research assistant to Jo Ann Barefoot, senior fellow at the Mossavar-Rahmani Center for Business and Government, and a member of the Banking Exchange Editorial Advisory Board.

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