Small business owners have historically faced a unique challenge in the banking world: Financial institutions (FIs) can sometimes fail to clearly define their small business services, blurring the lines between personal and corporate banking and forcing an SMB to fit somewhere within that ambiguity.
Increasingly, growing demand for improved digital services, and the emergence of FinTechs targeting small businesses, has encouraged traditional banks to develop tools specific to their SMB customer base, which was once too big for retail products and too small for enterprise services.
But there's a new area in small business banking where the lines are blurring once again.
The gig economy continues to expand in the U.S. and elsewhere: As PYMNTS' inaugural Gig Economy Tracker notes, gig workers are expected to make up half of the U.S. workforce by 2028, and already 16 million individuals are participating in the gig economy.
With new opportunities emerging to step into gig work, individuals can suddenly become standalone small businesses. With these professionals taking home a whopping $1.4 trillion in earnings in 2018 alone, according to the Tracker, financial service providers have a massive opportunity to help these professionals manage their money.
Gig workers are facing significant money management challenges, too.
According to George Kurtyka, co-founder and chief operating officer of Joust, late invoice payments are one of the most damaging problems small businesses face today, including gig workers.
"The statistics are surprisingly bad," he told PYMNTS recently. "About 71 percent of freelancers have had to deal with a client who doesn't pay on time, or at all."
Finding Solutions That Fit
Freelancers and gig workers may face similar hurdles to SMBs when managing cash flow. PYMNTS analysis has found that more than one-quarter of freelancers’ invoices are sent late, further expanding the risk of late payment. Plus, a heavy reliance on paper checks means that processing and reconciling incoming payments adds to the friction.
As Kurtyka noted, the knock-on impacts are damaging, and not only for a single freelancer struggling to get paid.
"The biggest challenge is the instability this causes in their lives," he said. "There are bills and vendors to pay, and not knowing when their next payment will come can be difficult."
But just because the hurdle of late payments may be similar to what a small business faces doesn't mean the same banking products and solutions designed for SMBs can always be the right fit for a freelancer.
Invoice financing, for instance, is one product that Joust believes presents an opportunity in the gig economy. The company, which launched operations last month as a digital bank for the self-employed, offers a PayArmour invoice financing solution, though Kurtyka highlighted a few key differences from a traditional invoice financing product.
One difference is the ability for the solution to be used for a single invoice, rather than operate as a lump sum of financing for multiple outstanding receivables from their corporate customers, as a small business often faces. Kurtyka noted that freelancers need to be able to use financing for a single outstanding bill, with late payments occurring in a variety of scenarios from a variety of clients – whether it is a delayed payment for services already provided, a retainer or another type of payment.
Drawing the Line
Gig workers sit somewhere between small businesses and individuals, and as the freelance economy grows and evolves, the distinction between the two will continue to blur.
But financial service providers and banks must be able to establish a clear distinction in order to service gig workers appropriately.
Kurtyka highlighted the challenge that many freelancing professionals face as a result of ambiguity: failing to separate personal spend from business spend. And because a gig worker is not always considered a large-enough business to obtain a commercial or small business credit card from a bank, separating that spend can be particularly difficult, leading to larger challenges at tax time, he said.
"If you're self-employed, you no longer get W2s like traditional workers do," he noted. "This makes it even more important for [freelancers] to separate their business payments from their personal payments."
It's another opportunity identified by Joust, which offers freelancers a Visa debit card to not only separate professional expenditures from personal ones, but to also gain access to that spend data for enhanced cash flow management and spend analytics. That opens up more avenues for financial service providers like Joust that service the gig economy to develop new products and revenue streams from more data – particularly as data integrations become more commonplace in the U.S., even without an open banking mandate.
As Joust moves forward, Kurtyka said the company is planning to take advantage of data integration opportunities via APIs, with plans to interconnect its invoice financing and payments processing services with other third-party platforms used by freelancers.
At present, the freelancer economy is underserved by the traditional banking market, he said. With the gig economy continuing to proliferate, demand for financial services designed with the freelancer in mind will only grow.
"[Gig workers] are paving the way for a new workforce," noted Kurtyka. "As a result, they're often left alone to tackle financial hurdles along the way. What makes it worse is that big banks ignore them, and leave them feeling unsupported."