Small business banking for a new era
From gig workers to small business owners and influencers to freelancers, the self-employed segment of the economy has grown rapidly despite the roadblocks of COVID-19 and “The Great Resignation.” In fact, as of February 2022, self-employed workers made up almost 11 per cent of the 157 million employed workers in the US – a massive increase from 2017, when about 1 per cent of the workforce was self-employed. If this growth trend continues, self-employment could one day be as common as a 9 to 5.
The 2020 pandemic led to more workers prioritising flexibility and work-life balance over traditional employment than ever before; it also may have pushed many into self-employment due to layoffs, the increased burden of in-home childcare and more. All of this combined had led to the rise of the gig economy and self-employed workers, with the global gig economy now projected to generate a gross volume of about $455bn by 2023, double than in 2018.
However, despite the influence and growth of the gig economy, banking has yet to catch up. Many traditional financial services are not designed to meet the needs of workers who may have an inconsistent income, conflated personal and business finances and unique credit needs, as many self-employed individuals do. If banks want to capture market share among this group of workers, the time to start implementing solutions that meets their needs is now.
Addressing the financial offerings gap
Small businesses often have a variety of different payment channels (Venmo, Zelle, credit cards, etc.) making accounting difficult to manage. Many self-employed individuals must also be able to easily make, facilitate and track small payments, such as customer purchases and invoices – which can be hard to do leveraging existing digital banking interfaces. Furthermore, the irregular paycheques of many in this sector make it difficult for banks to assess the risk of lending to them, leaving many without access to traditional banking services.
As a result, a significant gap has appeared between what traditional banks offer and the needs of small businesses and self-employed individuals, despite the market opportunity in the space. In place of traditional banks, fintechs have stepped up. Since 2019, fintechs have taken up the mantle of offering these workers targeted financial services, including financial advice, flexible credit lines and security deposit financing, lending services and more.
However, as this segment continues to evolve and more financial institutions begin thinking about entering the space, it will be necessary for banks to introduce solutions targeted at small businesses and self-employed workers unless they want to miss out on an increasingly important strategic opportunity. Furthermore, emerging technology, such as AI, is making alternative credit worthiness assessments viable and removing some of the risk of working in this space for banks, making it more feasible than ever before.
One place banks can start when considering how to reach this segment is through strategic partnerships with fintechs, or by tapping vendors who provide existing solutions in the space. For example, leading global financial technology solutions provider Veritran launched a Small Business Solution called Fusion by Veritran in October 2022 that helps banks and financial institutions meet the unique needs of self-employed workers. These types of solutions can help close the existing market gap and provide self-employed workers with the necessary mainstream financial services they’ve been lacking.
Although current players in the market may have a head start on meeting the unique needs of self-employed workers, it’s not too late for banks to catch up. If financial organisations begin adopting technology and implementing services targeted at the gig-economy, they can still be a winner in this growing segment.
By Greynier Fuentes, VP of Digital Solutions, Veritran