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Freelancers and Fintech — Follow the Money

01/16/2019 By

Companies’ use of freelancers — or as we refer to them, independent contract workers (ICWs)* — has become a hot topic of discussion as well as a source of considerable confusion among contingent workforce professionals and other human capital personnel in procurement and HR over the past several years.

It is a chaotic discourse. But there does seem to be something of a consensus that the number of individuals performing some type of at least “part-time” freelance or short gig-work has been materially increasing.

While there has been discussion of various potential drivers of this trend (e.g., business cycle, technology, personal income sufficiency, etc.), less attention has been paid to the state of ICW payments and financial services as a potential driver of ICW supply-side growth. And this is the case, despite multiple surveys of workers having shown that payments is one of the top problems (along with development of new business and securing health insurance) that is gating the propensity of ready-and-willing workers to engage in part-time or full-time independent contract work.

But while contingent workforce industry observers have focused on other factors driving or constraining ICW work and its consumption by businesses, market forces have been at work on solving the problem of payment and financial limitations that may be constraining the growth of part- and full-time independent work being performed. And significant developments involving freelancers and fintech have become visible over the last year, as we will discuss.

* Spend Matters equates the term “freelancer” with “independent contract worker” (ICW) which we define as any person who performs contingent work outside of and/or in addition to an ongoing full- or part-time employment arrangement with an organization (inclusive of staffing firms and companies that deliver specific services under contract). See Spend Matters’ SolutionMap for Contingent Workforce enterprise solutions.

Established Systems Do Not Work Well for ICWs

Independent contract workers know that typical business systems don’t work well for them. Established financial systems (along with established work intermediation systems, credentialing systems,insurance distribution systems, etc.) were not designed to enable ICWs (and micro businesses) or their engagements with the organizations that consume their work and pay them for it.

There are a number of payment and financial operational challenges that ICWs have been facing, including:

  • Establishing an enforceable agreement that ensures that they will be paid by clients in a timely manner. (Timely, reliable cash flow is critical to ICWs.)
  • Having an efficient and functional way to invoice client organizations, which includes organizations having a functional way to process ICW invoices.
  • Having access to efficient, fast and functional ways to get paid (i.e, payments systems like Paypal and an increasing number of others).
  • Having efficient and functional “banking accounts” in which to receive, organize and track payments (taking the form “digital wallets,” “cash cards” and other “bankless” financial services, 100% mobile banking, etc.).
  • Having capabilities designed for ICWs to manage their funds (e.g., disbursement to pay business expenses, accounting, alerts and triggers).
  • Having integrated capabilities for tax filings and payments.
  • Having access to financial credit services tailored to ICWs, ranging from revolving credit and business loans to personal home mortgages, which are hard to come by for ICWs.

As noted, these are challenges that have been and still are faced by ICWs and that constitute a potentially significant supply-side constraint that is sub-optimal for ICWs and their client organizations.

A December 2018 article from an authoritative source – — reported that the freelancer payments/financial services situation “is an issue the gig economy will need to resolve, and fast” and referred to “a report from payroll company ADP that noted that reliance on gig work is likely to increase in the coming years.” said that, according to ADP, “roughly 80 percent of U.S. firms currently employ independent contractors, and this trend shows no sign of slowing anytime soon.” Note: ADP acquired Global Cash Card in late 2017 as a critical element of its alternative payments strategy (including Wisely) and acquired ICW management solution, Work Market, in early 2018.

So there appears to be a real set of ICW requirements that are not yet being met. At the same time, exploding fintech innovation and the rapidly increasing number of “digital natives” participating in the economy (often through part- or full-time independent work) seem to be trends that will at least help to make those challenges and constraints a thing of the past. Moreover, the fundamental nature of digital innovation and generational adoption could mean that the lifting of these constraints might occur faster than many of us might think.

A New Payments/Financial Capabilities Ecosystem for ICWs

With much going on at the intersection of fintech and ICWs, let’s take a summary look at some of those developments that suggest an emerging payments/financial ecosystem for ICWs.

The backdrop to this emerging ecosystem was a world of traditional invoice processing, AOR and EOR payors, checks, ACH transfers, international payments services. But in the period 2014-15, new solutions (usually start-ups) appeared to address a range of specific ICW payment/financial needs. These include Quickbooks Self-Employed (Intuit), Qwil, Bonsai, And Co (acquired by Fiverr) and others. But as good and as well-targeted as these solutions are, they have constituted a fragmented landscape and have not, in themselves, achieved scale to engender a real ecosystem for comprehensively serving the range of core payment/capabilities needs of ICWs. While PayPal has become the de facto — very visible — alternative payment system used by ICWs, it has not provided an alternative financial industry platform that would support a large scale ecosystem.

Now this may be changing based on the coalescence of other developments taking place over the past five years. These include the emergence and maturation of digital-only banks (also called mobile banks, neobanks, challenger banks) and prepaid debit cards (not connected to traditional bank accounts, but a staple feature — if not a foundation — among online banks). Prepaid card issuers and online-only banks aim to provide more (and more innovative, valuable) services to underserved banking market segments, using a digital- and mobile-first platform approach, while legally skirting traditional banking systems and regulatory regimes.

Certainly online banks have a much broader market than just ICWs (which contributes to their potential industry platform scale).  But they inherently provide an efficient, low-cost financial management platform that turns out to be functionally well-suited to the needs of independent contract workers (see our list of ICW needs in the prior section).

What’s more, some online-only banks in Europe, the U.S. and Asia are increasingly focusing on ICWs. These include Azlo, Monzo, N26, Penta, Quonto, Revolut, Seed, Shine and others. But it is a dynamic sector. Shine, founded in 2016, just raised $9 million. U.S.-based Seed, founded in 2017, appears to be shutting down, while U.S.-based Joust appears to be on the upswing. (Spend Matters reported Tuesday that Joust launched a banking app for freelancers.)

N26, a Germany-based online-only bank, recently announced a $300 million Series D Round last week, upon which basis the company’s valuation rose to $2.7 billion — around three times the valuation less than a year ago. Currently, the company has 2.3 million users across 24 countries, mostly in Europe. N26 will be showing up in the U.S. in the coming months. It  launched its prepaid debit card-based, digital banking offering suitable for freelancers and micro-businesses in 2017. In 2018, it introduced N26 Business Black, which the company says “is only available for freelancers and those who are self-employed.”

For those skeptical about this fintech trend, it bears mentioning that online-only banking is also being pursued by an increasing number of traditional banks that — perhaps — are beginning to see the writing on the wall. In addition, what ADP is doing with its Wisely Direct prepaid card bears some resemblance to an online-only bank, which can be built around a pre-paid debit card offering. We’re not suggesting that ADP is getting into the online-only banking business, but the payroll giant is definitely walking the talk and is very interested in being able to provide such payment and financial services to underserved banking segments, digital natives, and last but not least, ICWs. For more on this, refer to our PRO series, ADP and the Future of WorkPart 1, Part 2, Part 3, Part 4.

Fintech, Freelancers and the Future

Online-only banks seem to be coming and not going (as far as we can tell). They support non-traditional financial services (such as alternative payment, credit and financial management services) for ICWs — something that could positively impact the growth of independent contract work. But at another level, as digital-first businesses situated at the financial core of labor market (i.e., financial transactions), online-only banks have the potential to act as digital industry platforms.

Fintech is a volatile, unpredictable beast. To what extent will online-only banks — as we conceive of them now — become the cornerstone of freelance payments and financial services remains to be seen. As online-only banks extend their financial services portfolios, enter new markets and adapt to different regulatory regimes, they seem to be entering into ecosystem relationships with ATM networks, credit card issuers and many types of digitally capable services providers (and providers of non-financial services as well). In this respect, they appear more like platform developers and ecosystem managers —  and the value creation core of the platform is facilitating financial transactions for millions of online users.

So this is where it gets interesting. In the contingent workforce professional community, we see the world in a certain way. We believe the independent contract workforce is probably growing — we just don’t know how much, in what area and in what form).  Intermediating work arrangements is the core of the business, while payments services tend to be an ancillary add-on, usually coming from third parties. Not to mention, financial and other types of worker-facing services are always way down on the priority list of ways in which value can be created for the intermediary (one exception that comes to mind is MBO Partners).

But what if the world of contingent workforce intermediation  were turned upside down and built around growing service offers and the capture of  large numbers of workers and financial transactions. This would be an interesting platform-constructed world in which “following the money” (capturing more financial transactions through more service offerings) trumps putting more “butts in seats” as the core value generator. But for the near-term, it will be interesting enough to see whether the coming together of fintech and freelancers leads to any increase in the amount independent contract work being performed and where and how that works happens.