Who would bank with the Mavericks?

This article describes our research and analysis at Phyllo for doing what we are doing - building data APIs to access creator and self employed economy platforms

The first thing I probably learnt when I turned an entrepreneur is that I will not get a credit card easily with no salary slips. A CPA friend with a thriving practice told me nightmarish stories of proving income for getting loans. Another friend, who works in a large bank told me the story about when they denied a card to a celebrity singer due to lack of income proofs and then his team had to call and "explain" the situation. A family friend, who is a seller on Amazon tells me about the lack of insurance options he has for his business and retirement options he has for himself.

World is full of stories of self employed professionals facing challenges in every aspect of business. The surprising thing is that this is not a small segment of people who are facing this problem, nor are they financially at the bottom of the pyramid to be ignored.

Sizing the self employed economy

McKinsey global institute’s 2017 research mentioned 54-68M people in the US engaged in self-employment. That is roughly 1/3rd of the tax paying population. 46% of this self - employed population indicates self employment as their primary source of income.

Moreover, 79% of this population did not belong to low income households and more than 50% of genZ earners mentioned engaging in self-employment; representing that this segment is financially well-off and the next generation of income earners will prefer self employment. In fact another 2019 survey by Lego indicated American kids prefer being a YouTuber 3 times more than an astronaut. Freshbook's 2018 survey pointed to tremendous growth in self employed professionals with an overall 16% increase in career satisfaction amongst self employed than traditional earners.

Rise of the creators and use of technology in the future of work

These numbers and trends are interesting enough to make many heads turn to this economy. But what makes it more interesting is that there is an increasing adoption of technology in this economy. Mckinsey's 2017 report linked above indicated 15% of self employed professional used tech platforms for income generation and ReCreate's growth of creative economy report suggested that this adoption was growing at 20% CAGR in 2017. In a post pandemic world we feel these numbers will be much more. We also feel that the adoption of technology platforms for creators / self employed will only grow in the next couple of years, because of following reasons:

1. It reduces entry barriers: Li Jin's super interesting article on the future of work indicates the unbundling of employment from traditional work; which essentially means that with the means of technology driven tools and platforms, a freelancer / microentrepreneur will be able to do much more to run his business and hence is now better positioned to work as an independent worker than before. For example, a musician today can create and distribute music on Landr, get following from YouTube, teach on skillshare, earn from fans at patreon and do live shows with Maestro without needing a support team and that reduces the entry barrier and operational costs to being a creator / freelancer tremendously.
2. It provides business networks: Technology platforms have bridged demand supply gaps by providing networks. Platforms like #Paid, Popular Pays are connecting brands to influencers for influencer driven promotions. In the last 2 years specialised marketplaces have emerged like ThredUp for re-used clothes, RV share for RV rentals, Dumpling for neighborhood groceries.
3. It allows self employed professionals earn a living: Brian Baumgartner making more than $1M a year using cameo app might look surprising but as we see the data, our internal analysis shows a GMV of $180B generated from individual earners by creator, gig and freelancer online marketplaces in 2020. Additionally, SMB marketplaces generated more than $300B in GMV (and we are still counting!)
4. They attract other tech driven businesses: This is perhaps the most interesting insight for us at Phyllo, that a tech driven business servicing a certain gambit of self employed economy will prefer servicing the professionals on these tech platforms first due to easier reach (through the platform), digital footprints and proven tech savviness.

Key challenges of self-employed and tech businesses that solve them

When we interviewed the creators, freelancers, small business owners and gig workers, 3 challenges appeared:

• This sector has been traditionally ignored by financial services: Services like personal loans, mortgage and credit cards have been denied or made difficult to get because of lack of salary proofs. Similarly many felt that lack of retirement options such as 401K plans or solutions tailored for insurance and business banking.
• They felt they needed to get more business: Many creators felt that they needed to be better at selling, others felt they needed better paying or more customers. Few others felt they were not treated well by clients at marketplaces
• They did not want to focus on what is not their core strength: Operational overheads like home deliveries, year end activities like taxation, reconciliation, budget management, production & distribution by those who wanted to focus on design and creation accounted for key challenges here.

It is not that there is no-one that is trying to solve these problems. In fact there are many that have emerged focussing on this economy in the last few years. Oxygen, Lance and Lili are neobanks focussing on freelancers, Stoovo is a neo bank for gig economy, Karat is providing cards to creators and Decent is focussing on health insurance to SMBs. Platforms like #Paid and Skillshare help creators reach a wider audience purely through their skills. Platforms like Stir and Better are helping self employed in money management while KeeperTax and Flyfin are helping in tax benefits.

Having said that we are just scratching the surface here. When we analysed all consumers / SMB facing fintechs that received funding in 2020, less than 5% had focus on freelancers and self employed for an economy that has contributions from roughly 1/3rd of the USA tax paying population.

Providing access to walled gardens of creator & self employed platforms.

Clearly there is a massive gap between the needs of a fast growing market with a digital footprint and the number of tech solutions that are solving it. And that makes it so interesting for us because historically, such situations have provided opportunities for massive digital infrastructure tools to come up for developers to build tech solutions for this emerging market over this infra.  

For example, the very popular talk by A16Z's Angela Strange on "every company will be a fintech company", focussed on the rise of embedded finance for customers with digital footprints and thus this provided more opportunities for fintech infra companies to use these digital footprints to provide KYC, AML, risk scores etc as a service.

Similarly, banks had massive transaction and identity data about their customers stored digitally, but when it was exposed as an infra by Plaid, Yodlee, Finicity and others; it gave multiple developers the capability to build fintech applications for these customers. This has happened again with companies like Codat (infra over accounting systems) and Checkr (income and employment data from payrolls) amongst others

We feel that building APIs over the creator and self employed economy platforms will bring tremendous benefits to both the demand (self employed) and supply (developer / tech coz.) sides of the ecosystem. Let us relook at the 3 biggest challenges of this economy mentioned above:

• Provision of financial services:  One of the key reasons freelancers and self employed professionals find it difficult to get loans and credit cards is due to lack of verifiable income proof. They do not have the traditional salary slips and 1099 forms need a lot of manual interventions. Also since income patterns are irregular and coming from various sources many of which are unknown to banks, bank statement scrapping for 1099 income rarely solves the problem.
• Here APIs to access data from such self employed platforms from where the professionals earn will give a lot of information about income, patterns of revenue, quality of work etc directly from source. Apart from this, such platform APIs will also power following benefits:
• Direct Deposit Switch Automation: Neo-banks want to be linked to all income sources and want their customers to switch from the old bank accounts to theirs. Today earners from self-employed / creator platforms do this manually which is either very cumbersome and error prone.  Phyllo APIs will automate this bank account updation in a single click.
• Identity and address verification: Many platforms do KYC and address verification of their merchant. This information can be exposed as an API for identity and address verification
• Business Finance Management: The creator / self employed platforms have tremendous data about day to day business activities. For example an e-commerce marketplace would have a wealth of transaction data such as customers, invoices, repeat purchase which the merchant might need for business finance management, reconciliation, accounting etc. Phyllo APIs will help developers get access to such data for developing their applications.

• Getting more business from better customers: Creators / self employed often use multiple platforms to increase their earnings and to get different functionalities as no one platform provides all of them (for example one platform allows you to teach photography courses while other allows you to pick up photography assignments by brands). Now these creators / self employed have already built a lot of brand equity on one platform but since these platforms do not talk to each other, it gets very difficult for them to switch to others without starting from ground zero.
• APIs that give access to data of such platforms allow each platform to identify and verify a creator / self employed in a non-intrusive manner, thus allowing creators to carry their identity and skills as an API that can be ported anywhere with their consent. So, for e.g. a popular course instructors on Udemy will get a different treatment when they plan to use Teachable or teach on skillshare or decide to earn from their students / followers on cameo. Such APIs will also help a creator / self employed to migrate to competing platforms by giving consent to port their data to another platform
• Being forced to spend time on activities not core to their skills: As work gets unbundled and the breed of creators / micro-entrepreneurs grow; technology platforms will play the role of doing everything else the creators do not want to focus on. For example Moe Assist is a creator project management tool that helps them organize their projects and track payments. Flyfin and Keeper Tax help self employed / freelancers to find tax write offs using just a mobile app.  Such tools will need data pipes to access data from the self employed platforms to provide the best services to their customers and reduce friction such as document upload, manual entries etc. For example, a creator project management tool can use an integration with a creator marketing platform (such as Hashtag Paid) to directly get access to projects and payments without the creator manually creating entries. Tax benefits discovery tools can get income and tax deducted from source directly as an API from the platform that has actually made the payment

We are barely scratching the surface when we think of the potential of such an infra to connect to platforms driving a new kind of growing economy . Personally I feel that a lot more use cases will also emerge as creative developers start playing around with our APIs and start imagining new possibilities. We will be writing about the use cases that we are validating in detail, in coming days.

Phyllo is building data APIs to access creator / self employed economy platforms. If you want to talk to us and want to play around with our APIs, please do not hesitate to write to us at hello@getphyllo.com

Image credits: Jakob Owens

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