Why Do We Need a New Banking Ecosystem for Gig Economy Workers?

The emergence of the gig economy in India represents a profound shift in the nation’s workforce. Unlike traditional employment, where workers receive consistent salaries and benefits, gig workers engage in temporary, flexible jobs. According to a report by the Boston Consulting Group and Michael & Susan Dell Foundation, gig workers constitute nearly 90 million in urban India and have shown consistent growth.

India’s gig economy is burgeoning, with an estimated workforce of 15-20 million workers. It’s a space where innovation thrives but is often juxtaposed with financial challenges, especially concerning banking facilities.

Gig Economy Banking is a critical aspect that requires attention, given the unique financial challenges faced by these workers. This blog post explores the banking needs of India’s gig economy, examining the issues and proposing solutions to bridge the gap with salaried employees.

Gig Economy Workforce: Solopreneurs and LLPs

Solopreneurs are self-reliant entrepreneurs operating without a traditional team. Examples include independent consultants, artists, or online retailers. Limited Liability Partnerships (LLPs) on the other hand combine features of partnerships and corporations and are prevalent among small to medium businesses in legal, architectural, and tech sectors. Although they contribute a lot to the economy, the banking facilities at their disposal are lackluster and inefficient. Let’s analyze their pain points in comparison with salaried employees and established businesses respectively.

For Solopreneurs

Access to Credit: While salaried employees usually have easier access to credit based on stable income proofs, only 23% of solopreneurs have access to formal credit systems.

Minimum Balance Requirements: Salaried accounts often come with low or no minimum balance requirements. In contrast, solopreneurs face higher requirements, limiting their banking options.

Interest Rates and Loan Terms: Higher interest rates and stringent loan terms are common for solopreneurs due to perceived risks.

For LLPs

Regulatory Compliance: Unlike larger registered businesses, LLPs face complex and cumbersome regulatory compliances, impacting 40% of LLPs in India in 2018.

Credit Facilities: Even though LLPs contribute significantly to the economy, banks are often hesitant to extend the same credit facilities offered to larger corporations.

Business Banking Features: LLPs often lack access to customized business banking features that are usually available to registered businesses, such as specialized loans, overdrafts, or merchant services.

A 2020 study by the Indian government revealed a significant gap in banking facilities offered to the gig workforce compared to traditional salaried employees and registered businesses:

• Low Minimum Balance Savings Account: 75% of salaried employees have access to this, compared to only 28% of solopreneurs.
• Credit Facilities: 60% of registered businesses avail themselves of credit lines, while only 15% of LLPs have similar access.

This disparity emphasizes the need for reformation in the banking sector to cater to the unique needs of solopreneurs and LLPs, who are equally vital in contributing to the economic fabric.

Contribution to the Economy

Both Solopreneurs and LLPs play a vital role in India’s economic landscape.

Often innovators and trendsetters, solopreneurs contribute significantly to various sectors like IT, design, and consulting. In 2019, they were responsible for 20% of India’s freelance revenue, translating to nearly $1 billion.

Thereafter, acting as a flexible structure for entrepreneurship, LLPs allow businesses to thrive without the constraints of a corporate framework. They play a vital role in the growth of small and medium enterprises (SMEs), comprising over 10% of India’s GDP.

Need to Address Banking Pain Points

The banking challenges faced by Solopreneurs and LLPs are not mere inconveniences but barriers that can stunt economic growth. 

Access to Finance: Lack of tailored financial products leads to a restricted flow of credit, hindering growth opportunities. According to RBI’s report, only 10% of small businesses in India have access to formal credit channels.

Modern Banking Facilities: The absence of personalized banking solutions equivalent to those offered to salaried employees and larger corporations adds to operational difficulties.

Regulatory Hurdles: Complex compliances can deter LLPs from seeking formal banking relationships, pushing them towards informal lending sources.

Initiatives and Solutions

Despite several initiatives aimed at addressing the banking challenges of solopreneurs and LLPs, the current solutions are still falling short. Government schemes like MUDRA and bespoke banking products from financial institutions have made some progress but haven’t completely bridged the gap.

The existing banking paradigm fails to recognize the unique financial needs of the nearly 90 million gig workers in India, who constitute a significant force in the economy. Traditional banking models are largely incompatible with the flexible and temporary nature of gig work, leading to hurdles in credit access, regulatory compliance, and modern banking facilities.

The urgency to build a new banking ecosystem for gig workers is underscored by their substantial contribution to the economy and their growing presence in the workforce. This ecosystem should include:

• Tailored Financial Products: Design banking products specifically for gig workers, considering their inconsistent income streams and unique operational needs.
• Flexible Regulatory Framework: Streamline regulations to facilitate easier compliance for smaller entities, thus making formal credit more accessible.
• Technology Integration: Utilize fintech solutions to provide seamless digital banking experiences tailored to the needs of gig workers.
• Collaboration with Gig Platforms: Partner with platforms that engage gig workers to develop customized financial services that align with their working patterns.

What Role Does Tech Companies Play Here?

Tech companies can be the bridge that connects traditional banking to the unique needs of the gig economy. Since banking is largely digitized these days, the new ecosystem for gig workers will be on the Internet. There comes the need to integrate the latest technologies and solutions to provide the best customer experience.

Mantra Labs developed ezetap’s Universal Payment Solution is a vivid example in this case. It is a secure interface that facilitates digital transactions across various touchpoints. This innovation reflects how tech solutions can tailor banking systems to suit the diverse needs of the gig workforce.

The growth of Solopreneurs and LLPs in India is a testament to the country’s entrepreneurial spirit. However, their unique banking challenges call for targeted solutions that understand and cater to their specific needs. With a combination of government initiatives, bespoke banking products, and technological innovation, there’s a pathway to creating a more inclusive financial ecosystem.