The embedded finance opportunity for marketplaces and gig-platforms

The US will have more than 86 million gig workers by 2027, and 50% of online spending will take place on marketplaces by 2030. In Europe, 28 million workers are active on gig-platforms and this is expected to double by 2030. The rise of gig-economy marketplaces has led to an increase in competition in the space. Gone are the days when Uber was the default choice to book a taxi, or Booking.com to book a room. 

Marketplaces have become commoditized. The breakthrough to retain vendors and customers in the long term is adding ancillary value-added services, which could arguably be the easiest way to create stickiness with both vendors and customers. It would disincentivize switching to a competitor, help vendors with their operations and additionally, create new revenue streams for marketplace platforms. 

Embedding finance, is the best retention strategy for marketplaces, as highlighted in this article. The figure below shows how embedding finance unleashes further network effects for marketplaces. By integrating financial services into the vendor’s account or digital journey, the platform creates stickiness, and attracts and retains the best suppliers by providing a superior experience. This in turn means the marketplace will gain a competitive advantage for hosting the best products and services which will attract customers. Embedding financial services on the customer-side will lead to increased demand and return customers which will attract even more suppliers and vendors to the platform. It creates a win-win situation for the platform, vendor, and customer.

Embedding financial services allows vendors to manage some of the most important aspects of their business, in one place. This will also give marketplaces the opportunity to help vendors improve the financial well-being of their business, which will ultimately lead to happier end-customers (think pricing consistency, inventory management, or simply surviving thanks to budgeting and cashflow management). 

Here is a list of the Top 10 “vendor-side” financial services to embed into marketplaces. It was prepared with typical “supply-side” marketplace vendors in mind, such as:

• Apartment or hotel-owners listing on Airbnb or Booking.com

• Taxi drivers on Uber, Lyft, or Bolt

• Vendors selling goods on Ebay or Shopify

• Pet-sitters, baby-sitters or teachers using online matching platforms

• Restaurant owners selling via UberEats or DoorDash

#1: Onboarding process

A first-time vendor, or gig-worker, opening an account on a marketplace would need a bank account, an ID, possibly a legal entity, and provide proof of tax clearance. Being the first touchpoint with a vendor, the platform has the opportunity to provide a seamless onboarding experience. 

By integrating Banking-as-a-Service into the platform, the vendor can open a store/account and, at the same time, get a bank account - which allows them to manage their business in one place. The compliance checks and licensing will all be handled by the BaaS provider.  

Shopify Balance is a great example of how vendors don’t need to open a traditional bank account. Businesses can keep their funds on Shopify, pay suppliers and receive partner offers.

#2: Cashflow and budget management

Depending on the product or service offered, bookings, jobs, or orders could be seasonal and ad-hoc. This means vendors struggle to predict cash flow. By owning the banking relationship with the vendor, the marketplace gets access to their transaction data and could easily provide insights into inflow and outflows, along with predicting seasonality on revenue and costs. This would incentivize vendors to manage their business on one platform rather than multiple so that they can have a simple, consolidated overview of cash flow.

#3: Financing and loans

It’s no secret that banks don’t cater to gig workers or small businesses with irregular incomes. Marketplaces, have transaction history on vendors and are best placed to understand the business and do a creditworthiness and risk-assessment check on the vendor – which can easily be facilitated by AI. Receiving a loan could be the difference between thriving and failing for vendors. With the right assessments and insurance in place, supply chain and working capital financing could become a profitable revenue stream for marketplaces, and in turn, could mean they own the financing relationship with vendors which creates long-term stickiness. For a gig-worker is could be the difference between a “pay-day” loan with sky-high interest rates or an affordable offer from their trusted platform that knows their income trends. 

#4: Investment and saving management

44% of Gig-workers aren’t saving for retirement. Embedding wealth management into marketplaces will help vendors and gig-workers improve their financial wellness. Think helping them plan for quarterly tax payments and setting long term goals like planning for their children’s education or retirement and pension. Access to their transaction data could also mean, nudging them, at the most relevant time, such as on “pay-day”, to deposit into a savings account.

#5: Managing profit margins 

Platforms usually provide vendors with pricing insights, based on demand and supply. Such as AirBnB telling hosts that 90% of listings are sold out for certain dates and suggesting prices, based on apartments with features similar to theirs. If the banking relationship with the vendor is owned by the platform, they will also be able to pick up trends or seasonality of input costs. Thereby, they can help the vendor manage profit margins by suggesting, “energy prices have increased by 20%” or “we noticed your supplier bill is 20% higher this month”, “therefore consider increasing your selling price by X% to maintain your profit margins and ensure you are able to cover rent and your loan instalment this month”. 

#6: Loyalty and discount rewards

Chances are, all the marketplace vendors in certain areas, use the same suppliers. When transaction data is owned, major suppliers can be identified. Be it laundry services for guests, fresh linen for beds, meat and fresh produce for their restaurants, gas stations to refill their taxi or delivery service agents. When grouped, the buying power of the vendors is massive, and a discount could be negotiated with their suppliers. Embedding a cashback, discount or loyalty reward with major suppliers into the platform could help vendors manage costs, and, create stickiness for a long-term happy vendor.

#7: Digital wallet

A no-brainer first-starter add-on for marketplaces is an integrated digital wallet. From all the examples mentioned before, there is a lot of value in owning the transaction data and the opportunity it gives the platform/marketplace to identify and provide tailored value-add services to vendors. A wallet will also mean reduced payout fees and faster pay-outs. This will allow platforms to remove third-party reliance or intervention, and remove an extra, low-value process from the marketplace-vendor relationship. 

#8: Insurance

With access to vendor transaction data, appropriate insurance products could be offered. This could be income-protection, extended warrantees or maintenance plans on equipment bought, damage protection against guests, cancellation cover, accident cover, health care insurance, cover for supply chain disruptions, etc. With an embedded wallet, insurance claims can be paid out instantly to allow vendors the peace-of-mind to focus on the business.

#9: Foreign currency hedging

Vendors on marketplaces with input costs in foreign currencies are exposed to currency risk. A vendor in the US may order goods, for resale on eBay, from China. They are expected to pay for the good within 30 days of ordering. During those 30 days, the US Dollar could lose value to the Chinese Yuan and significantly impact their profit margins. The same can be said for vendors with employees in different countries. With a payroll hedging solution, vendors can predict and control their staff costs too. 

#10: Managing VAT, tax and accounting

Accounting software such as Xero, and Quickbooks have made it easy to stay complaint with tax, VAT and preparing accounts. Imagine if a marketplace has access to all inflow and outflow transactions – would they not also be in the best position to integrate accounting software to help with VAT and Tax returns. This ties in with wealth management, to help them plan and save for VAT and tax payments. Ideally their payroll will also be run on the platform, so that their entire business is managed in one place.