How to Capitalize on Digital Payments in the Gig Economy

Key Takeaways

• The gig economy has continued to grow since 2020 and shows no signs of slowing down.
• It is essential for businesses to outline a strategic approach that implements cost-efficient payout methods, optimizes payout flows for platforms and workers, and leverages data analytics for cash flow forecasting.
• Leveraging emerging technologies can streamline payment processes and enhance security measures within the gig economy.

The “gig” economy relies on the use of independent contractors and part-time workers and thrives on high transaction volume, which can strain a business’s financial health. High-volume gig platforms face challenges in optimizing payment costs, forecasting cash flow and adopting new revenue opportunities. For these reasons, it is essential to outline a strategic approach that implements cost-efficient payout methods, optimizes payout flows for platforms and workers, and leverages data analytics for cash flow forecasting. By understanding these challenges and solutions, fintech professionals will gain valuable insights to optimize financial performance while unlocking new revenue streams.

The gig economy is here to stay. According to a 2024 report by TeamStage, “the gig economy is expanding three times faster than the total US workforce, and more than 50% of the US workforce is likely to participate in the gig economy by 2027.” And even though there was a considerable increase in gig workers during the COVID-19 pandemic, the gig economy has continued to grow over the past several years and shows no signs of slowing down.

Innovation and Adaptation

The industry is driven by innovations that are a boon for those working in this growing economy. Thanks to advanced technology, the marketplace has seen the rapid adoption of real-time payments. These low-cost, fast payment solutions allow companies to pay workers more frequently, via either weekly, daily or instant payments. In addition, these payments can be distributed through various methods, from traditional bank accounts to peer-to-peer (P2P) wallets such as Venmo and Cash App, as well as cryptocurrency. Real-time payments attract and retain more gig workers. 

Seize the Opportunities

The upside to these worker benefits also extends to the companies because they have expanded revenue opportunities based on gig payment pricing. Companies can gain financially by charging for their services and making money from payment processing. These include assessing fees for instant transfers, holding workers’ earnings until they decide to cash out and collecting the all-important interchange revenues.

With interchange revenues, gig companies often issue debit cards to their workers, who receive payments via those cards. They also use those same cards for daily transactions and purchases. A percentage of the fee used to perform that transaction is passed on to the company that issued the card (roughly 1%-3%). According to a 2023 report by the Federal Reserve, in 2021, the total value of interchange fees transferred from acquirers to issuers was $31.59 billion. Among the more popular payment platforms is Payfare, which earns 75% of its revenue via interchange.

Companies can capitalize on their revenue streams from referrals to benefit partners for tax or employment benefits and cross-border payment services. With the gig economy now global, currency conversions and international transactions are critical.

Overcoming Challenges

Although there are plenty of upsides for businesses using digital payments for their gig workers, there are also challenges to consider, particularly with high-volume transactions. Cash flow management challenges, particularly when payments to companies are made via credit card, can take several days to settle, yet gig workers are paid almost instantaneously. It doesn’t take much for a company to suddenly find itself paying out faster than it has money coming in, which can lead to a cash flow problem for some companies.

It’s also crucial for companies to address payment reversal requests, which are inevitable when working with high-volume payments to multiple gig workers. Payment reversals can come from myriad places, especially services. For instance, Can Monkey is a national service that takes out and returns trash cans once a week for vacation rental owners. If homeowners aren’t satisfied with the service – perhaps the cans were not taken out or brought in or were damaged in some way – they will ask for a payment reversal. This becomes challenging if the gig worker already spent the pay, leaving the gig employer on the hook for those funds, in addition to the fees required to implement reversals. This inevitability of payment reversals also necessitates companies to invest in excellent customer support to handle requests from multiple gig workers.

Companies can take several steps to mitigate these concerns and optimize costs, including determining the best pricing model from their payment processor. All digital payment platforms, such as Checkr Pay, Stripe, Branch and others, offer one of two pricing models. The first is percentage-based. If a company transfers $100 and the payment charge is 1%, then the fee is $1, or $2 for $200, etc. There is also a flag charge per product, where the fee is $1, irrespective of the amount.

Flat-fee pricing may be the best option for companies with consistent transaction sizes and volumes. Some payment processors also offer tiered pricing models. Increased transaction volumes result in decreased fees, and some payment processors charge a fixed monthly (per-seat) price regardless of whether a gig worker is active on the platform. According to Fintech Nexus, worker turnover among gig employees is as high as 500%, and in 2023, The Wall Street Journal reported that turnover was directly related to employee pay and experience, with the cost of turnover estimated to be 0.5 to 2 times the employee’s earnings, even for a gig worker. Therefore, it behooves companies to negotiate to have that fee waived or reduced or to choose a platform that doesn’t have per-seat pricing. These numbers are also a good reason for gig companies to shut down accounts of inactive workers to reduce unused seats.

Streamlining Processes Through New Technologies

Ensuring a robust verification process, from identity and background checks to payment method verifications to prevent fraud, is key to streamlining costs and reducing overhead. Lacking a solid verification process often leads to payout reversals. It’s important for companies to use advanced fraud detection tools and monitor real-time transactions. Fraud detection technologies such as Sardine.ai, Salv, Stripe Sigma and others can identify and flag unusual and potentially fraudulent activity that can be halted before a payout is processed. In addition, background check providers that integrate payment solutions, such as Checkr Pay, can be implemented in the onboarding process.

Customer-support costs can also be reduced using next-generation application program interface (API) chatbots and artificial intelligence (AI) to implement surge pricing for rideshare gig workers based on supply and demand. Perhaps one of the most important new technology tools for the gig economy designed to prevent fraud and validate payment methods is the “Know Your Customer” (KYC) verification process. These robust tools require gig workers to provide government-issued IDs that allow gig companies to check everything from a person’s driving record and potential violations (Lyft, Uber) to criminal and sex offender records (for caregiver platforms like Care.com) and qualifications and certifications (for medical professionals, such as nurses).

KYC validates payment methods using technology such as Plaid to verify bank information and prevent money laundering and payment fraud. It also covers myriad safeguards, including guaranteeing that regulations are followed. Gig workers are independent contractors, and KYC can ensure that companies do not illegally withhold taxes.

With the proper safeguards, companies can optimize their costs and boost revenue through digital payment platforms by following a two-pronged approach. The first is to cater to gig workers’ needs through various payment options and tailor financial services to them, including simplified tax processing. The second is to leverage emerging technologies to streamline payment processes and enhance security measures. By offering attractive options to gig workers, protecting their businesses by reducing transaction costs and being proactive with fraud detection policies, companies will trust and work effectively and efficiently within the gig platform.