Is the ‘settlement gap’ to blame for gig economy platforms losing users?

By Jessy Conflon | 19 July 2019

A recent study found that 4.4% of the UK population were gig economy workers between 2017 and 2018. This explains the emergence of so many gig economy platforms, eager to serve a consumer’s every need. But not all gig economy platforms that are launched succeed. 

Although the gig economy model has successfully disrupted some markets like Uber in the taxi industry, the transition hasn’t been as smooth for many others. Platforms that facilitate trades services like plumbing, handymen, babysitting etc., commonly face the problem of network leakage or disintermediation. This is when buyers and sellers connect on a platform but transact independently outside of it.

One of the main causes of disintermediation for this industry is the settlement gap - the delay between a payment being made and it reaching its destination, or, put simply, the inability of a platform to facilitate instant payouts. Cash-in-hand transactions are a major factor in trades services. Without the ability to digitally replicate them, gig economy platforms don’t necessarily add enough value and incentive to ensure loyalty from their users. 

Why is cash-in-hand so important?

Cash-in-hand transactions facilitate ‘that Friday feeling’, allowing workers to spend their earnings immediately after finishing a job. But this isn’t a simple transaction to replicate digitally. In order to facilitate instant payouts, a platform needs to first become a regulated financial institution to handle client funds and operate compliantly under PSD2. To then make payouts, they must either embark on a manual process of making payments themselves, or build a state-of-the-art solution that can automate complex payment routing instead. If neither of these options is possible, there is a delay between a payment being made and it reaching its destination account. 

But this is not just an inconvenience. The settlement gap can have more serious implications than preventing tradespeople from immediately spending their earnings. Often supplies are needed ahead of a job - a painter needs paint, a cleaner needs cleaning products, a builder needs tools and parts etc. If a platform can’t pay immediately, a tradesperson may not be able to accept jobs. Restricting work in this way renders your platform redundant. 

A further potential implication of the settlement gap comes as a result of The Taylor Review - a 2017 government report. The report looked into modern working practices and questioned the lack of workers’ rights in the gig economy. It recommended that a clear distinction needed to be made between self-employment with “genuine two-way flexibility”, and those working ‘gigs’ who were essentially employed by platforms, but without the equivalent working rights. This is one of many recommendations that the government has agreed to legislate in their Good Work Plan of December 2018. 

Once the Good Work Plan is legislated, the framework to determine whether someone is an employee or worker will be much more stringent and there will be “more emphasis on control and less on the notional right [sic] to send a substitute”. Paying tradespeople immediately may be perceived as closer to the contractor work model and, although delayed payouts are not specifically addressed by The Taylor Review, that’s not to say that they won’t be classed as an example of a lack of “genuine two-way flexibility” in the future. Closing the settlement gap could help you to future proof your platform and more clearly define the status of your workers. 

Resolving the settlement gap

Trades services platforms have the potential to thrive in the gig economy space. The platform model itself offers numerous advantages: it is cashless; it is secure for both parties; it is user-friendly, integrating useful features like invoicing and scheduling. Resolving the settlement gap to digitally replicate cash-in-hand payments could quickly become a platform’s unique selling point, and one that distinguishes it from its competitors. 

But how can it be done? There are a few options. If you have a payments licence, it’s possible to compliantly facilitate instant payouts, but it’s not a simple task. Acquirers generally take between 3-5 days to settle payments which means that further innovation is required to enable this feature. Furthermore, it can fast become a manual, labour-intensive and a non-scalable process if you don’t have the right technology to automate payments routing and reconciliation. 

If you don’t have the time and money to embark on the long, costly and laborious journey of becoming a regulated financial institution, a better solution is to partner with a modern payments provider, like Paybase. This not only offers you the regulatory cover required by law and the automation of payments routing and reconciliation, but it also provides the operational agility that will enable you to offer instant payouts to your workers. At Paybase, we can provide you with the flexibility to meet a wide array of use cases. Pre-funding options are just one solution for seamlessly enabling instant payouts (and thus eliminating the settlement gap) and they can be set up out-of-the-box with the Paybase integration. 

Partnering with the right payments provider will help you close the settlement gap and tackle disintermediation with ease. And in the process, it can give you the tools to build a truly disruptive product. 

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