The challenger banks catering to gig-economy workers

When Johnny Reinsch went from being an attorney to a freelance consultant, he stumbled into a cash-flow problem when a good client failed to pay on time due to a mistake.

"I was going to default on my mortgage because of a five-day cash gap,” Reinsch said. “I went to the very well-known bank that had my mortgage at the time — they had every financial product I had ever signed up for in my adult life — and I said, 'This is a great client. I have every expectation they’re going to pay. Is there anything you can do for me?' The response wasn’t just no, it was, 'No, we recommend you get a payday loan to cover this.' "

It was a hard pill to swallow.

“At that moment, I felt very left out in the cold by this longstanding banking relationship I’d had,” Reinsch said.

The experience left him wondering why this had happened to him, and he concluded that while the traditional financial system is good at underwriting products within well-defined buckets, it doesn't operate well outside of those buckets.

“Especially if you’re a true sole proprietor or freelancer, there are not a lot of options out there,” Reinsch said. He is just one of several gig-economy workers who felt their banks failed them and set out to create an alternative.

gig economy
Reinsch’s startup, Qwil, focuses on providing working capital for the freelancer who has trouble, like he did, getting paid on time.

“The credit system doesn’t provide a lot of options for a freshly minted freelancer or a true SMB,” Reinsch said. “There aren’t great products for them or the products aren’t as accessible as they are to their W2 or full-time counterparts.”

Because the cost of customer acquisition is high and the typical loan size low for freelancers ($1,000 on average), Qwil works with marketplaces, payment providers and HR platforms to offer its cash advances in their ecosystems.

One such marketplace, Dronebase, is used by drone pilots that do things like assess flood damage for insurance companies. Whenever a drone pilot working in Dronebase has a payment that’s about to be paid out, Qwil captures the data, proving that the job was performed, and offers the drone pilot the ability to get paid the same day for a small fee. Other Qwil users are freelance software engineers and designers, small design agencies and small doctors’ offices.

Qwil’s underwriting technology assesses the payor’s likelihood of paying. It captures information about the approval status of the invoice: Is it definitively approved, is it likely to be approved or is it simply booked and not approved? It conducts identity verification and fraud checks on each freelancer. Qwil charges a flat fee for the advance, such as 1% of the amount. No interest rate or late fees are charged. And it never goes after the freelancer or small- business person to collect.

“If we underwrote this incorrectly, we’re not going to go after the freelancer. It’s our bad for underwriting badly,” Reinsch said.

It does go after the freelancer's client, however. Reinsch wouldn’t say how many users Qwil has. His team initially thought Qwil's offering would appeal to low-skill, low-paid workers. But, he said, it has attracted highly paid software developers and designers as well as delivery drivers. The advance amounts have ranged from $1,000 to $1 million.
Hussein Ahmed
Hussein Ahmed, founder and CEO of San Francisco-based Oxygen, has an origin story similar to Reinsch’s. He was working on getting an MBA from University of California, Berkeley and consulting on the side when he applied for a loan at LendingClub. His FICO score at the time was in the high 700s.

“I got an email letter saying, 'Sorry, we could not extend credit because we could not verify your income,' " Ahmed said.

He was pointed to a daunting set of requirements including sending two years of tax returns, bank statements, and other personal and business documents.

“That’s the first time it hit me that it doesn’t make sense. Why I can't get money despite making more than $150,000 in annual income? I'm treated like a bad borrower, a second-class citizen, just because I don't have a full-time W-2 job,” Ahmed said.

He researched the market, wondering if there was a reason the online lenders weren’t helping freelancers. “I thought, these guys are smart and they're not wasting time going after this niche little market,” he said.

But he found that there are 57 million freelancers in the U.S., accounting for more than 35% of the workforce. One estimate is that more than half the country will be freelancing is less than seven years.

“That was the light bulb. I saw this is a big enough market,” Ahmed said.

Online lenders like OnDeck, Kabbage, Fundbox and Bluevine all look at accounting software data and bank account data to analyze the cash flow of and qualify small business applicants. But the freelancer graphic designer working in a Starbucks or contract copy writer can’t get this type of loan, Ahmed said.

Oxygen tries to look at the worker’s broader financial picture. It pulls in cash- flow information from bank accounts and credit report data. It performs cash flow analysis and cash-flow forecasting.

“We’re able to look more into details of actually how volatile is that income? Is it cyclical, seasonal? And then assess their capacity and willingness to pay in a much more nuanced way than other lenders are looking at today,” Ahmed said.

Oxygen offers a bank account backed by Evolve Bank & Trust. It also works with data aggregators to pull in external bank account data, so it can see all of a person's expenses and discretionary income.

It also provides a line of working capital that customers can access as needed, to help them deal with inconsistent income. For instance, an engineer working on a project may not get paid for three weeks but has rent due the first of the month. So that person might take out a small loan to cover that gap. Oxygen's banking and lending services are bundled into a membership with a flat monthly fee of $29.99.

Ahmed wouldn’t say how many users Oxygen has. The company, which started in a Y Combinator incubator, has been in production since September has been growing users at an 80% monthly rate.

Most of the technology was built in-house. But Oxygen also works with technology partners Socure (for KYC), Hummingbird (for AML), Jumio (for identity verification) and Mitek (for mobile check deposit). At the end of January, the company announced it had raised $2.3 million in seed funding from investors including Digital Horizon Capital and Cynthia Chen.
Archie Ravishankar, CEO of Cogni.
Archie Ravishankar (pictured), CEO and co-founder of New York-based Cogni, which is expected to launch this summer, watched entrepreneur and freelancer friends struggle with financial problems their banks weren’t solving when he decided to form his challenger bank.

Cogni will offer a checking account and debit card, as well as up to 12% cash back at restaurants and retailers. It will provide “curated financial and lifestyle services” in an app designed for millennials, freelancers and side hustlers.

The app will offer access to partner products such as discounts on fitness classes.

“Rather than try to be a better, different or easier version of a traditional bank, by focusing on parity and table-stakes features like a five-minute account opening process, low fees and free checking, which we offer, Cogni is designed to complement and enable our members’ lifestyles,” Ravishankar said.

The company is 2% owned by Barclays.
Lamine Zarrad
Joust offers a deposit account through nbkc, a community bank, and PayArmour, protection for freelancers against delayed payment and nonpayment. It also offers a merchant account through ProPay that freelancers can use to process credit and debit card payments for their products and services.

This month, Joust started a partnership with the Freelancers Union, which has 425,000 members. In a survey, the union found that 71% of its members have trouble getting paid. It also announced an Android version of its app (it had only iOS before).

“Joust’s partnership with Freelancers Union means freelancers now have ethical banking and financial solutions tailored to their specific needs,” said Lamine Zarrad, Joust co-founder and CEO (pictured).

The PayArmour feature predicts whether or not an invoice will be paid by monitoring the small business and its customers. If the answer is yes, it offers the user two options.

For a 1% fee it offers a guarantee the payment will be made within 30 days. For a 6% fee it will instantly fund the invoice. Users can also take out PayArmour loans when they are out of work. Eventually Joust plans to provide gap financing for those in-between times.

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