3 challenges facing global gig economy growth after COVID-19

economy 2020

(Credit: Unsplash)

This article is brought to you thanks to the collaboration of The European Sting with the World Economic Forum.

Author: Yan Xiao, Project Lead, Digital Trade, World Economic Forum & Janette Chung, Product Director, Jobox.ai


  • COVID-19 is accelerating the growth of the cross-border offline-to-online (O2O) gig economy.
  • Cross-border payments need to catch up for the cross-border gig economy to realize its full potential.

The spread of COVID-19 across the globe has changed many people’s lives. As more and more people are asked to stay home, many activities have been forced to move from offline to online (O2O), including work, grocery shopping, food delivery, education and entertainment. This new trend could help the global O2O gig economy flourish provided key challenges can be overcome.

What is the World Economic Forum doing about the coronavirus outbreak?

Responding to the COVID-19 pandemic requires global cooperation among governments, international organizations and the business community, which is at the centre of the World Economic Forum’s mission as the International Organization for Public-Private Cooperation.

Since its launch on 11 March, the Forum’s COVID Action Platform has brought together 1,667 stakeholders from 1,106 businesses and organizations to mitigate the risk and impact of the unprecedented global health emergency that is COVID-19.

The platform is created with the support of the World Health Organization and is open to all businesses and industry groups, as well as other stakeholders, aiming to integrate and inform joint action.

As an organization, the Forum has a track record of supporting efforts to contain epidemics. In 2017, at our Annual Meeting, the Coalition for Epidemic Preparedness Innovations (CEPI) was launched – bringing together experts from government, business, health, academia and civil society to accelerate the development of vaccines. CEPI is currently supporting the race to develop a vaccine against this strand of the coronavirus.

In 2018, the total volume of global cross-border trade in services was valued at $5.8 trillion USD, one quarter of the value of total exports and 7% of world GDP. The total value of the global gig economy was estimated to be $204 billion USD that same year. From 2005 to third quarter of 2019, global trade in services has increased by 20%. The WTO estimates that global trade’s share of the services sector could increase by 50% by 2040 and that adoption of digital technologies can help developing countries increase their share in global services trade by about 15%. Services moving from offline to online could further improve market efficiency, but many frictions exist in the areas of cross-border payments that could halt the ability for global O2O gig economy to reach its potential.

Global Services Trade Activity
Global Services Trade Activity
Image: WTO

Challenge 1: Access to payments

Lack of access to cross-border payments services prevents gig workers with the right skillset to provide services online that cross borders. Unlike face-to-face transactions, which are often settled in cash, transactions between buyers and sellers of services rendered online are structured either as transactions between two individuals or through a trusted services marketplace. As of today, cross-border payments between two individuals are often conducted through bank transfers or remittance companies. Payouts to service providers through services marketplaces also require the recipients to have bank ownership or access to mobile payment accounts, which eventually may be linked to a bank account. The percentage of adults with a bank account is much lower in the developing economies compared to the high-income economies, according to the Global Findex Database by The World Bank. For example, only 34% adults in the Philippines and 37% in Mexico have access to bank accounts in 2017 compared to 93% in the US. Additionally, cross-border payment services are often asymmetric in developing countries. For instance, people in 83 countries and regions (most of which are developing or less developed countries) can send but not receive money through PayPal.

 

Challenge 2: Payment inefficiencies

Cross-border payments can be highly inefficient for gig workers due to market fragmentation of available payment options, high costs, slow settlement speed and lack of transparency. With online service marketplaces acting as intermediary, the payment process is decoupled into a consumer-to-business (C2B) payment followed by a business-to-consumer (B2C) payment. In 2018, only 41% of e-commerce transactions were conducted in cards.

To optimize for conversion of C2B payments, online marketplaces need to accept numerous alternative payment methods preferred by consumers in each country, such as ELV in Germany or Alipay in China. Setting up each alternative payment method can be costly, which will eventually be borne by consumers.

Regarding the B2C segment of the payment process, online service marketplaces typically optimize for costs over speed and traceability. Cross-border payments are mostly cleared through banks supported by SWIFT network, a network that financial institutions use to transfer information securely. Cross-border wire transfers move like the hub-and-spoke model of airlines: transfers move step-by-step from the originator’s bank to the correspondent bank to the beneficiary’s bank, typically via daily settlements at each bank, thus increasing handling fees and time. (In a country like the US, for example, the medium international wire transfer fee is $45 for the sender and $15 for the recipient, according to a survey conducted by Nerdwallet, and the settlement typically takes 3 to 5 business days.)

To minimize costs in cross-border payments, online service marketplaces often aggregate multiple payments between two countries in one patch. The wire instructions are transferred from the sending country to the receiving country through a chain of intermediary banks. Often, transfer instructions can only be processed during bank business hours. Once money lands at a bank in a receiving country, it is exchanged and disbursed into accounts in different banks via local bank transfers. This process, from the time a marketplace sends to a wire instruction to the time the money reaches a service provider’s account, can take 4 to 7 days, during which both marketplaces and service providers have no visibility on the status of the payment. At the same time, service providers are often in need of money to reach their hands quickly in order to make a living.

Challenge 3: Proving transaction authenticity

Cross-border payments for online service are more susceptible to money laundering than payments for goods. Traditionally, cross-border payments for physical goods require proof of shipments, to demonstrate the legitimacy for moving money. However, in the new world where we trade virtual goods or virtual services, it becomes more difficult to prove their existence. Criminals can create fake transactions on marketplaces to launder money. Since online service is delivered virtually, proving the authenticity of the transaction while not prying into people’s privacy can be a real challenge for the global financial system.

COVID-19 has made people more accustomed to procuring services online, which may provide more business opportunities to gig workers in areas where labor costs are low. However, in order to benefit from this transformation, lack of access to cross-border payments, inefficiency in cross-border payments, and money laundering risks need to be resolved before growth for the cross-border O2O gig economy can be unlocked.

Insights in this piece complement the recently published whitepaper Connecting Digital Economies: Policy Recommendations for Cross-Border Payments.

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