Are banks meeting the needs of the ‘passion economy’?

When Deborah Ajaja gave birth to her son in 2018, she felt frustrated that the gifts and cards available to announce births often failed to represent her and her new baby’s heritage. While working full time as an advertisement sales executive for a technology company, Ms Ajaja founded Colour Celebrations as a ‘side hustle’ business to fill this gap in the market. 

However, Ms Ajaja would not describe her business as a ‘side hustle’, saying she “really dislikes the term”. Instead, she calls Colour Celebrations, which offers baby milestone cards and luxury gifts for Black and mixed-race families, a “passion project, born out of a personal need”. 

Colour Celebrations is an example of what many are calling ‘the passion economy’. The term has been floating around technology ecosystems like Silicon Valley for a few years. Broadly, it represents an economic movement that offers people fresh and flexible ways of making money by building businesses around what they love, as opposed to the ‘gig economy’ that focus on services workers in commoditised industries like food delivery and taxis. Passion businesses tend to focus on creative or unique services, rely on a range of digital delivery platforms and technology to reach customers, and are often operated by a sole trader. These businesses, especially at the start, are founded by people who run these enterprises in their spare time, or as a ‘side hustle’.  

Despite the current attention being focused on the passion economy, Oliver Prill, CEO at Tide, a fintech provider of banking services to the small to medium-sized enterprise (SME) market, believes this sector is still in its infancy. “When we think of the passion economy, these are people that are building a business around the thing that they are passionate about... that’s different to the general trend that we’ve seen, for a very long time, of self-employment. I can be my own boss; I can create my own environment.”

Where banks come in

Be they a passion project, side hustle, full-time or part-time, these new entries into the economic landscape are still businesses which require support from the banking industry, such as dealing with invoices, expenses, taxes and sometimes payroll. All activities that suck time and resources away from entrepreneurs like Ms Ajaja who would rather focus planning for the Colour Celebration Christmas pop-up shop than deal with chores like taxes and invoicing. 

As many banks still struggle to support traditional SME companies, is the industry ready to offer services to this smaller-sized, but fast-growing segment of the corporate market?

To gauge the scope of this market, it is interesting to examine data from e-commerce platform Etsy, which hosted 4.4 million entrepreneurs selling more than $10bn worth of creative goods in 2020. According to their own data, 81% of Etsy sellers identify as women, 83% are sole traders and 97% operate their businesses out of their homes. 

The passion economy trend extends beyond Etsy crafters, however. According to research from Money.co.uk, out of 28 European countries, the UK is home to the largest number of micro-businesses, around 115,000, that are more than five years old. Germany, Poland, Romania, Portugal and Slovakia, in that order, fell behind the UK. However, in terms of survival for these companies, France, Sweden and Slovakia boast survival rates of more than 70% for businesses reaching the five-year mark. 

Targeting this growing market lies at the centre of Mettle, a start-up developed and launched within NatWest. Mettle is a mobile application aimed at small businesses, sole traders and limited companies with up to two owners. 

According to data conducted by YouGov on behalf of Mettle, total economic contribution from self-employed workers is estimated to be more than £125bn in the UK. Its survey also revealed a lack of satisfaction with the traditional banking establishment. For example, 35% of self-employed or side hustle business owners who bank with an incumbent provider do not feel supported, versus 16% who bank with a challenger or neobank. However, around 83% of those surveyed in the UK felt supported by challenger banks because of their ability to access banking services virtually.

Growing trend 

According to Wayne Freeman, chief technology officer at Mettle, further research predicts that 50% of people in the UK will operate a side hustle by 2030. While this trend started before the Covid-19 pandemic, the rise in these types of businesses has accelerated in the past two years. 

“It’s interesting,” says Mr Freeman. “I think having this side hustle in addition to a full-time job, probably for the first time, has become a necessity for many people, maybe to supplement their income due to furlough or maybe because they have been made redundant, unfortunately.” 

The average Mettle customer, according to Mr Freeman, wishes to have access to everything they need to run their business from a financial perspective in “a single place and more importantly, on the go”. 

NatWest developed Mettle from the ground up as a scalable, secure, resilient cloud-native platform, separate from the bank, using “modern methods and technologies”, says Mr Freeman. “I think we’re very fortunate to be able to have the best aspects of fintech but with expertise of a very established bank, which has been serving customers for 350 years,” he adds. “The luxury of starting afresh shouldn’t be underestimated.”

HSBC took a similar approach to tackling this market with the development of Kinetic, a mobile application for small businesses launched earlier this year. SMEs can apply for a Kinetic account via the app and gain access to a suite of HSBC business banking services. 

Peter McIntyre, head of small business banking at HSBC UK, says: “The environment has changed a lot, access to finance has changed a lot for small businesses and a lot of that’s driven by digital.”

While building Kinetic, HSBC gathered around 3000 customer insights to gauge exactly what these types of small businesses wanted from a banking service. Mr McIntyre says business owners were looking for an application that would “manage all of those things that I don’t have time to do while I’m monitoring my side hustle”. That means access to a current account, which can enable payments and receive funds, but also can be opened “very quickly”, he adds. Since the launch, HSBC has added 20,000 new customers via the Kinetic app, with 91% of those customers getting access to the account within 48 hours, with many more gaining accesses the same day or even within 20 minutes, says Mr McIntyre. 

At a disadvantage

The ease of onboarding and the one-stop shop, flexible mobile accessibility desired by the micro-business market, as described by both Mr Freeman and Mr McIntyre, is hard to come by from many traditional incumbent banks. Despite being incumbent banks themselves, it is notable that both NatWest and HSBC built their small business-focused applications from scratch, rather than try and shoehorn a legacy retail or corporate product onto this emerging customer base. 

As Ms Ajaja’s Colour Celebration enterprise started growing, her initial search for a business bank proved time intensive, complicated and cumbersome. “I actually approached some of the more traditional business banks and I tried to set up an account, but it was so difficult,” she says. “The paperwork required, the fact you had to book to see a personal business banker – at the time I worked in Canary Wharf, but I was super busy. Where am I going to find the time during the week to sit down and get an appointment with a business banker? And then when I did try and get one, it was six months down the line.” 

It was at that time that a friend of Ms Ajaja’s suggested looking at UK challenger Starling Bank for a business account. Within 24 hours of downloading the application and applying for an account, Colour Celebrations began banking with Starling in 2019. “I've not looked back ever since,” she adds. “Honestly, I don’t mean to sound cheesy, but it has been such a game-changer for me and my small business.”

Symmie Swil, head of SME banking at Starling Bank, says the typical micro-business founder is “their own CEO, they’re running sales, they’re probably doing the writing and the marketing, maybe they’re hiring people, so they’re very, very time poor”. These entrepreneurs are asking for real-time access to business banking services in a single mobile app and are not interested in switching between websites and different customer experiences, she says. In addition to the core business accounts, the applications need to allow for ease of access to third party software such as those that support accounting, legal or insurance services, she adds. 

“At the same time, they’re so intrinsically linked with their business,” says Ms Swil. “They want the same level of service and digital experience that they have in their personal capacity.”

Starling launched its business banking application in 2018. According to Ms Swil, the bank had around 200,000 business banking customers in late 2020, which has risen to 400,000 for this year. The majority of these businesses are sole traders, micro-businesses, and a “vast majority” have less than 10 employees, she adds. 

Many of these businesses have unique needs that run outside of commoditised banking services. Charlotte Morley, founder of The Little Loop, an ethical rental service for children’s clothing, is currently in the process of applying for a ‘B-Corp’ certification, which is awarded to for-profit entities, certified by the non-profit B Lab, as voluntarily meeting higher standards of transparency, accountability and performance.

“It’s very difficult to get accreditation and if you are a B Corp, then you are one of only a handful of companies in the world who are doing everything right,” says Ms Morley. “They do consider your banking and they look at whether the bank itself is ethical.” She adds that their business banking provider, Starling, fits this category because it is an independent bank and is considered to be a bank for good. “If something is well branded, or if it’s got awards or social proof that indicates that this is a good thing to want to be a part of – I think Starling does that very well,” she adds. “I kind of subconsciously trusted that it would be a bank that would work well for a small start-up because it seems to have come from those roots itself.”

Personal problems

Despite the increasing selection of business bank accounts for this sector, many of these businesses rely on personal bank accounts. In the UK, sole traders, freelancers, or contracting, not through a limited company, are not required to open a business account as self-employment isn’t legally separate from the individual. However, this set-up has caused issues dealing with the various initiatives related to the global pandemic. 

Etsy estimates that during Covid, one third of sellers experienced income declines, but only 8% were able to access relief funds. Around a quarter of Etsy sellers wanted to apply for relief funds, but were either unable to apply for them or unsure if they could.

According to Mr McIntyre at HSBC Kinetic, many micro-businesses struggled to qualify for the UK government’s Bounce Back Loan Scheme for pandemic relief. “Historically, a lot of people run their side hustle or their passion business on the side through their personal account,” he says. “You don’t have access to the same business functionality, those beyond banking services, through your personal account as you would do through a dedicated small business account or provider.” A business account would give an owner instant access to turnover, revenues numbers and evidence of taxes paid related specifically to the ‘passion business’, making it easier to apply for various Covid relief schemes, he adds. 

As the world emerges from the Covid pandemic many sectors are experiencing a loss of talent, which some are calling the “mass resignation”, as many people leave to work in projects that they feel are more fulfilling or passionate about. Many of these new entrepreneurs are looking to focus their passions on their businesses and not on financial admin tasks. 

Laura West, co-founder of The Doers, a brand strategy marketing consultancy that works with a network of freelancers, admits that before founding the business she had never sent, chased or paid an invoice before. “It’s been completely new to me,” she says. Today, via her Starling business banking app, she often deals with payments and invoices in the “five minutes before the school gates open in the morning” via her mobile phone.