why the creator economy is primed and ready for embedded finance

The creator economy is beyond buzzworthy. but for good reason- with the convergence of our work and personal life, a large part of our identity is being shaped around the occupation that we hold. The pandemic has also shown a need for income diversification amidst mass layoffs of knowledge workers. These factors are pushing more and more people to go into the creator world and thus the opportunity to capture value within the creator-stack enlarges.

Creator centric platforms are at an advantage to beat traditional finance to adapting to the capital needs of creators. They have unique insight into the pipeline and revenue data that traditional financial institutions don’t have and don’t understand.

In the creator economy, we’re seeing a reinvention of media in a way that has never been done before. Media is no longer exclusive to well funded publications and production studios. Instead, the power is in the hands of individuals who are inherently strong community builders. They control all decisions ranging from the content to the distribution and are acting as employee + CEO.

However, this switch-up of legacy media business models has led to a lot of confusion for traditional financial institutions who don’t understand the creator economy at the granularity needed to underwrite it. These creators are running multi-million dollar media empires from a google spreadsheet and a personal credit card which is incredibly unsustainable.

Paychecks…a year later

As an artist, accountant and marketer - creators have their plates full already and don’t have the bandwidth to constantly be chasing down their paychecks. Whether due to outstanding royalty fees or long pay cycles, these entrepreneurs often have lumpy and highly vulnerable paychecks which can be chalked up to a few reasons.

i) platform risk

Creators are currently at the mercy of the platform. This risk is most prevalent when a creator depends on ad revenue or site traffic. When YouTube was going through it’s ad-pocalypse where CPM rates dropped to the floor and videos were being demonetized without explanation, many creators were left with an unpredictable problem where their income wasn’t just lumpy but completely eviscerated.

ii) corporate structure

Creators can have a variety of corporate structures and often they vary by scale. Those at incredibly large scale (750k+) often bring in management agencies, the middle scale of creator (>100k) often structures their own corporation and those with (<100k) may not even have a corporate entity at all. This problem of corporate structure emerges at the levels of mega (750k+) and micro/nano (<100k) creators getting paid on delayed cycles.

For mega-creators, they face a workflow problem- their management company/agency gets paid first and then the money trickles to them. This interjection of a middle-man results in slower pay cycles and frustration from creators because they feel like their income is being “held hostage” by agencies.

For micro/nano creators, their problem results in the systems that pay out creators themselves. The way that marketing departments and PR agencies actually push out payments require a corporate entity to be in place for instant payments (these payments are often processed months after services have been completed as well). When this corporate entity is not in place, the agency or brand must manually send checks to creators which can take several weeks, if not months.

When a creator is relying on these streams of income, the volatility of paychecks threatens their livelihood.

iii) industry standards

Some industries, like music and film, are known to have egregiously long pay cycles. Creators don’t even get paid for their work until months or years later. This is because companies in these spaces know that they can get away with delaying payments to creators. After all, the creators are gaining more value from the distribution they provide than the monetary benefit.

Where creator-first platforms can win

The platforms that exist as a crucial portion of a creator’s workflow have a privileged insight into a creator’s data whether through business management or distribution.

i) distribution platform

A distribution platform is one that’s core capability is pushing out user-generated work to an audience- this can be anything from TikTok to Substack. The distribution platform gains a crucial view into the creator’s potential core earnings. This is most advantageous in OTT/streaming services because creators historically don’t have deep visibility in the analytics of these platforms.

Distribution platforms have deep analytics on creator’s end product

By being able to see every community interaction with a creator’s work, these distribution players can create a rich customer profile and analyze audience behaviors over time. This data is proprietary to the distribution platform and thus offers an information advantage to add in financial services since they have an unrivaled view into the creator’s income and earnings potential.

ii) business management platform

A business management platform, a way to aggregate and analyze financial data across many streams of income or manage workflows, is one of the greatest tools in the creator’s toolbelt.

Business management platforms can stitch together multiple data sources

The business management platform is exceptionally powerful because it allows a creator to seamlessly track all of their various streams of income in one place. Many digital media creators have diversified income sources, often ones that aren’t related to their core content, to generate revenue. Therefore, using their pure distribution analytics can be flawed when evaluating a creator’s income because the distribution play is a siloed view into a single revenue source.

However, taking a third-party approach to aggregating a creator’s data may result in quality loss where distribution players may impede the access to high-quality predictive data. So while these plays can give a more holistic view into the creator’s true income, it will be limited by the distribution players and their tolerance for sharing data.

Opportunity for embedded finance

In a nutshell, embedded finance is the concept of including financial services within an application/platform where adding these services supplement the core function (check out this article for a better primer). As explained in this a16z article, introducing embedded finance allows a company to a) expand revenue without up-selling and b) drive customer acquisition.

In the ever-growing creator-stack, introducing financial services into the product is a key way to differentiate and win.

i) payments

A key distinction between creator economy distribution plays and consumer platforms is the payment capability. Patreon was one of the first pioneers in this category, allowing users to pay a recurring fee natively to access premium/exclusive content from a creator. This payment + SaaS model has spurred a whole category of creator-centric platforms anywhere from digital goods to premium video content. Payments will always be integral to creator platforms but we’re beginning to see new shapes within the payments ecosystem take place whether through distribution platforms (ex. Twitch), SaaS (ex. Shopify) and business management (ex. Stir).

ii) lending

One of the biggest problems facing creators attempting to get outside capital is that their incomes are incredibly lumpy.

YouTuber Graham Stephan breaks down his income streams and analytics with 1m subscribers

This makes it hard for an outside lender who is unfamiliar with the creator-ecosystem to understand the true nature of how creators are paid out. To layer on top of this, many creators will pay themselves as an employee making minimum wage to optimize for taxes. This results in an on-paper income that vastly differs from the earnings of that particular creator. Traditional underwriting models are incredibly challenged by these new revenue streams and this is where creator-centric platforms have the biggest opportunity.

Distribution plays have a view into past performance for creators and can underwrite predicted future performance. However, business management platforms have a bit of an edge if they can gain the same granularity of analytics because they can stitch together the many streams of income that a creator may rely on unlike the distribution players who only see the singular stream.

iii) insurance

Creators’ careers are incredibly volatile. Since the business is often based in the personality/persona of the creator, it makes it incredibly hard to separate reputational and company risk. They are one and the same in the creator economy. Thus while a creator may be incredibly profitable one day, it just takes one misstep to tank their business. They could also just be poor caretakers of their community and slide into irrelevance over time.

There is a place for creators’ reputational risk to be underwritten by a distribution play. Whether this may be something akin to connecting into YouTube dislikes-to-likes ratio and formulating a model to predict a creator’s tendency to polarize their audience or their engagement level to predict the effort that they put into cultivating community, these distribution players are in the most privileged place to put insurance models in place. Especially while we’re seeing once mega-famous creators losing traction and relevance over time, similar to athletes and celebrities, we’re beginning to see the need to insure a creator’s sometimes short-lived career.

There’s plenty of opportunity beyond these categories with notable traction in payroll (ex. Stir and Stem). However, payments, lending and insurance are some of the most crucial spaces to crack since they’re causing so much pain for creators today.

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While the opportunity for embedded finance is huge in the creator world, some companies are beginning to tackle the creator finance suite head-on and become a stand-alone solution (ex. Karat). Embedded finance has still yet to penetrate many sectors and the demand for these services will dictate whether it will saturate the creator-stack. The creator world is incredibly differentiated from many of these other sectors because creators are SMB’s who demand a consumer experience. With the success of embedded finance in the consumer world with the Apple card and Lyft payments, it’s hard to argue that the wave won’t hit consumer-esque platforms next.