Thirty years ago, the “gig economy,” if you could call it that, was driven by a relic of the 21st century: classified ads in newspapers.
Craigslist only launched as a website in 1996, and anyone looking for short-term employment had to make a lot of phone calls or beat the pavement.
Today’s gig economy is a completely different story.
This dramatic change has faced lenders with a challenge: more people are making a steady living without formal employment than ever before, but knowing how to evaluate and underwrite them is as hard as ever.
As a result, lenders are overlooking or rejecting creditworthy borrowers because they lack the right lending technology. It’s a major issue of inclusivity as well as profitability. Many consumers use gig labor to supplement their 9-5 job, but may not report it as accurately in a credit application.
What lenders and creditors need is a better way to analyze transaction data and automatically generate a detailed picture of an applicant’s income and debt obligations.
In this article, we’ll cover why gig economy lending can be such a profitable channel and how your organization can take advantage of the opportunity.
Why the Gig Economy Matters Now
Odds are you haven’t been monitoring the growth or health of the gig economy.
The fact is that the gig economy numbers are astonishing. For starters, close to 70 million Americans take part in contract and freelance labor—that’s 36% of the active workforce!
To put a dollar sign and some commas next to that stat, freelancers contribute more than $1.3 trillion to the U.S. economy every year. And the average gig worker is earning close to $100,000 a year.
According to recent data from the U.S. Census, the number of nonemployer businesses is growing at a strong clip.
While the rise of the gig economy has been buoyed by the internet and smartphones, the global pandemic reshuffled much of the workforce. Many people started micro-businesses or took on gig work in addition to their regular jobs.
While this alternative workforce may not fit the conventional lender’s idea of an “ideal borrower,” the actual numbers should shatter any remaining doubts about their viability and profitability.
Very few lenders have successfully tapped into the gig worker demographic, leaving a wide-open door for firms that can market to and serve these people effectively.
The Data Challenge of the Modern Workforce
Digital banking and loan-origination platforms have streamlined the work of verifying income, but conventional lending workflows still rely heavily on W-2s and pay stubs. Gig-worker income rarely fits into those categories or follows the payment cadence of full-time or salaried employees.
The money is there, but it flows inconsistently or varies widely in amount. That’s a red flag to most lenders who were trained to see creditworthiness from a narrow perspective.
Based on the data that Bankuity has analyzed across a range of creditors and lenders, there are two primary errors that happen:
- Incorrectly assessing a borrower as “low-risk” and over-lending, when in reality the person is going to fall into collections or default (this often happens because of debt obligations that didn’t appear in the application).
- Incorrectly assessing a borrower as “high-risk” and rejecting or under-lending to them when they are actually highly reliable and solvent (often due to under-reported income).
Lenders don’t have time to pick through pages of transaction data and correctly identify income deposits and debt payments. That’s why so many gig workers are unable to get the credit they deserve and so many lenders are less profitable than they should be.
Transforming Raw Transactions Into Reliable Income Metrics
The task of ingesting and classifying transaction data is perfect for artificial intelligence.
Lending technology such as Bankuity, powered by advanced banking verification (ABV™), can digest gigabytes of data in minutes and normalize every line-item with near-perfect fidelity.
Armed with accurate data, lenders and creditors are far less likely to make either of the critical errors that lead to write-offs or erroneous borrower rejection.
Ideally, an advanced lending platform should allow your lending or credit team to:
- Sort and correctly identify multiple income streams.
- Calculate a robust average value for irregular income flows.
- Offer recommendations about the lowest-risk gig jobs or alternative income streams.
- Easily handle data from a variety of financial partners and institutions, including digital-only platforms.
The level of data science and analysis that such complexity requires is beyond the reach of most firms, especially with most lending teams stretched to capacity. The right lending technology can eliminate the need for that work and improve the quality of your underwriting.
Driving Inclusive Growth and Revenue
At Bankuity, we’re committed to expanding the market reach of every client we work with. And the gig economy represents massive untapped potential for lenders and creditors.
We’re not suggesting that the gig economy is a profitable demographic, we know it is.
In fact, one of our clients ran a small test with 250 gig economy workers and saw a first-payment default rate of only 11.3%. This metric signals manageable risk in what has been categorized as a very high-risk pool of borrowers.
Critically, there are steps such as precise debit timing and optimized collection processes that can bring the risk of default down even more.
The Gig Economy Is Only Getting Stronger
Successful lenders are masters of assessing and pricing risk.
Typically, anyone with alternative income streams presented a challenge that simply wasn’t worth the effort. There were plenty of applicants with W2s and simple bank statements that could keep a lending operation busy and profitable.
Those days have passed.
Gig workers are becoming a normalized part of the economy. They run professional businesses with regular demand for credit and financing. It’s up to forward-thinking firms to meet the demand with lending technology that is up to the task.
If your firm currently serves gig workers or is interested in expanding your gig economy lending operation, Bankuity can help you move forward with confidence. Gig borrowers are ready and waiting. Will you answer?
