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The Gig Economy Presents New Opportunities for Lenders

The Gig Economy

Banks, credit unions, and other financial institutions used to cringe when they heard the terms “freelancer” or “independent contractor.” After all, those people without steady paychecks could present a huge risk. But that perception is changing. The reality is that full-time freelancers now generate an average income of $68K annually, which is higher than the median U.S. household income of $59K.

The pandemic, along with the desire for flexibility and entrepreneurship has vastly increased the number of freelancers and independent contracts. Currently, 1.1 billion “gig workers” exist globally, and 2 million new gig workers emerged in the U.S. alone during 2020. 

That trend isn’t slowing. The global gig economy is expected to grow from $204 billion in 2018 to $455 billion in 2023. That’s a CAGR of 17.4 percent! In fact, reports have called that segment of the population “the economic backbone of the future” and “the new working class norm.”

By 2028, the U.S. population of independent contracts is expected to hit 90 million. Keep in mind too that even people with full-time jobs are taking on “side gigs.” Close to 60 percent of U.S. workers now say that they work outside their day jobs to bring in extra income and pursue their passions. 

Lenders who are fearful of or ignoring this segment run the risk of losing out on a highly profitable and sizable population!

Why Independent Contractors are Doing So Well

Economic uncertainties caused by the pandemic and its aftermath have contributed to companies’ willingness to use independent contractors to replace or augment full-time employees. In fact, more than 53 percent of businesses say that their use of freelancers has increased. 

After all, freelancers can cost less (because they don’t require benefits). Additionally, the work-from-home trend means that companies can hire talent from anywhere. When business takes a downturn or upswing, terminating contracts or hiring more team members is relatively simple.

Many contractors enjoy the flexibility of selecting assignments and work hours and the businesses they work for, and may see better work products and attitudes as a result. 

The Challenges of Gig Work

Although the freelance economy presents many benefits to both businesses and workers, it can be challenging. The economy is just beginning to redefine independent contractors and some professionals who have been misclassified create legal and tax issues for the hiring companies. But what makes this huge segment of the population a new challenge for lenders is the fact that their income can be unpredictable and finding a trusted source of earnings can require some extra work.

How Technology is Transforming the Independent Contractor Landscape

Automation and technology-based platforms are helping gig workers, the businesses that employ them, and lenders in many ways.

A wide range of platforms (digital job boards and scheduling apps) have emerged to help independent contractors find more work. In addition to general sites, specialty sites have sprung up to help workers with targeted skills keep their cash flows strong. Think of them as the Uber or Lyft of professional employment.

For example, restaurants have dealt with their labor shortage by using on-demand apps. Upwork, Fiverr, and Clearvoice are apps that generate assignments and income for creative and marketing talent. Many of these platforms have the added benefit of providing employers with reliable and well-organized payment reports, which not only enable them to manage expenses and remain in compliance, but also to help the workers themselves track income for tax reporting. 

New, tech-powered banks and financial institutions are springing up, specifically to handle the banking needs of the independent contractor segment. Although great for the workers themselves, this can present a long-term competitive threat to more traditional banks. As these neobanks begin to offer more credit services, conventional lenders will lose out on the income that these loans can generate.

This white paper outlines some of the challenges and opportunities arising from the rapid growth of the gig economy. Neobanks represent significant competition to the traditional brick-and-mortar or online banking systems, as well as smaller banks and credit unions. Also known as “challenger banks,” they represented $35 billion in assets in 2020 and are projected to grow at a CAGR of 47.7 percent, reaching a value of $722.6 billion by 2028.  

Bank and credit union websites are using technology to deliver a better and more personalized consumer/borrower experience. Streamlining and professionalizing the entire lending process, they provide consumers with an end-to-end experience that is simple and fast and they enable the lending institutions to gather more accurate information and credit histories from their prospects and consumers. In addition to minimizing risk, they cut out paperwork and staff time, which can save the financial institutions thousands (if not millions) annually.

What Your Institution Needs to Do to Meet the Needs of Gig Workers

First, you must realize the opportunity and be aware that if your institution doesn’t write loans to this population, your new competitors will. Embrace the fact that a gig worker is no longer an unemployable drifter, but rather a solid earner and potential lifetime (and lucrative) customer.

Use technology to gather accurate and comprehensive information about independent contractors. Never assume that just because someone doesn’t get a steady paycheck that they are automatically high-risk. 

The right lending platform can help you gather the accurate data you need to make the best lending decisions and tap into this lucrative and rapidly-growing market segment!

Embrace this new lending opportunity and learn how we can help you minimize risk while doing it.