How the Gig Economy Can Drive the Next Wave of Fintech and Banking Innovation
2018 was a banner year for fintech VC, with the lending segment consistently emerging as a leading repository for VC dollars. Over the last decade, fintech lenders have helped fill a void as big banks pulled back on making small business and personal loans in the wake of the “Great Recession.”
by Hussein Ahmed, CEO and Founder, Oxygen
Today, there are next-generation lending services for individuals seeking loans (based on FICO scores and verifiable employment status and income) and small businesses (based on business cash flow, assets and collateral). There are also payday lenders, which provide workers in traditional, full-time employment roles with earned wages before they are cashed out, but often at high interest rates.
However, there remains a clear void when it comes to servicing the unique needs of a rapidly growing segment of U.S. borrowers — freelancers, or gig economy workers. This borrower base presents an exciting opportunity for all lenders — fintechs as well as established banks — in several key ways:
Today, people are exposed to so much personalization wherever they go — in their marketing messages, digital advertising and more — that they’ve become conditioned to expect it in all the services they interact with, including financial services. Consumers are attracted to personalization because it makes them feel special and unique.
In financial services, this translates to tailored service offerings based on an intimate understanding of individual customers’ unique financial circumstances — the so-called “Bank of One.” According to Digital Banking Report, 84 percent of financial services professionals consider it very or extremely important to know their customers, but haven’t yet implemented adequate strategies. A recent Accenture survey reinforced these findings, citing that less than one third of banking customers believe their bank knows them and their financial needs well.
Lenders looking to service gig economy workers have a golden personalization opportunity at their fingertips. Freelancers and gig economy workers are paid at irregular frequencies that don’t match the predictability of the more traditionally employed. This can make their financial lives less linear and harder to manage. Imagine the goodwill that a financial services provider will experience if it can accommodate these payment cycles, helping smooth out the rough financial edges of a freelancer’s life.
Accommodations could include giving customers access to low interest cash advances, or allowing them to take out and pay back loans on customized schedules that match their income frequencies. Another compelling idea is collaborating with popular gig economy marketplaces to find ways to make additional income in order to stay on top of their finances or to pay back outstanding balances.
Capitalize on the Market While Minimizing The Risk
According to Intuit, the gig economy currently represents 34 percent of the U.S workforce, and this is expected to grow to 43 percent by 2020. Upwork reports that 59 percent of U.S. companies use remote workers and freelancers in some capacity.
And yet, many freelancers will face huge challenges securing credit. I experienced this myself in the freelancer role. I was making excellent money (over $150K per year), yet when I went to apply for a loan on a popular P2P lending platform, I was denied due to the fact that I was not a traditional W2 worker. If you are a freelancer applying for a loan on one of these platforms, you will likely find yourself redirected and faced with a swarm of paperwork and documentation requirements that the typical W2 worker does not have to contend with. It’s no wonder that many freelancers resort to predatory lenders instead.
Obviously freelancers represent a huge market opportunity for lenders, but the challenge lies in de-risking freelancers who often have lumpy or volatile incomes. De-risking is possible through close analysis of individual financial patterns -– the timing and frequency of inflows as well as outflows. Such analyses help identify general income frequency and timetables, enabling lenders to make informed risk assessments while also determining what loan amounts are tolerable within the context of the freelancer’s regular ongoing outflows and financial commitments.
Not only does this close analysis and consequent tailoring of arrangements help lenders hedge risk, but it also helps drive the level of personalization that all customers (in this case, freelancers) crave.
Collaboration Between Fintechs and Traditional Banks
Some of the most exciting financial services innovations we’ve seen have been the result of partnerships between traditional banks and fintechs. It’s often a win-win scenario for both parties — the banks can gain faster access to new and emerging markets (often by offering a new fintech service as an extension of their own services), while the fintechs (who are the actual loan underwriters) can roll out new services without having to “reinvent the wheel” by building their own infrastructure, securing access to capital and ensuring regulatory compliance.
One example of this is J.P. Morgan Chase’s recent acquisition of payments startup WePay. The acquisition is helping J.P. Morgan Chase better serve small businesses, while giving WePay a much broader distribution channel than they would have had otherwise. Goldman Sachs’ Marcus is perhaps the most well-known example of a major financial services organization leveraging an in-house all-digital fintech operation.
Promising, creative and forward looking fintech startups have successfully raised capital and executed amazingly. Ironically though, many of these same fintechs have not yet addressed a rapidly growing (and atypical) target market facing the same challenges they once faced — freelancers, or the gig economy.
As the gig economy gains steam in the coming years, the entire financial services ecosystem must adapt in order to address both the opportunities and the unique challenges. Initiatives aimed at improving personalization, de-risking and fostering fintech-bank collaboration provide a valuable guidepost and blueprint for moving forward.