Why Banking the Gig Economy Is So Hard (And Fintechs Are Winning)

Already growing in size before the pandemic, the gig economy has continued to build up by numbers and variety of work available. But the erratic nature of their income complicates these employees' financial lives.

COVID-19 and its impact on the economy has placed gig workers — and the disproportionate risks they face — under a microscope and in a spotlight. There are more gig workers than ever, now. And increasingly there is recognition that they have unusual financial needs that most mainstream financial institutions have not been meeting. This has led to opportunity for fintech providers.

“Gig and hourly workers stepped up behind the scenes across the country, keeping warehouses stocked, delivering goods and helping Americans stay safe at home,” says Zack Smith, CEO of Jobble, a marketplace connecting gig workers and employers.

“Many gig workers are underbanked and lack access to resources that can grow their financial wellness,” Smith continues. “From savings and investment accounts to reliable access to their funds, gig workers deserve to be served like the hard workers they are. Many also lack benefits or access to programs that can keep them healthy and supported.”

Putting Gig Work in Perspective:

An estimated 25% of the U.S. workforce is involved in the gig economy, according to the Gig Economy Data Hub.

And that estimate may be low, because gig workers can be difficult to classify. Some sources suggest the count may be as high as 35%.

The pandemic led many who formerly viewed gig work as a side hustle to make it their primary source of income, and led more traditional workers to take up gig work to supplement a reduced income, says Romy Parzick, CEO of Vault. “This type of transition can mean trying to adapt to a loss of benefits plus an increase in income fluctuations.” The mission of Parzick’s firm is reimagining the benefits space for today’s economy.

Necessity Drives Gig Working But Mainstream Financial Services Haven’t Adapted

To some, the gig economy seemed utopian — products and services at our fingertips for practically nothing, delivered by people who chose when they worked. However, now it can seem increasingly dystopian as the gig economy expands, fueled by a lack of full-time employment opportunities.

Gig workers earn erratic incomes, making it harder to qualify for consumer loans and mortgages, and generally lack many of the protections and benefits other workers enjoy. Gig workers only gained access to unemployment insurance with the passage of the CARES Act of 2020, and some still aren’t covered.

Along with essential medical workers and certain government workers, delivery drivers, for example, were deemed essential to keep the economy moving and allow other workers to remain safe at home. Add to this that many delivery men and women are people of color, often immigrants, according to Maria Figueroa, Director of Labor and Policy Research at the Worker Institute at Cornell University. Research indicates that BIPOC workers (black, indigenous and people of color) face greater risk from the coronavirus, and often live in smaller, multigenerational homes containing vulnerable family members.

Understanding the Gig Market:

Gig economy workers commonly forego things like insurance, savings and investments — either they can’t afford them or they find it too cumbersome to manage outside of an employer-based program.

Employers may not believe they can afford robust benefits for gig workers, but it is in their interest to do so from a productivity standpoint. Vault’s Parzick points out that 54% of employees listed “financial or money matters” as their leading source of stress in PwC’s Employee Financial Wellness Survey [PDF]. The pandemic has no doubt exacerbated this concern.

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Giving Credit Where It’s Needed Isn’t Always Easy

One benefit that fintech providers have offered workers of all types in recent years is advances on paychecks. In varying forms this benefit has been offered by the neobank Chime, and fintechs PayActiv, Branch, Earnin, and many more.

Eye on the Headlines:

Often this service has been hailed as a boon for cash-strapped workers. However, some of these services have come under fire in mainstream media. For example, in March 2021 New Republic compared the earned-wage access industry to payday lenders.

Yet the need for convenient credit is real.

“The truth is a large portion of the United States lives paycheck to paycheck and relies upon services like check-cashing to get by,” says Kobina Ansah, CEO of the New York-based COVERR. His firm provides credit services optimized for 1099 contract workers.

“I have had debates with some of my more affluent friends, and often times their response is, ‘Why don’t they just save more, or go to the bank to get a line of credit? Rates are low,’” Ansah says. “What many of us who are more fortunate don’t understand is that saving or excess cash flow is a luxury, not a given for all workers. For a demographic that does not meet ‘typical’ risk parameters, an alternative approach has to be taken.”

Ansah is referring to the pricing of risk necessary for a sustainable business model for credit providers.

“In my world dealing with gig workers who are sole proprietors, we have similarly created an alternative way to provide needed working capital,” Ansah continues. “In an effort to provide a service with high utility, but also account for our risk, we just launched a partnership that will help our clients to write off COVERR’s fees from their taxes.”

Indeed, that touches on one of two major challenges for many gig workers: income taxes. The U.S. tax code can be very complicated and tax preparation and advice for small businesses like self-employed gig workers who may have multiple employers can be costly.

Credit reporting, as practiced by the traditional credit bureaus, leans toward the traditional workforce. President Biden has spoken of a public credit reporting agency, but industry experts are doubtful that it will be created.

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What Are Traditional Banking Institutions Doing?

Gig workers make challenging customers for banks and credit unions because their inconsistent income makes it difficult to lend to them. This earnings challenge also puts them in need of financial management assistance.

Fintech companies have stepped in because only a few banking providers have waded into this area. Among the banking companies that have:

  • Green Dot has made providing gig economy services part of its business strategy. For example, Green Dot powers Uber’s banking services. In October 2020, Green Dot was the lead investor in the Series A round of Gig Wage, which provides financial services to gig workers, powered by Green Dot’s banking as a service.
  • PNC launched a prepaid product called Indi for gig workers in 2019. Indi offers services similar to those provided by Square (which now holds a banking license) such as assisting in quarterly payment of taxes.
  • NBKC is similar to Green Dot in that it has invested in several startups serving gig workers, such as Joust, a banking platform for individual businesses and gig workers that was acquired in 2020 by ZenBusiness.
  • Grasshopper Bank, based in New York City, was built for small businesses, and is able to scale its services to freelancers, gig workers and sole proprietors.

But these are just a few tech-forward banking firms that can only capture a small piece of a large and growing segment of society who need modified versions of the products and services that the rest of us take for granted. Opportunity remains for more banks and credit unions to offer customized services to the many millions of gig workers in the U.S.

Offering these services requires ingenuity, but will also offer great rewards to those that can successfully build services for a segment that desperately needs innovation. Fintechs have managed to start to make this work. Can your institution become nimble enough to compete?

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