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Gig Economy - A Financial Services Nightmare

The idea of Gig economy is not new. In fact it exists in its rudimentary form by the name of Daily Wage worker. With digitisation of work and remote working ecosystem advancing to next level, Gig economy is now a very viable option for knowledge workers. I remember the website Rent-a-coder website, all the way back in 2002 when I was looking for odd programming jobs to fund my tuition fee for my masters. The system used to work.

Fast forward by 16 years and now Gig Economy has created a lot of buzz but number of people working under gig economy are still the same. Though one interesting trend coming out of the gig economy, 86% of Gig economy workers are less than 55 years of age and only 15% of those are baby boomers. This is the reason why people get excited for the future it holds when the relatively young pool will help bring Gig Economy to the mainstream in another 10 years.

Let us discuss what it means for Financial services companies if Gig Economy gets a bigger share in the workforce. The current banking (loans - personal, car, mortgage) & insurance products have to take certain income assumptions that help the financial services companies to place a tangible risk profile to the loan seeker. based on the risk exposure the interest percentage or even loan approval is given. For Insurance sector it is even much worse, the entire underwriting of an Insurance is based on the Insured person's profile. All these drivers used to look at factors like monthly salary bracket, employment history and credit history.

Now for a Gig Economy worker this steady payment source doesn't exist, then how will the profile be created for such a candidate. How will the underwriting of the Insurance be done. Risk exposure will shoot up and that will push the premiums higher for the insurance policies. On what criteria the credit lines and personal loans be offered, and on what basis any home loans or car loans be approved where the amounts and thus, the NPL exposure is higher.

The glaring questions industry is facing are:

  • Does that means anyone working under Gig economy won't be able to utilise these products?
  • What's the alternative?
  • How to be ready for this untapped market?
  • What are quick wins in this segment?

One way to resolve this is to get a centralised or Govt backed Credit Score. This can be coupled with the central KYC registry some country governments have proposed and this makes the Credit Score Maintenance a federal function. All Banks & Insurance companies can leverage this, and this simplifies the underwriting process significantly. The risk matrices are lighter and ecosystems can be built around them fairly fast.

This solves the technical challenge of qualifying these Gig Economy workers to financial products. In my next piece I'll explore what is so lucrative in Gig Economy that millennials seem to get attracted to it so easily. What has changed in the society or our circumstances that people are now seeing insecure income sources with more open perspective than before.

 

Gig Economy

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