How Credit Unions Can Capture the Gig Economy Market

From freelancers to Uber drivers and even independent photographers, writers and consultants, members of the gig economy keep the world of commerce spinning. Who are these trailblazers on the road to an independent living? Research has indicated that a single identity is hard to pinpoint.

What we can glean from the Gig Economy Data Hub are mostly demographics. There are more gig workers in the 16- to 35-year-old age group than you’d find in a traditional workforce. However, younger generations have not cornered the freelance market. When it comes to the providers of skilled services, the average age skyrockets to over 55, according to data from ADP.

The gig economy represents a growing and vibrant sector. The “Freelancing in America” study conducted by Edelman Intelligence told us that 57 million people were freelancing in 2020, making up 36% of the U.S. workforce.

Given the size of the market, gig workers are a new frontier for credit unions, and represent an area where challenger banks are already actively courting new commercial customers. For traditional financial institutions to seize a share of the growing pie, they must first evolve strong digital capabilities and a deeper understanding of the freelancer in today’s economy.

Understanding the Needs of Today’s Gig Worker

While freelancing is often depicted as a career journey born of necessity, three in 10 gig workers have started freelancing by choice. Fifty-nine percent make more money doing so, according to the Edelman Intelligence survey.

Also revealed by the Edelman Intelligence study was the fact that the gig economy isn’t just driven by Uber Drivers and Door Dash delivery personnel. Fifty percent of freelancers provide a professional service, such as computer programming or consulting.

But members of the gig economy do have one thing in common. Their needs when it comes to financial products and services align more closely to those of a business owner than a traditional worker or a consumer.

For one thing, gig workers must track income and business expenses in order to pay quarterly estimated taxes. To handle financial tasks like these, freelancers tend to turn to third-party solutions, such as cloud-based applications that provide anytime, anywhere access.

There is just one problem. While these solutions are slick and streamlined, there is little a freelancer can do when faced with complicated questions or the need to plan holistically for the financial future of their business.

As a result, many freelancers walk a thin line between personal and professional financial management. Sole proprietors are able to funnel freelance income through their individual tax return, so there is a tendency to utilize personal accounts for business expenses.

This constant interplay between business and commercial finances can leave gig workers prone to risk. For example, a marketing consultant who fails to notice a business charge on a personal credit card may neglect to deduct it as a business expense. That means the freelancer is paying higher taxes than are necessary.

On the other hand, a tendency to stringently report every legitimate business expenditure to reduce the current tax burden comes back to haunt gig workers later in life in the form of reduced Social Security benefits.

Since the operating model of most traditional financial institutions is based on relationship building and customer or member support, credit unions are distinctly positioned to own the freelance market, if they can get a few things right.

A Financial Institution for the Freelancer

According to Hussein Ahmed, founder and CEO of Challenger Bank Oxygen, some traditional financial institutions have failed to grow their lines of service to meet the needs of the gig worker. “That’s leaving the newest generation of workers and those who are self-employed short on options,” he said in a statement to PYMNTS.com.

The slower response from traditional credit unions to the needs of the gig worker is also opening a door of opportunity for challenger banks like Oxygen. In May 2020, Oxygen rolled out a new platform dedicated to the needs of gig workers. Accessed through a mobile app, it provides freelancers with a one stop shop for managing both business and personal finances, all through their smartphone.

Likewise, challenger Indi has created a banking solution aimed at freelancers. It’s – you guessed it – another app, and it offers many of the features freelancers crave, including the ability to track expenses and even save for taxes.

While challenger banks like Oxygen and Indi demonstrate an understanding for the gig worker’s way of life, platforms like these have still not evolved to meet the full range of products and services a freelancer needs from a financial institution.

Beyond the daily banking requirements of the freelancer are cash flow concerns, particularly as the COVID-19 pandemic reduces demand for services. According to the study conducted by the Edelman Institute, 44% of freelancers had realized a drop in income due to impacts of the pandemic.

Situations like these make access to credit important for the freelance worker, but traditional underwriting methods aren’t in sync with current working models, where infrequent paychecks don’t automatically translate to high risk.

Fortunately, with digital tools, traditional institutions are best equipped to serve the gig economy. Open APIs make it possible for credit unions to plug and play the full range of services that freelancers need to manage their financial outcomes. Since products hosted by APIs can connect to existing core data, it’s easy to provide access to both the personal and business side of the freelancer’s finances.

More importantly, as freelancers interact with digital products and services, the data they generate can be used for a variety of purposes, most importantly to fuel lending solutions that support freelancer growth.

Best of all, when a freelancer needs to walk through the complexities of their finances, there is always an informed advisor just a branch or phone call away.

As the gig economy continues to grow, credit unions are uniquely positioned to meet the needs of non-traditional workers by adopting the range of digital solutions necessary to keep both their institutions and the freelancer competitive.

Michael Abare is Senior Product Manager for Finastra in Austin, Texas.