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  • June 25, 2020

Consumer Lending in the Gig Economy

Aubrey Hawes
Head of Pre-Sales, Americas, Oracle Financial Services
This is a syndicated post, view the original post here

In the past several years, the Gig Economy grew faster than traditional job markets. The Bureau of Statistics, Federal Reserve, estimated the size of the market to be between 55-75 million workers or about 34%-43% of the workforce. While, like so many other areas, the Gig Economy took a large hit during the recent crisis, many believe it will continue to be a strong and growing part of the market moving forward.

For starters, while COVID-19 slowed 1099 gig workers in areas such as transportation, the market for online grocery shopping and delivery surged with sites such as Instacart. While no one can predict how the economy will play out for the job market, gig or otherwise, in the next several years, banks need to recognize that independent workers will be a growing part of the workforce and start to support this underserved group.

As banks look to migrate to a new consumer loan servicing platform, they need to look beyond operational efficiency and costs alone, to understand how that platform will support an evolving customer population. The ability to rationalize lending products and introduce new, more innovative lending products targeting new and growing segments of the US market such as 1099/Gig Workers will be key.

Banks can’t serve the Gig Economy workforce on traditional platforms

Legacy consumer loan servicing platforms were built for a different era.  An era of banking that was paper-based with loan coupons and check payments are coming into a central mail clearing.  Most banks have modernized the ability to accept digital and recurring drafts, while the loan servicing platform engine has stayed the same.  A loan servicing platform that was primarily built for vehicle financing with a fixed term and rate, standard amortization with principal and interest for a monthly payment.

Times have changed, and Fintechs such as Affirm, Bread are driving product innovation. They are reaching new customer segments and responding to changes in customer behaviors with products that support repayments weekly. Some of their products also support bi-weekly, prepayments, payment holiday, or paying in 3 installments, on top of their traditional payment model. These new loan products may not even charge interest but offer a flat fee per amount borrowed.

How to Innovate for Gig Workers?

Let’s look at a specific use case such as 1099 or gig workers who may require short term lending to address gaps cashflow.  The Office of the Comptroller of the Currency (OCC) is encouraging banks to offer responsible short-term, small-dollar installment loans, typically two to 12 months in duration with equal amortizing payments, to help meet the credit needs of these types of consumers. According to the OCC, US consumers borrow nearly $90 billion every year in short-term, small-dollar loans typically ranging from $300 to $5,000. 

Breaking down Small Dollar Lending

Modern core loan servicing platforms support defining new innovative small-dollar loans. Oracle’s platform meets the OCC recommendations and can be flexible priced to address the market for consumers who lack the discipline to use credit cards without falling into debt responsibly. Many of these consumers fear debit more than death, according to Credible Labs, Inc 2018 Millennial Survey.  These new lending products can be defined with a loan amount of $300-$5,000 and a variable term 1-12 months with a sliding scale so the minimum amount would be optimized for the loan term.  For example, a bank could accept a minimum loan amount of $300 for one month, where $1,500 would be the minimum loan amount for only six months.

To keep things simple, these loans could charge a zero interest with a flat fee per hundred dollars borrowed.   See the table below for a sample of what could be configured to keep it easy for 1099/Gig consumers.

The Upside: Addressable Market

What is the total addressable market for a product offering like this?  If we assume there are approximately 60 million 1099/Gig workers, and we believe traditional banks could address 30-50% of this market, we are talking about 18-30 million potential customers.  We assume an average loan fee for a $2,000 -$3,000 small-dollar loan amount is between $150 to $225. With an application fee of $10, a given consumer might take 3 of these loans out in a calendar year, making the total annual addressable market is $8.64B to $21.15B.

Assuming an individual bank could address acquire 1.5M accounts in an annual year, that would be between $240M-$352.5M in revenue using the average loan size of $2,000-$3,000. Applying a 50% business efficiency ratio for a consumer bank - $140M-$176.25M in annual profit.  This becomes interesting if the bank is comfortable underwriting loans like these since the gig economy is continuing to grow.

Yes, risks are there

Addressing this segment of this market does come with more risk.  Typically gig workers are more sensitive to the broader economic health of the nation. They usually don’t lose their job but working hours can be reduced in downturns, as we are currently experiencing.  These types of consumer lending products have a much higher risk of losses than collateral backed lending, but they also have a much shorter duration allowing banks to dial-up and down the volume based on economic swings.

So does Gig Economy make Economic Sense for Banks?

Yes!

Traditional banks can’t ignore this growing segment and let digital banks and Fintechs take this market as this is part of our economic future.

Traditional banks should look to modernize their consumer loan servicing platforms to support new innovative products, test and learn how to engage with this growing segment of the US economy.

Looking at the economics, even though there are underwriting risks today, Gig economy needs to be part of a banks lending growth strategy.  

To learn more, feel free to message me to explore more, or have a conversation.

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