By Ali Hamriti, CEO and Co-founder of Rollee
In today’s rapidly evolving financial landscape, the traditional frameworks of credit scoring have struggled to adapt to the needs of the modern workforce. The repercussions are deeply felt by gig workers and independent contractors who continue to face hurdles when accessing essential financial services.
According to the findings from The Gig Economy Equality Gap report, two out of three (66%) gig workers have been denied a loan since being a gig worker, despite knowing they have a good credit score.
The flaw lies not in their repayment capability but in the incapability of existing credit assessment systems to grasp the intricacies of their income sources. In fact, findings have revealed that 73% of financial institutions surveyed said their current risk assessment processes are not able to see a complete picture of gig worker’s payments, income, and employment records. Unsurprisingly, a third (38%) of UK gig workers are not confident that their bank has a complete picture of their income streams when they are applying for a financial service.
Limitations of traditional credit scoring systems
This is largely because traditional credit scoring systems have relied on archaic methods that are not set-up to comprehend the irregular income streams typical of freelancers and gig workers. Over a third of financial institutions surveyed (34%) said they are more likely to approve an application from a PAYE worker than a gig worker because they have greater transparency of their income and employment data. These systems in place tend to favour conventional, long-term employment models, leaving gig workers at a disadvantage.
Digital transformation for financial inclusivity
It is more important than ever for financial institutions to adapt their processes to accommodate the diverse needs of the independent workforce. Financial institutions need solutions to access alternative data, verify diverse income streams and employment records to address the current data disconnect and bridge the gap. Gaining a complete, holistic view of data ensures that credit assessments consider not only financial transactions but also the capacity of gig workers to repay.
Whilst the advent of open banking has shown promise by allowing secure sharing of financial data with third-party providers, it still does not paint a complete picture due to its focus on bank-based payment data.. Financial institutions need to have seamless access to alternative data sources in real-time. By automating connections to multiple income and employment platforms, institutions can have a comprehensive overview of gig workers’ financial profiles, empowering fairer credit assessments.
Embracing change for a fairer financial future
This journey to digital transformation demands considerable investments in data infrastructure and a fundamental willingness amongst financial institutions to evolve. Taking the steps to bridge the data disconnect signifies the final frontier for open finance. It is an essential step toward levelling the playing field for gig workers, acknowledging, and supporting their contributions to the economy.
Financial institutions therefore play a key role in this shift to a fairer financial future; however, they must transcend their role as simply just transaction facilitators and become catalysts for financial inclusivity.
Gearing towards financial empowerment
Bridging the gap isn’t just about improving financial systems, but rather, it is about empowering individuals who are reshaping the conventional working methods.
The potential of open finance extends far beyond the realm of banking, promising to reshape economic paradigms, offering a future where financial inclusion isn’t merely a privilege but rather, a fundamental right that is ingrained in society. This shift will mark a turning point where every type of worker, including gig workers, PAYE workers and independent contractors can benefit from open finance and its more transparent way of assessing alternative data during the credit decision-making process.
It is therefore a collective commitment to eradicate the barriers that currently hinder gig workers from being able to access basic services. Ultimately, it serves as a catalyst for financial and societal transformation, driving us towards a more fair and inclusive future for everyone.
