How gig workers are breaking the banking mold

As more people choose freelance work over or on top of full-time employment, a new gig economy is emerging with customers that require different products and services from community banks.

By Karen Epper Hoffman

The world of work is changing, especially for the youngest generation of employees. And if community banks want to win and retain these customers, they will have to change too.

Since Wired magazine wrote about this then-emerging trend more than a decade ago, the so-called gig economy has gained massive ground among the U.S. workforce, especially among young workers. Independent contracting is on the rise. A Marist and NPR survey published last year estimated that one in five Americans is a contract worker, a population that numerous studies predict will grow. And their banking, payments and credit demands do not always line up with their salaried peers.

“As [our] bank’s client base continues to grow, so do the number of independent contractors we have as clients,” says Joe Fazio, co-founder and CEO of $653 million-asset Commerce State Bank of West Bend, Wis. “In fact, we’ve also seen a similar uptick in the outside resources we use at the bank. Executive coaches, management consultants, loan review specialists, compliance consultants and more are independent operators of their own businesses.”

A growing trend

A 2016 McKinsey Global Institute study, Independent Work: Choice, Necessity, and the Gig Economy, found that 27 percent of the country’s working-age population engages in independent work. The majority—72 percent—are doing so by choice, rather than out of necessity. Among the senior citizens that community banks already count among their most-valued customers and the young consumers that banks want to attract, this trend is even more pronounced. The study found that 53 percent of working-age people under 25 and 44 percent of those over 65 do independent work.

And the trend is exploding. In her 2018 Internet Trends Report, Mary Meeker, general partner at Kleiner Perkins, predicted that freelance work is growing at three times the rate of the total U.S. workforce. However, given their uneven income streams, demand for business-like products and services, and a credit modeling system that does not typically account for the positive aspects of these gig workers, customers in this booming market segment do not always feel well served by their financial providers.

Quick stat

27%

of working-age people in the U.S. do independent work

Source: McKinsey Global Institute

Ryan James, CEO of $125 million-asset Surety Bank in DeLand, Fla., says the community bank has seen a definite increase in consumer accounts that have more than one source of deposits, typically coming through a PayPal account or another third-party gateway.

“All different types of consumers are now doing freelance work,” he says. “We have school teachers that also tutor through Skype nationwide. Sales associates at mobile stores freelance as graphic designers. Nearly every small-town retail store additionally offers their products through an online retail store.” James says many of these gig workers may be freelancing or working a “side hustle” in addition to a full-time job. “We also have many customers outside of their day job selling their handmade crafts through Etsy, and individuals that buy and sell products through eBay,” he adds. “Not to mention YouTube creators and Uber drivers.”

Not all community banks are seeing a huge spike in gig workers, but many are seeing at least some change. Peter Nelson, president of $290 million-asset Glenwood State Bank of Glenwood, Minn., says that over the past few years, his community bank has been seeing more customers doing contract work. “Being in a rural area, many times this contract work allows people to work from home,” Nelson says. “It still is less than 5 percent of our applications. However, it used to be close to zero.”

How to accommodate gig workers

One of the biggest challenges of banking a typical gig worker is that there isn’t any such thing. Some of the customers that fit into this category are salaried employees working a side hustle; some are students or homemakers working a full-time or nearly full-time schedule of independent work; and others can be very profitable micro-businesses boasting only one or two employees, with six figures in annual income. Fazio finds that the type of business these customers are in drives how they get paid for services. “Professional fees generally are paid by check or ACH, and there is little or no need for accepting card-based payments,” he says. “Therefore, traditional depository banking services meet their needs.”

And for these home-based, on-the-go or time-constrained workers, mobile and internet banking and payments services are often a higher priority compared with the average bank customer. “Mobile and internet banking are really key,” Fazio says, adding that these customers often prize the ability to “get funds deposited quickly and easily, without the requirement to go to the bank.”

Stacey Zengel, vice president of Jack Henry & Associates and president of Jack Henry Banking, says that these out-of-the-box gig employees have been pushing the company and its bank customers on the digital front. “They are looking for cash management products, the ability to capture checks and other mobile services,” he says.

Borrowing can present a distinct issue for gig employees. Since their income may fluctuate based on the season, their industry and other variables, Nelson points out that they often do not qualify for federal home loan programs, even if their earnings are relatively high. Glenwood State Bank tackles this issue by keeping the loans in-house. “Like many loan applications, we look at the sustainability of the future earnings versus worrying about how long someone has been an employee at a certain job,” Nelson says.

Fazio concurs. “Many do not understand the difficulty self-employed income can cause when seeking a home mortgage, due to the changes driven by Dodd-Frank in determining a person’s ability to pay,” he says. In those instances, Fazio agrees his bank looks to provide an in-house portfolio loan, “until we can qualify them for a fixed-rate secondary market loan.”

Banking the gig economy

Community bankers share their experiences serving gig workers.

“As [our] bank’s client base continues to grow, so does the number of independent contractors we have as clients.”

Joe Fazio, Commerce State Bank

“They have a level of complexity and needs that are different than typical consumers.”

Gautam Sircar, Jack Henry & Associates

“We also have many customers outside of their day job selling their handmade crafts through Etsy, and individuals that buy and sell products through eBay. Not to mention YouTube creators and Uber drivers.”

Ryan James, Surety Bank

Knowledge is power

Perhaps one of the most significant differences with this emerging and growing group of customers is their desire to take charge of their financial life in the same way they have taken charge of their work life.

“These clients are searching for good advice on how to handle their finances,” Fazio says. “They see a market opportunity to provide a service without having to join a company to earn a salary. They like the idea of defining the terms on which they can offer the service, controlling their lifestyle by determining the hours they work, the client they choose and how they price it.”

Many of these card-accepting freelance workers have already come to rely on PayPal, Square or Stripe for payments, James adds. “Banks have dropped the ball on offering payment gateways to consumer accounts for their gigs,” he says. “The traditional payment gateways or merchant services typically required too much upfront investment for the small business [or gig worker], so they went directly to other simplified gateways.”

Community banks could accommodate these customers by offering direct integration into their online banking to accept payments, as well as the option of submitting an invoice to a client for payment, James says.

“If consumers and businesses had the same level of simplicity to submit invoices and accept payment within their online banking, why would they need to go anywhere else?” he points out. He adds that his community bank left its core software provider because of its lack of third-party integration in regard to online banking.

Many gig workers resemble a consumer customer in some respects, and a small—or really small—business customer in other ways, according to Gautam Sircar, senior managing director of Jack Henry & Associates. “These customers are not really consumers,” he says. “They have a level of complexity and needs that are different than typical consumers.”


Karen Epper Hoffman is a writer in Washington state.

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