Open banking solutions can protect Gig workers from BNPL debt trap

Buy Now, Pay Later (BNPL) is a type of unsecured short-term financing that allows consumers to make big-ticket purchases and pay for them in installments, often interest-free. This form of consumer financing has been growing rapidly in the last few years and is projected to keep growing for a long time to come. Temporal Discounting, the human tendency to reduce the value of things that are available in the future, while overvaluing things that are available now, dovetails perfectly into consumer psyche, making BNPL a huge success. BNPL offers are often enticing, even consumers who can afford to make a full payment opt for it and end up purchasing a higher value item.

Considering the unique financial situation of gig workers, e-commerce platforms and FinTechs are targeting (or) likely to target this segment of the population with BNPL offers. While FinTechs’ intent of serving the underserved is noble, it should be done in a manner that gig workers do not face undue financial stress.  Regulators around the world are requiring lenders to make affordability assessments before offering a BNPL option. With increased delinquency being witnessed with BNPL financing in the last few months, it is even more important for FinTechs  to conduct the necessary due diligence before making an offer.

Gig workers and their financial needs

Gig economy is characterized by short-term contracts and freelance work, often involving an online platform. Companies and individuals hire workers, rent accommodation, order meals, receive healthcare services, and more - all intermediated by platforms. The short-term nature of these contracts implies that the provider of these services has variable income, restricting them from accessing conventional credit. Although they may not have a stable income, they do require financial services to live a comfortable life.

Before making an BNPL offer, FinTechs should evaluate the offer's viability, not just for themselves but also to determine the gig worker's affordability. Fortunately, the technology platforms of FinTechs and the open banking ecosystem available today can provide sufficient insights to assess the repayment capacity of gig workers with ease.

Open banking solutions

Gig workers have a financial relationship with multiple banks and financial institutions. A Fintech intending to serve a gig worker will require a comprehensive view of the customer’s finances before offering their solutions to gig workers. Open banking has already arrived on the scene with solutions in the form of financial data aggregators. They are intermediaries aggregating the financial data of a customer from multiple financial institutions based on customer consent. These aggregators collect account, balance, and transaction information of gig workers and provide FinTechs with the data. With their help, FinTechs can generate a comprehensive picture of the gig worker’s finances.

Open banking offering a safe BNPL to gig workers

Gig workers make extensive use of platforms to conduct their gigs. Their use of these platforms leaves a sufficiently large footprint that can be analyzed for their behavior towards gig work in the following ways:

1. Duration of gig work (No. of years)
2. Average customer ratings (Translated to a number)
3. Rating changes over time (Improving, Stable, Falling)
4. Uniformity of income or minimum income per month

FinTechs can leverage the services of financial data aggregators to analyze:

1. Transaction information (Assess discretionary spending as a % of overall expenses)
2. Average cash balance for a specific period (Sufficient to cover “n” installments)
3. Average income of a gig worker over a period (Measure income to expense ratio / income to saving ratio)
4. History of making utility and credit payments (Measure consistency in making utility payments over a 3-year period)
5. Income growth over time (Growth and stability)

Harnessing insights from the gig platform and open banking data will help FinTechs in arriving at a BNPL eligibility score. The BNPL eligibility score reflects the confidence that a FinTech has in a gig worker’s ability to make payments without default. A score of such nature will ensure that FinTechs do not run into a default risk while financing the BNPL purchases of gig workers.

The way forward for BNPL financing of gig workers

The consumer durables industry is quite popular with gig workers, as they offer solutions to these organizations on a temporary or project-by-project basis. A big difference is that gig workers are a lot more vulnerable to financial distress than full-time employees. It is important for financial institutions to objectively assess the repayment capacity of gig worker using a reliable BNPL eligibility score before making a BNPL offer. Such a BNPL eligibility model will be appropriate for both gig workers and FinTechs in the long run.