As the cost of living crisis continues, more workers are turning to side work to make ends meet. Studies indicate that around one in every three adults in the UK now have multiple incomes, citing economic necessity. Of those who haven’t, over 40% are considering taking on another side job.
The search for a side hustle lies deep within the gig economy, a sector that has doubled in size over the past five years. Almost half of gig economy workers also have a full-time job, using the flexibility of gig work to work around their full-time hours.
Despite gig work and freelancing becoming a common career path, many lenders have yet to incorporate affordability assessments that account for non-traditional income. Those who rely fully on freelance and gig work are often underserved by the credit system, facing denied applications for credit due to its unreliability. Consumers who use gig work to supplement their main income often have the extra income left out of the assessment, also resulting in limitations on their credit options.
At times of economic uncertainty, access to credit can be particularly critical. Over the past two years, demand for loans has steadily increased as consumers weather the difficult climate. Consumers have turned to credit to tide over increases in household bills and food costs, an option often out of reach for those working with unreliable income streams.
While the demand for loans exists at all-time highs, increased interest rates have led to a higher cost of capital. Affordability requirements have risen and, therefore, led to decreased loan approval rates and product consumption as lenders tighten their risk appetite and opt for “safer” loan applications. For those lenders aiming for growth, it can be a challenging climate.
In many cases where income is non-traditional, or applicants don’t have a robust credit history, smaller lenders use data points such as geographic location to asses affordability, often not accounting for the full range of their actual earnings.
However, technological developments have meant that there is a capacity to account for more volatile income streams. In October 2023, Fuse by Pave launched a new verification tool that focuses on allowing lenders’ affordability estimates for freelance income streams.
Using transaction data, the tool assesses applicants, giving a range of probability for their future earnings and affordability for loans.
“You can automatically assess someone’s earnings right out of their current account information,” said Sho Sugihara, CEO and Co-Founder of Fuse by Pave. “Not only that, you can account for things like volatility in self-employed income.”
Assessing Earnings Probability in Non-Traditional Income
The tool uses transaction data, identifying and categorizing income and expenditure streams for the past 12-24 months of the applicant. Using machine learning models trained on the Pave credit builder app, which serves many underserved segments, including gig economy workers, they can then attach a probability range for their future earnings.
“Rather than giving a statement that shows a person earns, for example, £40 thousand in the last year, we can say this person has an 80% probability of earning £40 thousand in the next six months. That allows lenders to have a much more nuanced risk criteria setting,” said Sugihara.
He explained that while traditional affordability assessments worked well in an economy where all applicants had a fixed income, the rise of gig work, freelancing, and side hustles called for a more nuanced approach.
“If you’re looking for a fixed income that is reliable, the market to which you can lend is diminishing rapidly,” he said. “It’s almost rare now to find that. So if you want to keep growing, especially in this climate, as a lender, you have to adopt this mentality of looking at this problem in a different way. Can we look at it as not a fixed income estimate problem but a range estimate and probabilistic estimate customer challenge?”
“Affordability assessments have to go from a point assessment of someone’s income or an estimate of someone’s income to a more range estimate of someone’s (future) income. It’s a paradigm shift,” he continued. “We’re seeing the top lenders do this already. And I think we’ll see it more and more.”
This approach, he explained, could allow lenders to increase their acceptance rates and grow their customer base despite the difficult climate.
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