The “gig” economy has experienced explosive growth during the past decade. This rapid expansion also presents significant vulnerabilities, particularly when it comes to payment fraud. The transient nature of workers, diverse and fragmented gig platforms, and complex payment structures create a perfect storm for financial risk. Addressing these challenges head-on and exploring innovative solutions is vital to safeguarding the integrity of the gig economy and ensuring secure, reliable financial transactions.
The gig economy expansion
The gig economy surged throughout the COVID pandemic when many restaurants closed as the world went into lockdown. During this period, people turned to services such as DoorDash and Grubhub, and companies such as Shipt, Amazon Fresh, Instacart, and other grocery services became essential.
During the post-pandemic boom, companies realized they could optimize their costs by using a flexible workforce. According to the National Bureau of Economic Research, nearly 2.1 million new workers entered the gig economy in 2020, double the number of entrants in 2019. Another 3.1 million entered in 2021, but more than a million left. While this rapidly changing market also led to layoffs, particularly in the tech industry, there was a simultaneous increase in consulting work as companies moved to temporarily hire writers, designers, marketers, and other specialists to complete specific projects.
With the gig economy continuing to grow and showing no signs of slowing down, the speed and ease of real-time payments (RTPs) have spawned myriad benefits for gig workers, many of whom rely on being paid instantly.
The rise of fraud
Because RTPs are new, their risks are yet to play out fully. What the industry has learned, though, is that these instant payouts are extremely difficult to reverse once the fraud has occurred. There are three major concerns connected to the rise of fraud in the gig economy:
1) Peer-to-peer (P2P) apps. The steady adoption of P2P wallet apps such as Zelle, Venmo, and CashApp has created a culture where these payments are taken for granted. Today, they are used to exchange money, and the main issue is that they are mainly used for personal and not business use, which means there are no buyer protections in place—at least not yet. They are also not federally insured and are highly susceptible to fraudulent activity.
2) RTP fraud. Fraud in RTPs is a technological problem. As such, it is imperative for companies to engineer a platform that can detect and signal fraud in transactions, which is challenging to do in real time.
3) Fraud prevention. Investing in fraud prevention funding may be an option for large companies, but small businesses, many of which are involved in the gig economy, may have difficulty making that investment because dealing with fraud does not generate revenue.
Investing in solutions
Fortunately, companies have options for providing fraud protection solutions. In the case of identity fraud, companies can invest in a Know Your Customer (KYC) program to validate workers’ identities, ages, and qualifications during the onboarding process. While this does cost more and makes for a less seamless onboarding process, in the long run, verifying workers as early as possible lowers the risk of identity fraud.
Using payment gateways can also help detect fraudulent transactions. These software-as-a-service (SaaS) products, such as Stripe, Square, and Amazon Pay, charge extra for fraud protection but are worth the investment. Organizations can also make the extra effort to validate a broker’s payment methods by ensuring that they run a program that validates workers’ routing and account numbers and then confirms workers’ identities before approving transactions.
Tax fraud is also a concern in the gig industry because workers can easily avoid reporting their earnings as taxable income, since gig platforms don’t have to withhold earnings. Failure to report taxable income can result in the worker and the company being held liable. To facilitate this issue, companies can adopt tax reporting efforts within their platform that can progressively show throughout the year exactly what the tax burden is on their gig workers. They can offer forms that are easy to download to establish their financial disclosure responsibilities.
Companies can also dedicate the resources necessary to create clear dispute resolution policies, including delineating the responsibilities of the buyer and the seller. These policies can be effective by being transparent and allocating resources to the product and support departments.
There are several metrics and key performance indicators (KPIs) that companies can use to track the success of their fraud prevention tactics. These include:
- The chargeback rate. This measures the total percentage of all transactions that resulted in a chargeback or payment reversal due to fraud.
- The fraud incident rate. In addition to payment-related concerns, this metric captures entity-related concerns, such as incidences of underage workers and fraudulent employment reporting.
- Time to fraud detection. How quickly can the company’s systems detect fraudulent activity? The sooner the fraud is discovered, the quicker it can be corrected. This is crucial because cybercriminals can quickly withdraw funds from an account once they access a card.
Best practices for gig workers
As independent contractors, gig workers can also advocate for their work and pay. They can validate the business they are working for to avoid becoming victims of fraud. That includes doing basic research on the company’s reputation and ensuring they have a transparent payment policy that lays out how much, when, and in what form they will be paid and what fees, if any, are involved.
Gig workers can also avoid companies that pay using non-traditional methods such as cryptocurrency or unheard-of “company” card programs. The safest bet is to insist on reliable payment methods, such as via automatic clearing house (ACH) payments or push-to-card payments. Finally, gig workers can ensure that they understand the dispute process and how their company defines job or service completion.
Long-term thinking
While it may seem counterintuitive, the solution to fraudulent payments in the gig economy isn’t solely through technology. Instead, the best way to combat cybercriminals is for the industry to take a more collaborative approach to sharing information about fraudulent accounts and patterns.
As more people enter the gig economy, it’s vital for the industry to raise public awareness about how gig workers can protect themselves from potential fraud. A combination of advanced technology and a “buyer beware” attitude can help ensure gig workers receive their payments—and peace of mind.
About the Author:
Akshay Rawat is an engineering lead at Checkr Pay, where he creates payment platforms that cater to the unique requirements of gig workers and platform operators. With more than 20 years of industry experience and entrepreneurship, Akshay specializes in engineering scalable fintech systems. Connect with Akshay at LinkedIn or at akshay.rawat@gmail.com.
