The financial technology industry was handed a rare opportunity to demonstrate its capabilities when the federal government authorized nonbank companies like PayPal Holdings Inc. and Square Inc. to help distribute $349 billion in economic relief to small businesses reeling from the COVID-19 pandemic.
The Small Business Administration, which manages the so-called Paycheck Protection Program, approved the two financial institutions along with automated online lender Kabbage Inc. and Intuit Inc. subsidiary Quickbooks Capital to work alongside traditional banks to underwrite and disburse the loans.
The program is a portion of the rougly $2 trillion economic stimulus package enacted on March 27.
Fintech industry trade groups succeeded in convincing policymakers that their members are uniquely suited to administer these loans and potentially other federal relief payments.
“We can move loans out into the capillaries of the small-business economy,” Brian Peters, executive director of Financial Innovation Now, told CQ Roll Call in an interview. The organization is a trade association whose membership includes PayPal, Square, Intuit and other lenders approved to distribute the relief funds.
He said fintechs can help money reach businesses whose needs may not fit well into a traditional bank’s manual underwriting process, which he described as more expensive and more time-consuming. Fintechs often partner with traditional banks to streamline the verification and approval process while others operate as direct lenders themselves.
Sam Taussig, head of policy at Atlanta-based online lender Kabbage, said fintech was born for situations like this. Fintechs have the technology, the operations and process structure to take a small business with which it has never interacted and onboard it to a "fairly technical and onerous program" like the PPP.
Taussig appeared at a CQ Roll Call virtual town hall on April 15 to discuss ways fintech’s agility could support the small-business economic recovery effort.
“The larger banks simply don’t have the technical resources to efficiently move smaller businesses or customers they’ve never seen before through the process in a reasonable amount of time with a reasonable amount of cost for the bank,” Taussig argued.
Supporters say fintechs have formed relationships with millions of small businesses and in most cases have already verified customers’ identities, ensured their companies are properly registered, and performed anti-money-laundering due diligence similar to banks’ so-called know-your-customer standards.
Nonbank lenders can easily access and verify loan applicants’ credit card revenue data, accounting statements and payroll records because many of them already use platforms by Square, Quickbooks and Divvy Pay to run their back offices.
Intuit, for example, estimates that as many as one in 12 American workers’ paychecks are processed through its platform.
Larger fintech players can also wield a technological advantage, leveraging artificial intelligence, machine learning tools and intricate algorithms to help them better manage and interpret all that data.
“These fintech players have the sophisticated technology that allows them to underwrite and approve loans very quickly,” Jodie Kelley, chief executive of the Electronic Transactions Association, said in an interview. “For a program that’s trying to distribute funds quickly, that kind of technology can absolutely be brought to bear.”
The Electronic Transactions Association and Financial Innovation Now each urged Congress for weeks to allow their members to help administer the relief program, writing letters to lawmakers touting fintech’s speed.
The trade groups say they are continuing to press Congress on using fintech alternatives to traditional banks, such as reloadable prepaid debit cards or peer-to-peer transfer platforms like Square’s Cash App or PayPal’s Venmo.
Peters said fintech’s involvement will result in the economic rescue money getting to more businesses that need it, rather than concentrating the funding towards larger firms with better access to traditional banks.
“The sizes of the loans that we distribute are going to be much smaller compared to traditional financial players on both the average and the median loans,” Peters said. “And that will be one of the biggest indicators of the reach that these [fintech] companies have to small businesses that are typically underserved.”
PayPal’s average loan amount, for example, which comes in at under $10,000, wouldn’t be a profitable transaction for a traditional bank, Peters said.
The Treasury Department backs the PPP loans, which are designed to help businesses avoid layoffs by covering payroll expenses. The loans are capped at two-and-a-half times the business’s average monthly payroll. They bear 1 percent interest, and payments are deferred for the first six months.
The loans will be forgiven if the business maintains its regular payroll for at least eight weeks, and up to 25 percent of the funds may also be used for other qualified operating expenses, such as rent or utilities.
For the program, a small business is defined as a firm employing fewer than 500 workers, and it includes nonprofit groups, independent contractors and the self-employed.
Lenders that were previously approved by the SBA began accepting PPP applications on April 3, and several fintech companies were approved to start taking loan requests by the following week.
The small-business relief fund was completely exhausted in less than two weeks.
“The SBA has processed more than 14 years’ worth of loans in less than 14 days,” Treasury Secretary Steven Mnuchin and SBA Administrator Jovita Carranza said in a joint statement on April 15, in which they also urged Congress to authorize additional funding for the PPP.
The SBA reported that it had approved more than 1.6 million PPP loans that originated through 4,975 lenders as of noon on April 16. The overall average loan size is $206,000, it said.
The SBA posted a notice of the lapse in appropriations for the program on its website by April 16 and said it was no longer accepting applications until further notice.
Lawmakers from both parties have called for additional appropriations to bolster small businesses besieged by government-mandated closures, reduced sales and employee health concerns during the widespread public health crisis.
The PPP’s funding shortfall after just two weeks of taking applications indicates that more funding is needed.
“The huge amount of demand out there feels like we're trying to drain the lake through a garden hose,” Peters said.