FTT+ April 5th: A Closer Look At How Fintechs Are Working On PPP & The U.S. Stimulus Package
Hi all,
Still here, still focusing on Covid. If you get Ian’s free newsletter that comes out on Fridays, you already know what I’m going to talk about. If not, 1: you should sign up for it, 2: it’s about the small business relief program and fintech’s role.
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Fintech largely became a thing in the wake of the financial crisis. And despite some hiccups, I think we can all agree that things have been pretty damn good since then. The economy was doing great, stocks were up, people had jobs with wages that were increasing, millennials were starting to buy homes and cars. It was a great time for fintech.
We all knew that was going to change, since bull markets always end. But none of us expected it to change this fast. No one was prepared for this, either personally or professionally. But one of the great things about fintech and startups more broadly is that they are used to adapting fast. It gets a little trickier in fintech given regulations, but that also brings us to my main area of interest this week, the Paycheck Protection Program.
A business saving piece of legislation, it was supposed to open bright and early on Friday morning, but as I was talking to John Pitts, Plaid’s head of policy, at 10am ET, things still weren’t up and running.
“The difference between what banks and SBA are usually able to process and the demand is massive,” he points out. He’s right. The PPP is empowering lenders to make up to about $350 billion in loans. In fiscal year 2019, the SBA made about $23 billion in loans available to businesses through its flagship 7(a) program. That’s a really, really big difference especially when you consider the time frames: a whole year vs a couple of weeks. “A critical thing here is the way the program is structured. It's first come first serve, so once the money runs out, it runs out.” As of just Saturday, Bank of America said it had already received more than 145,000 applications totaling $30 billion through the program.
Important note: after my call with John, President Trump did say he’s prepared to offer more funds, but businesses need the money fast.
The night before the program was meant to start, banks across the country were telling customers that they weren’t ready to start offering the loans. Chase, Bank of America and others were still trying to get things in order.
While I don’t believe any of them opened right when the program was allowed to begin, Bank of America was one of the first to get going around the end of my call with John, but it came with some strings attached. At the onset, only current BofA loan customers were able to apply. So if you hadn’t taken out a business loan or some sort of credit product with them previously, they weren’t ready to lend to you yet, even if you had a deposit account with the bank.
As of Friday night, the SBA said 13,669 loans had been approved, valued at more than $4,300,000,000 (note: it’s unclear how much of that has been sent out to the businesses that applied).
The SBA is also trying to get more folks approved to make loans in the first place. It said that it’s reactivated more than 30,000 licenses for community banks and credit unions, and it is also the first time that they have allowed non-bank lenders to participate in a government backed program, which is one of a few ways that fintech can get involved and help. This means someone like a Kabbage would be able to make loans, which their website says they are working on.
But how exactly would it look to get non-bank lenders to participate in PPP lending? Ian spoke to an executive at a small business lender on Thursday night, who sees a sort of 4 party system to enable lending in a cost effective way:
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A fast acting and flexible regulator: Regulators here have been confusing everyone involved; applications and rates have changed a few times, and there’s not much around clarity how PPP loans are originated or forgiven. A regulatory partner that can be flexible and move quickly can simplify things for everyone involved.
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Fast Capital: Money needs to move fast here—small businesses need money as soon as possible. Someone that can send funds to fintech lenders within 2 days would be ideal to get funds to businesses quickly. If fintech lenders have a strong enough balance sheet, they might be able to fund the loans, otherwise, they’d need to partner with a bank.
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A fintech lender: A non-bank fintech can actually move money over the rails and be the party to disburse funds to small businesses. They also have the processes in place to disburse these loans (unlike many banks, which are working remotely for the first time), and the technology to work with other fintech companies to aid in KYC, payroll verification, and other key functions.
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A bank: The issue here is that fintech companies aren’t in a position to hold these loans on their balance sheet. They need to sell them back to banks, and ideally, these loans would be either bought back by the Treasury when they’re forgiven. The key here is to get the funds to the small businesses that need it as soon as possible. This bit’s still a little murky: a bank may not be necessary if the SBA can forgive/buy the loan by the end of week 7, according to the Interim Final Rule document that was published on Friday. But the lender would need to be able to hold the loan until then.
Another way fintech can help comes from the form of B2B companies like Gusto, Divvy, Plaid, Alloy and others helping businesses quickly provide the information needed about payroll to get approved for the loan application.
You see, for the program and for any loan, there’s a certain set of information required in order to both be granted a loan and to figure out the amount you should be given. Rather than filling out a bunch of forms, an ideal way of speeding up the process (especially if you’re not currently a customer of the institution you’re trying to get a loan from) is connecting your payroll and bank account information. The companies I mentioned above are a few of the fintechs that could play a huge role in that. Alloy, which provides automated digital business onboarding to the likes of Radius Bank, Brex, Marqeta and others, sent out an email to customers on Friday informing them that it could help them verify businesses & business owners as they try to ship these loans to small businesses as quickly as possible. Divvy has an entire page on its website telling both customers and noncustomers that it can help them quickly apply for a loan.
I haven’t talked to John since Friday, but at that point, he said his conversations with other firms around this was going really well. He also argued that everyone needs to think of this as a way to help their customers and create loyalty, rather than a way to generate revenue and gain market share.
“We need to work collaboratively across the ecosystem. This isn't to make money or establish larger market share, this is the time to pull everyone together to help rescue people faster,’’ he said.
What he said towards the end of our conversation was what resonated most with me in terms of portraying just how big of a moment this is for our industry. It goes back to what I said in the beginning about how fintech has already proven it can reshape finance in boom times. But now is the time for it to not only prove that it can survive a large downturn, but that it’s a vital part of the world’s economy.