Small business not only takes into account 47 percent of U.S. employment but also provide a path to success for minorities and women. During the coronavirus pandemic, these small businesses:especially those belonging to minorities– suffered greatly because consumers have disproportionately reduced spending on services that require personal physical interactionsuch as hotels and restaurants. In response, the US government launched Payroll protection program (PPP) to provide guaranteed and potentially forgivable loans to small businesses. In this post, we investigate financial technology (fintech) lenders involved in PPPs and find that by paying only a small fraction of the total loan amount, they provide important support to minority business owners who have been underserved by traditional banking in the past.
Small business experiences during a pandemic
Previous post office showed that the decline and recovery of small business incomes differed by demographic characteristics. Survey data show that the number of active business owners decreased by 22 percent February to April 2020, with Black and LatinX owners hitting hardest. Industries with a higher concentration of businesses of women, blacks, Hispanics and immigrants were among the hardest hit. More recent evidence shows that these trends continued until the end of 2020, when nearly 80 percent of small businesses reported falling revenues with a sharp mismatch between business owner races.
Bank and fintech lenders in the payroll protection program
PPPs are administered by the Small Business Administration (SBA) with funds distributed in three rounds or waves. During the first two waves, from April 3 (PPP launch date) to August 8, 2020, funding totaling US $ 659 billion was authorized. In 2020, PPP provided 5.2 Million Loans Over $ 525 Billion… The current (i.e., third) round began in January 2021 with authorized additional funding of $ 284 billion, all of which were exhausted by May 4…
Eligibility is broad and different from other SBA loan programs in that applicants only need to document their salaries and other expenses and do not have to meet the requirements “loan elsewhere“test work. However, they can apply for and receive loans only through eligible financial institutions… Since lenders bear no credit risk when making loans guaranteed by the US government, differences between lenders in repaying loans primarily reflect their ability to process applications and their approval decisions.
Initially, loans were mainly distributed by banks, which allowed for quick lending, but also increased the likelihood that the loans would go to the bank’s existing customers rather than the hardest hit borrowers. An important change is that the SBA has allowed more non-bank lenders to accept applications. near the end of the first wave… Of particular interest are fintech lenders, defined as non-bank Internet lenders, such as Kabbage, Square, Lending Club, OnDeck, and PayPal Working Capital. Recently, fintech companies have become important lenders for small businesses, especially in places where banks have burst out. Compared to banks, fintech lenders can be more efficient in processing applications (as shown for mortgage), and more likely lend to underserved businesses who cannot borrow from banks.
Who and from which lenders applied for PPP loans?
From which lenders did borrowers look for PPP loans? To investigate this issue, we use data from the Federal Reserve. Small Business Credit Review 2020, which included 9,693 respondents from small employers (firms with 1-499 employees) across the country and was conducted in September and October 2020. Some firms reported in the survey that they did not apply for PPP loans, mainly because they believed unqualified for a loan or loan forgiveness. 87 percent of job seekers applied to either a large bank (one with over $ 10 billion in deposits) or a small bank, while only 8 percent went to fintech companies. In comparison, in the previous five years, 44 percent of firms with one to 499 employees used a large or small bank, and 20 percent used fintech companies.
One of the reasons borrowers might turn to banks is because they already have a relationship. While this link can facilitate loan approval and encourage banks to keep an eye on the survival of applicant firms, it can also discourage the hardest hit borrowers from obtaining loans. Indeed, as shown in the chart below, 95 percent of applicants to large banks and 83 percent of applicants to small banks have previously had PPP relationships with their lenders. (Borrowers may have relationships with multiple lenders.) These borrowers had more employees, higher credit ratings, and most likely white owners. In contrast, only one in three small employers who approached a financial technology lender had previously worked with that lender. These borrowers had fewer employees, lower credit ratings, more difficult to access PPP credit, and were more likely to be black-owned and downsized. Thus, our results show that PPP applicants independent choice among lenders, and underserved borrowers gravitate towards fintech companies.
Nearly half of all small employing firms sought PPP funds from a large bank, with little difference in the number of applications by race and ethnicity (see chart below). However, there are clear differences in the racial makeup of applicants to small banks and fintech lenders. Fewer black and Hispanic owners approached smaller banks than white and Asian owners. In contrast, roughly one in four black-owned firms turned to financial technology lenders, more than double the percentage of whites, Asian and Hispanic-owned firms.
Who got approval for PPP loans and from which lenders?
Have fintech lenders lend to black-owned firms, approving their applications at a high rate? The chart below shows that fintech lenders approved a large majority of their candidates, although most of them did not have an existing relationship with them. Moreover, fintech lenders approved the highest percentage of black-owned small employer applications compared to firms of other races and ethnicities. PPP approval rates were the highest in banks, which probably reflects the fact that most of their applicants had existing banking relationships under previous research…
How many PPP loans have fintech lenders provided?
The structure of applications for obtaining and approving loans under PPP is reflected in the shares of banks and financial companies-lenders in the amounts of PPP loans (see the diagram below). During wave 1, fintech’s share of loan stock (number of loans) was less than 2 percent (4 percent) compared to 96 percent (91 percent) for banks, partly reflecting the SBA’s late approvals. A smaller share of fintech lenders in loan amounts implies smaller amounts of fintech loans, and we will partially explore this topic further. three from this series. Smaller banks had a higher lending share than large banks, consistent with anecdotal evidence that large banks initially lacked the capacity to process applications, giving smaller banks the opportunity to gain market share.
As more fintech lenders were approved as PPP lenders, their share of lending increased to more than 10 percent of total loans and 20 percent of loans in wave 2. While large banks remained their shares from wave 1 to wave 2, shares of small banks have collapsed by almost half. One possible explanation is that fintech lenders reached out to small bank clients by providing more efficient approval process which outweighed advantages of previous banking relationships… By comparison, clients of large banks seem to have continued to value their banking relationships.
Inequality in access to credit
Although fintech lenders accounted for a small proportion of PPP loans, they were likely serving borrowers who would not otherwise have received the loan. Applicants who approached fintech lenders for PPP loans were more likely to have no banking relationships, were minority-owned, and had fewer employees. What’s more, a higher proportion of applications from black-owned businesses were approved by fintech lenders compared to white, Asian, or Hispanic-owned firms. Since black owners were approved for lending by fintech lenders at a higher rate even before the pandemic, our results show that the historical factors preventing black owners from obtaining bank loans continued to work with PPPs.
In the next post, we explore the implications of unequal access to credit: have smaller firms received their requested PPP loan amount, and have the loans been directed to the hardest hit areas and have reduced job losses.
Asani Sarkar is Assistant Vice President in the Research and Statistics Group of the Bank.
How to cite this post:
Jessica Battisto, Nathan Godin, Claire Cramer Mills, and Asani Sarkar, Who Got PPP Loans from Financial Technology Lenders ?, Federal Reserve Bank of New York. Liberty Street Economics, May 27, 2021, https://libertystreeteconomics.newyorkfed.org/2021/05/who-received-ppp-loans-by-fintech-lenders.html.
Additional posts in the series
COVID-19 and Small Business: Race and Income Unequalities
Who Benefited From PPP Loans From Fintech Lenders?
Economic Inequality Series
Denial of responsibility
The opinions expressed in this post are those of the authors and do not necessarily reflect the views of the Federal Reserve Bank of New York or the Federal Reserve System. The authors are responsible for any errors or omissions.