The United States government announced several weeks ago a plan to distribute billions of dollars in stimulus checks to individual Americans and small businesses across the country. However, the distribution of the stimulus seems to have been easier said than done.
Indeed, banks across the country have either struggled to meet the demands that have been placed on them by the federal government or have been slow to start their participation in the distribution program.
Indeed, the Washington Post reported in early April that small business owners seeking coronavirus-related loans have “encounter[ed] chaos and a slew of questions.”, and that the “banks expected to distribute the loans, including some major names, won’t yet participate in the program.”
And the banks aren’t necessarily to blame: Consumer Bankers Association chief Richard Hunt said in a statement earlier this month that “having just received guidance outlining how to implement a $349 billion program literally hours before it starts, we would ask for everyone to be patient as banks move heaven and earth to get a system in place and running to help America’s small businesses and the millions of men and women who work at them.”
However, two weeks after the program began, banks are still struggling to process thousands of loan applications (not to mention distributing individual stimulus payments and other corona-related financial aid.)
This seems to be the primary reason that the US government made a quick turn toward the fintech industry: on Monday, the United States government made the decision to approve Paypal, Intuit, and Square as participants int he US Small Business Administration’s (SBA) Paycheck Protection Program (PPP), which provides forgivable loans to small businesses that keep all employees on their payroll for at least eight weeks. The firms began issuing the loans today.
— Spiros Margaris (@SpirosMargaris) April 14, 2020
Is this the dawn of a new era of opportunity for fintech?
” This is where fintech firms can shine”
For Michael Sury, lecturer in finance at the University of Texas at Austin and director of the Financial Analytics Program and the Center for Analytics and Transformative Technologies, the answer is yes.
“Given the challenges that traditional banks have had in implementing the various liquidity provisions of the stimulus package, a window of opportunity has opened for FinTech firms to differentiate themselves and serve as an additional channel,” he said.
“It’s clear that the banks are totally overwhelmed with trying to process record loan and credit facility volumes, but this is where FinTech firms can shine. In many cases, their core competence is precisely in managing and processing information—which is critical to getting funds to where they are desperately needed.”
Some fintech firms, recognizing this opportunity, strode a few steps ahead of the United States government–TechCrunch reported that Square, Paypal, and Intuit lobbied for weeks before the United States finally made the decision to allow them to participate in the loan distribution process–and while PayPal has forayed into the world of small business loans in the past, Intuit and Square are new to the scene.
2015 Fintech: "We're going to put banks out of business."
— Ron Shevlin (@rshevlin) April 12, 2020
And perhaps this is a sort of ‘breakout moment’ for fintech companies in terms of building relationships with the United States government. Speaking on CNN about the decision to allow the three companies to facilitate the distribution of SBA loans, Karen G. Mills, a senior fellow at Harvard Business School and former administrator of the US SBA, said that “I think that this is going to be the week that we see fintech come in and maybe even save the day.”
“The next two weeks are critical for America’s small business owners–as you know, they have really been struggling; they only have about three or four weeks of cash on hand, and they’ve been closed for that period of time [already],” she explained.
“This is going to be the week we see #FinTech come in & maybe even save the day,“ @KarenGMills says more money from #Congress is needed & we could still lose 20% of US small businesses. #coronavirus pic.twitter.com/WVooZfMahe
— Julia Chatterley (@jchatterleyCNN) April 13, 2020
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“You saw it in the unemployment numbers…these are half of America’s jobs. So, we did have one week of the plan so far, and as you said, it was bumpy–banks are not known for moving quickly, and this is $349 billion worth [of stimulus cash].”
Still, the bottleneck effect is going strong: “people are applying; [the SBA] says they’ve got about $200 billion approved–but only about 1% seems to be flowing into the hands of small businesses. So, the question is, what are we going to do to get the money out there?’
FinTech could ease the stimulus bottleneck effect
This is exactly where Square, Paypal, and Intuit enter the mix.
Indeed, Kevin Olsen, senior vice president of payments solutions platform VSoft, told Finance Magnates that, of course, “as far as funding goes, that’s on the government.”
“However, what fintechs can do here is very similar to the conversation we have about processing more generally. Technology makes things easier, faster, and more efficient. The bottleneck that has been exposed here for small businesses and consumers alike is that processing issue,” he said.
Loans are being applied for by the thousands, but very little money is actually being distributed at this time. The SBA simply cannot process and issue all of these loans fast enough. The fintech industry, as a whole, ultimately makes that process easier.”
“This is all consistent with a major emphasis on digital access and enablement.”
What does this look like on a practical level?
Brian Drozdowicz, manager of customer acquisition and growth solutions at Bottomline Technologies, explained to Finance Magnates that “since the PPP program is so new and unique, most lenders did not have a purpose-built solution in place and standing up a new digital experience can take months to enable. This an opportunity for their fintech partners can come in to help.”
Drozdowicz also explained that while the need to quickly distribute the stimulus has expedited the urgent economic situation at hand, the process of integrating fintech solutions into the banking system in the United States has been going on for some time.
“This is all consistent with a major emphasis on digital access and enablement,” he said. However, now, “there’s a sense of urgency around small business account opening and onboarding, especially as many SMBs begin to see loans come through.”
Drozdowicz also pointed out that “now, we’re beginning to see the impact of branch closures”–that while the facilitation of stimulus distribution is a considerable challenge in and of itself, small businesses that normally depend on in-branch banking services may have been high and dry.
“Since many small businesses have been dependent on physical branches for service and access to credit, this digital capability is even more essential in the current environment due to temporary branch closures and social distancing guidelines,” Drozdowicz explained.
As bank branch closures proliferate, fintech firms can fill other gaps in the American economy
Therefore, while facilitating the flow of stimulus cash may be the most significant task at hand, fintech firms also have a host of other opportunities to serve clients who may be left without the banking services that they are normally accustomed to.
Indeed, “FinTech can offer other solutions as well,” Michael Sury explained. “They can increase the number of options available and streamline the process for raising capital beyond just traditional bank loans. They can automate and integrate finance and accounting functions, which are essential to the success of any small business, including managing invoices and receipts, HR, cash flows, and taxes.”
“Other FinTech firms can also help develop and manage insurance and retirement solutions,” he added.
Brian Drozdowicz also explained that “there is also a real need for liquidity and cash management controls, more robust cash flow reporting, payroll and invoicing, digital payments and potentially real-time payments, all of which require digital solutions that can be done remotely and paperless.”
“Technology providers can have a major impact in all of these areas with their bank partners, offering and interconnecting many of the features required in rapid response situations—where time-to-market matters.”
There have also been some positive “side effects” of the introduction of fintech platforms into the SBA lending zone: fintech solutions have the potential to “reduce fraud by including integrated risk and compliance capabilities that help streamline and secure the process for lenders and borrowers.”
Bottomline itself is also “providing our digital account opening solution along with the loan application platform, which allows lenders to choose open new deposit accounts as well.”
” This is an important problem that needs solving.”
Still, time is of the essence.
“The next week is indeed a critical time window because many small businesses already run on very low liquidity (i.e., keep very low cash balances),” Michael Sury said.
“If the logjam of funds that have already been earmarked for small businesses does not clear up, we may see a record number of business closures.
“As it is, Congress will very likely need to approve additional funds to keep these businesses in operation. Given the generally accepted maxim that ‘small businesses are the backbone of America,’ this is an important problem that needs solving. And FinTech solutions can address it.”