May 1, 2020

Small business emergency lending program expands fintechs’ portfolios

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It's not in most fintech firms' nature to be lenders, but the pandemic is pushing them to branch out.

The Paycheck Protection Program is a week into its second round of funding small businesses through the coronavirus outbreak. Some financial tech companies, also known as fintechs, got permission from Congress to offer those loans. They include PayPal, Square, Intuit, Kabbage and others.

The hope is that they can get money to people and businesses who haven’t worked with traditional banks in the past. Fintechs say their tech is an advantage. Is that true? I dig into it in Quality Assurance, where I take a second look at a big tech story. I spoke with Felix Salmon, chief financial correspondent for the tech site Axios. The following is an edited version of our conversation.

Felix Salmon (Photo courtesy of Salmon)

Felix Salmon: The banks were a bit slow to be able to set up websites. Their customers found it impossible to get through to a human being or to find out where they stood, whether their applications were going through. There was a general feeling that given that all of this was being done on the internet, that internet companies might be better at doing it than the banks were. So relatively quickly, this program was opened up so that the eligible lenders included not only banks, but also internet companies like PayPal and Quicken and Square.

Molly Wood: I feel like one of the questions about these lenders, and fintech companies and neobanks in particular, is that in some ways they replace this idea of the community bank. Do we have any evidence that they are, or could be, more inclusive than established lenders?

Salmon: I think they are in [that] if you apply for a PPP loan from PayPal, then your chances of getting it are probably the same, no matter who you were. Given that many of the people who are applying, if not most of the businesses applying, have no particular relationship with these fintechs to begin with. That doesn’t mean they’re going to get their loan. It’s far from clear that the ability of PayPal to get loans through the [Small Business Administration] system and get people funded is any greater than any other bank. But at least you can feel that you’re on a level playing field, if that’s any solace, which it probably isn’t, to be honest.

Wood: Who is applying through, let’s say, PayPal or Square or Intuit? Who are these small businesses?

Salmon: To a first approximation, everyone who didn’t get a loan or wasn’t able to get through when applying through their bank. Whatever the reason was, if you haven’t got your money, it’s not that you give up on your bank entirely, but you say, “Well, maybe I can’t get a loan through my bank. I should try getting a loan through someone else.” Given that it’s not difficult to apply through PayPal or Quicken or Intuit, you may as well try. If they come back to you and say, “Hey, you’ve been funded,” that’s brilliant, and you can take the money. And if they don’t, it’s no harm, no foul.

Wood: Is there any evidence, or will there ever be a way to tell, do you think, on the claim that these tech-driven platforms are more nimble and better able to get your application through than a big bank?

Salmon: The banks and the fintechs have all been extremely unhelpful when people like you and me have been asking them for details about how many people try to apply, how many of those people who tried to apply actually got their money. Those ratios are not public information. They’re not even information that the SBA has. You’d need to get that information directly from each one. I don’t think any of them are going to be releasing that data on a kind of apples-to-apples basis that we’ll be able to make that determination.

Wood: Is this an opportunity for these companies if they are able to establish themselves as this type of lender or just do good by some small businesses? Is it an opportunity for them to build the customer base down the road?

Salmon: I think for about 24 hours it was an opportunity to get some goodwill. I think that if small business owners actually went to those places, put in their applications and then didn’t receive any money, that some of that goodwill did evaporate. What’s more, a lot of these companies aren’t actually lenders at heart. Companies like PayPal and Square are much more based on payments than they are on loans. It’s not clear that even if this did give them a foot in the door when it came to small business lending, that that’s something that they would really want to beef up.

Wood: It feels like certainly some of them have provided loans, like Kabbage or Intuit, but the others that haven’t, do you think they’re likely to discover that, in fact, this is a terrible morass that they would like to back out of slowly?

Salmon: Small business loans are a horrible thing to be in, in general, because [in] small businesses, so many things can go wrong. It’s so difficult to really get under the hood and find out how creditworthy they are. For PPP, it’s different because it’s all guaranteed by the government, so you don’t need to spend too much time really underwriting the loan and understanding the business before extending them the credit. If you want to actually lend money to small businesses as part of your business, especially if you’re doing it unsecured and you don’t have access to cash flows, which you can just seize to pay back the loan, then it’s a really gnarly business where a lot of lenders have become unstuck. It’s not clear that very many investors want these companies to get into that line of business.

As part of the federal aid program, fintech companies are lending to small businesses, a difficult market to navigate. (Oliver Douliery/AFP via Getty Images)

Related links: More insight from Molly Wood

Other fintechs and so-called neobanks are also trying to entice new customers or serve the ones they have in different ways during this pandemic. The neobank Chime gave all its customers a $200 advance against their government aid payments since many of those checks were slow in coming. It said it saw 200,000 new sign-ups after that, according to Business Insider. Although, to Felix Salmon’s point, Chime said it has no interest in getting into lending. 

Crunchbase has a piece this week about how fintech companies are still thriving during the downturn — hiring, raising money and in some cases being acquired. An analyst told Crunchbase that being approved as small business lenders was actually an additional “stamp of approval” for the industry.

Also watching

On the financial tech side, the venture firm Andreessen Horowitz says it raised $515 million to invest in cryptocurrency and blockchain tech, and will even buy some crypto assets just to hang onto in case regular money collapses, I guess. Crypto and blockchain are still a thing, even if no one is looking. In fact, just this month, Facebook released an updated white paper about its digital currency initiative, Libra, which it hopes is more regulator-friendly. “Watered down” was a phrase applied to Libra 2.0.

On Tuesday, the British payments operator Checkout joined the Libra Association. Side note on cryptocurrency: Forbes reported a couple weeks back about how Coinbase data this month shows a sudden spike in bitcoin purchases in the amount of exactly $1,200 — which is the same as a stimulus check. 

Finally, we round out earnings week with “Will the Tech Giants Save the Economy?” Amazon, although it made a ton of revenue off all our extra online shopping, missed on earnings because it’s spending a lot trying to hire, revamp logistics chains and maybe occasionally get some protective gear to warehouse workers — hopefully. The company said in normal times it would have projected a $4 billion profit next quarter but instead will spend that entire amount on coronavirus-related expenses. In its letter to shareholders, Amazon said, “If you’re a shareowner in Amazon, you may want to take a seat, because we’re not thinking small.” 

In other earnings news, Twitter actually beat expectations, but analysts did not like the part in the earnings call where executives said that they, like the rest of us, literally have no idea what the next quarter holds.

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The team

Molly Wood Host
Michael Lipkin Senior Producer
Stephanie Hughes Producer
Jesus Alvarado Assistant Producer