Tech lenders push for a piece of the coronavirus, small-business bailout

Key Points
  • Lawmakers are working on an economic stimulus and rescue plan for small businesses to soften the blow from the coronavirus outbreak.
  • Fintech companies argue their tech-focused underwriting approach could get funds into the hands of small businesses faster than commercial banks. But there are regulatory roadblocks to letting non-banks distribute government aid.
  • "If they started going out and making these loans, it would wake up the banks -- otherwise I'm afraid this could be too slow," says Karen Mills, former head of the U.S. Small Business Administration during the Obama administration.
Square payment system
Source: Square

Tech-focused lenders are lobbying to be part of a government stimulus plan for businesses hurting from the coronavirus slowdown. 

Financial Innovation Now —  an industry group representing Square, PayPal, Intuit, Stripe and other non-bank finance companies — sent a letter to Congress on Friday asking that their members be included in any emergency U.S. government funding. 

"Small businesses are not well served by traditional financial institutions, nor will existing federal small business loan programs deliver funds soon enough," the letter reads. "Any federal small business loan program must leverage digital advances in the marketplace to ensure that stimulus can reach those business most in need."

Lawmakers have been working on a stimulus bill to mitigate potentially disastrous impacts of the coronavirus pandemic on the economy. The bill would include small business loans, managed through the U.S. Small Business Administration. It failed in a key Senate procedural vote Sunday evening. 

Fintech companies argue their tech-focused underwriting approach could get relief funds into the hands of small businesses faster than commercial banks. 

"Everyone's heart is in the right place but folks in Washington are a little too disconnected from how small businesses actually work," Sam Taussig, head of global policy at fintech lending firm Kabbage, told CNBC in a phone interview. "There's risk that these businesses won't be able to withstand a prolonged shutdown — they simply can't wait."

Timing is key for small businesses. Half of all them hold a cash buffer of less than one month, and a quarter of small businesses have fewer than 13 days of a cash in reserve, according to a 2016 JP Morgan Chase Institute survey of small businesses. 

Fintech firms are touting an automated underwriting process that takes a matter of days. Other SBA, loans can take as long as 90 days, according to Kabbage's Taussig. He said the firm had been working with the SBA and Treasury to make sure they can inject working capital into these small businesses, and "prevent them from having to go out of business" as Americans self-quarantine. 

Although they aren't banks, Kabbage, Square, PayPal and Stripe have become lenders of choice for many small businesses that use other payments products from the companies. These companies have access to transaction histories of sellers on their platform and often use that merchant's sales data instead of a credit score – an advantage over some U.S. banks. Square's bank charter license application was approved by the Federal Deposit Insurance Corp. last week and is expected to go into effect in 2021. But for now, other tech companies mostly partner with banks since they don't have licenses to take customer deposits on their own.

Regulatory friction

The SBA is in charge of getting government relief money to businesses hurt in a natural or economic disaster. So-called economic injury loans are used to help businesses whose cash flow has been reduced by events that are out of their control -- in this case, the worsening coronavirus outbreak. These low-interest loans are available to businesses, renters, and homeowners and can be used to cover small business operating expenses, such as payroll.

In order to give these fintech lenders the ability to use government money to facilitate these loans, some regulatory roadblocks would have to be waived. Congress would have to add a provision allowing non-banks to serve as conduits to SBA Disaster Assistance Programs. 

Karen Mills, a senior fellow at Harvard Business School and former head of the SBA during the Obama administration, said fintech companies may be able to do this quickly. But the "devil is in the details" when it comes to getting it written into the stimulus package. 

"These fintechs have proven they can execute with their small business constituencies effectively and quickly," Mills, author of "Fintech, Small Business & the American Dream," said. "If they started going out and making these loans, it would wake up the banks. Otherwise, I'm afraid the banks could be too slow."

These fintech companies may also be hit by a slowdown to their core lending and payments businesses as a result of the coronavirus slowdown. Shares of PayPal, Square, and major credit card companies have taken a hit in recent months due fears of a sluggish consumer spending. Square's payments and payroll products cater mainly to small businesses. 

"For now, Square is still mostly a small business merchant acquirer and as such the COVID-19 impact here will be material," said Canaccord Genuity fintech analyst Joseph Vafi, who lowered his price target to $60 from $90. 

Kabbage executives said it's too soon to tell what happens on the lending side. But customer call volume has surged three times after the weeks since the outbreak worsened in the U.S. 

"We're seeing high contact rates of customers who have questions. They want to understand how we're going to get through this," Kathryn Petralia, co-founder and president of Kabbage, told CNBC. "You try to make sure capital is available for those who are doing well, but also make sure you're not giving too much. We're constantly evaluating customer business performance."