Fintech may soon receive a larger share of government-backed financing

Less than 15% of SMEs in emerging economies had access to the resources they required to expand and generate wealth prior to COVID-19. It is estimated that SMEs in developing nations have unmet finance needs worth $5.2 trillion annually. However, as a result of the epidemic, traditional banks’ lending options have become even scarcer, which has slowed economic growth. As a result, SMEs have looked to financial technology, or “fintech,” as a means of obtaining the funding they require. The phrase originally referred to the back-end operations of well-established financial institutions, but it has since expanded to encompass a wide range of industries working to enhance the provision and use of online financial services. A key component of fintech, which has its origins in the 2008 financial crisis, is online lending. According to Andrés Fontao, co-founder and managing partner of Finnovista, an innovation and venture development company with a strong presence in Latin America, that crisis eroded trust in the banking system and opened a space for technology-enabled financial institutions to expand.

The Biden administration’s initiatives to improve small business owners’ access to capital may present a significant market opportunity for fintech lenders. A larger share of the SBA-backed loan market may go to fintech companies. A proposed rule change from the Small Business Administration may eliminate a 40-year restriction on new licenses for nonbank lenders to participate in its main loan programme. Since 1982, there has been a limit of 14 nonbanks, including fintechs, that can offer SBA-backed loans through the roughly $35 billion yearly programme. This has limited the majority of bank lending (which occasionally partner with fintechs and other nonbanks on sourcing the loans).

However, as stated by Vice President Kamala Harris in a list of policy initiatives aimed at advancing racial equity in small business ownership, published on October 4, the Biden administration is hoping that raising the cap can make the loans more accessible, “particularly, in smaller-dollar and underserved markets, where borrowers are most acutely shut out of” lending. The 7(a) loans are intended to help business owners who struggle to obtain other types of financing; nevertheless, data shows long-standing discrepancies in the loans depending on race and income. The loans are available for up to $5 million and are backed up to 85% by the SBA.

Fintech companies think they can help. According to a Federal Reserve Bank of New York investigation, fintech lenders “certainly benefited borrowers who would not have obtained loans otherwise,” frequently because they lacked established banking contacts, when the companies were able to issue SBA-backed Paycheck Protection Program loans. According to Ryan Metcalf, head of public policy and social impact at online lender Funding Circle, “the fintech industry generally serves minority-owned, low-to-moderate income, and the smallest of small enterprises.” The SBA is having difficulty reaching that demographic through banks. A plan to ease the embargo on new SBA lending licenses was put out by Senators Tim Scott and John Hickenlooper last year, and it received backing from organizations like the Bipartisan Policy Center.

According to Dane Stangler, director of strategic initiatives at BPC, “if we’re serious about expanding access to capital for those business owners and entrepreneurs who have historically lacked such access — and that is part of the original purpose for SBA funding support programs — then we should widen the scope of who is able to participate.” This could be a protracted process. No rule has yet been proposed, and an SBA representative would not say when to anticipate one. Researchers discovered that some of the fintech companies were accountable for a sizeable portion of fraudulent loans, despite the fact that they were credited for increasing the number of enterprises that could receive PPP financing. That might be taken into consideration when deciding whether to approve additional SBA-backed loans to nonbank lenders. The adjustment must be taken into consideration, according to Stangler, “if our purpose is to broaden access to money,” even though the restrictions should be carefully crafted.