As the largest federal stimulus package in the history of the United States, the Coronavirus Aid, Relief and Economic Security Act, injects a planned $2.2 trillion into the U.S. economy, fintech startups are angling to get a seat at the table when it comes to distributing the cash.
“In the last crisis, banks stepped away from the kinds of lending that our members do,” says Scott Stewart, the head of the Innovative Lending Platform Association. “The bank process [for lending] is quite lengthy. Our members are underwriting loans using algorithms at speed and scale.”
Under the CARES Act, roughly $450 billion in loans are set to be distributed through the Small Business Administration and other entities. While Congress is still working out the details, fintech companies are thinking that they should — and will — have a role to play getting stimulus money into the hands of entrepreneurs.
“The Treasury Department and the SBA have the authority and have been instructed in the legislation to allow us into the room,” says Stewart. “We will have to go through some sort of process to become qualified non-bank lenders.”
The argument for handing some of the responsibility for distributing the stimulus dollars to startups to disburse comes from the ability of these companies to approve loans faster than typical banks.
“We don’t want to be standing here in December with a fraction of those dollars in the hands of the small businesses in America,” says Stewart.
Fintech companies that could participate include FundBox, BlueVine, Kabbage and publicly traded OnDeck. FundBox, BlueVine and Kabbage have raised more than $3.6 billion between them in equity funding, according to data from the industry tracker Crunchbase.
In an industry analysis published in late March, the venture capital monitoring and investment data platform provider PitchBook wrote that startup fintech lenders could actually find themselves severely impacted by the coronavirus-related slowdown.
“[Fintech] lenders will see competitive interest rates offers become less of a differentiator as stimulus efforts pump low-interest loans through traditional bank channels. As credit markets tightened up, traditional lenders will benefit from having a larger, more established customer base with a stronger credit profile,” PitchBook wrote. “Business shutdowns and increased unemployment will likely drive substantial credit defaults and losses for fintech companies focused on small business and consumer lending. providers will see significantly reduced loan volume as the securitization market locks up and as fewer customers meet credit criteria.”
If these observations are correct, then lenders may need the lifeline that access to Treasury loans could provide to keep their own lights on.
“There’s a conversation around whether we will be able to do this directly,” says Eyal Lifshitz, chief executive of lending company BlueVine. “There was a conversation that the Treasury would be able to allow non-bank lenders to participate directly. In the beginning 7(a) lenders are going to participate in the program.”
Lifshitz sees another potential opportunity for smaller lending companies by pitching the ability to act as the top of the funnel to more traditional financial services institutions. The economic demand to distribute this money as quickly as possible to companies and employees would almost mean that lenders have to work with providers that are used to distributing loans quickly.
“There is an ability to participate for fintech players by partnering with the banks. They need to be able to do this online,” Lifshitz says. “We are having conversations with banking providers who are seeing if we can work together to help with the online on-boarding.”
For most startups, Stewart thinks that the types of small loans that fintech lending companies provide are actually at the sweet spot for what the Small Business Administration is trying to do. “The majority of these businesses are not going to need huge amounts of capital,” says Stewart. “They’re not looking for huge tranches of capital underwritten by a bank. They’re looking for $50,000 to $150,000.”