Looking Beyond The Biggest Banks For SMB Relief

The Paycheck Protection Program (PPP) has dealt some difficult lessons, even to the largest Main Street lenders, as financiers struggle to meet demand, seamlessly process applications and mitigate the risk of fraud.

But the PPP initiative also presents a major opportunity for smaller banks, credit unions (CUs), and FinTechs to play a larger role in recovery efforts and potentially secure some valuable, long-lasting small- to medium-sized business (SMB) customer relationships that drive up competition.

Late last month, the U.S. Treasury Department and Small Business Administration took measures to support small lenders’ position by temporarily shutting out the biggest banks from the PPP, allowing banks with less than $1 billion in assets to have their shot at issuing funds.

There are millions of dollars still up for grabs in the second round of PPP funding, and increasingly, nonbank financial service providers are stepping forward to offer SMBs an alternative to major banks to secure capital, both in the U.S. and via other government funding initiatives abroad. The results have been mixed, with some nonbank lenders stepping in to fill SMBs’ needs — and others faltering to keep pace with demand.

New Funding Channels Emerge

Western Union announced this week it became “one of a few nonbank approved lenders” approved to connect SMBs to PPP funding, according to a press release. Existing Western Union Business Solutions clients and Western Union Agents customers can apply for funding. According to Western Union, the company services more than 10,000 SMBs.

The company adds to a growing list of nonbank lenders in the U.S. eager to participate in the PPP scheme. Last month, PayPal and Square announced they, too, were cleared to participate in the program.

In the U.K., meanwhile, the British Business Bank continues to open up the ability for smaller banks to participate in the government’s Bounce Back Loan Scheme (BBLS) and Coronavirus Business Interruption Loan Scheme (CBILS). While the approved banks include high street financial institutions (FIs), alternative lenders and FinTechs are also stepping deeper into the U.K.’s SMB relief efforts.

Digital challenger bank Starling and marketplace lending platform Funding Circle are collaborating to connect U.K. SMBs to CBILS funds, for instance, a deal in which Starling will issue capital via the Funding Circle platform, according to a report. Both entities are accredited to participate in the CBILS initiative, reports noted.

“This partnership with Funding Circle provides us with another outlet, on top of our own CBILS and BBLS lending, to help meet the needs of business owners affected by [the] coronavirus,” stated Anne Boden, CEO of Starling Bank, in the report. “It’s a great example of the FinTech industry pulling together to meet a very urgent need.”

FinTechs’ Uncertain Role

Their partnership coincides with new analysis released from the World Economic Forum (WEF). In a recent blog post, the WEF argued that FinTech platforms are more equipped to provide SMBs with the necessary capital to survive pandemic volatility than traditional banks.

“Traditional lending has not solved the problem of lack of access to credit for [SMBs] and does not fit with the reality of today’s [SMBs],” the blog post stated. “Small business owners in fast-growing economies rarely have collateral against which they can borrow, often lack the time to visit a branch, and cannot wait six to eight weeks for a ‘maybe.'”

Data integration capabilities of FinTechs have enabled SMBs and lenders to accelerate the underwriting, approval and funds distribution process in ways that many larger, traditional FIs cannot, it added.

“For the first time, [SMBs] can share what data they have in exchange for access to credit to help them grow,” the blog continued. “By using advanced analytics platforms and artificial intelligence to assess transactional and alternative data (something as simple as a bank statement that shows an [SMB’s] cash flow), FinTech lenders are gaining a much deeper understanding of [SMBs].”

In practice, however, the agility of a FinTech to accelerate access to needed capital is not guaranteed.

A USA Today report noted New York-based alternative lender Ready Capital and its SMB loan broker Lendio were able to approve “tens of thousands” of SMB applications through less stringent criteria than traditional big banks imposed on SMB applicants as part of the PPP program.

Yet the majority of Ready Capital’s SMB users waited weeks to receive funding, reports said, with only two-thirds of the $3 billion worth of PPP loans approved, financed via Customers Bank. That means many of the 40,000 small firms approved for PPP funding by Ready Capital are still waiting, unable to apply for other financing yet still faced with obligations like rent and payroll.