How Fintechs Funded More Than Half of All PPP Loans to Black-Owned Businesses, Part 2: Online Applications

May 5, 2022

The Paycheck Protection Program (PPP) was meant to help all small businesses survive the pandemic, but until fintechs got in the game, Black-owned businesses lacked access. A 2021 study lays out the three main reasons why fintechs were the most effective at reaching this underserved community, and what all lenders can learn from these results. In this 3-part blog series we give insight into this game changing study and our take on how fintechs best serve undercapitalized communities. 

A paper written by NYU professors called “Automation in Small Business Lending Can Reduce Racial Disparities: Evidence from the Paycheck Protection Program” reveals that:

While fintech lenders accounted for only 17.4% of all PPP loans, they were responsible for 53.6% of PPP loans to Black-owned businesses. 

Black-owned businesses were about 12 percentage points more likely to get their PPP loan from a fintech lender.

The study sites three main reasons why fintechs were able to fund so many underserved small business owners who applied for PPP: loan amounts, online origination, and removal of bias

In Part 1 of this series, we learned that fintechs were the most impactful lenders for Black-owned businesses seeking Paycheck Protection Program (PPP) loans, because the ability to originate large volumes of lower loan amounts fits the needs of the Black-owned business community. 

This article focuses on the second reason.

Fintechs Leap Over Geographical Limitations to Capital Access

Automation is a byproduct of online loan origination. An online process eliminates the need to visit a physical bank location. Not being required to visit a bank branch, or have an existing relationship with a bank, is a plus for minority communities who lack access to traditional banking.

Without the geographical limitations involved with branches, fintechs can reach every urban and rural community equally. 

When the gates opened for PPP applications, most lenders began their outreach with existing customers. Banks, both large and small, sited capacity restraints as an influential factor when prioritizing PPP applications. Because of these constraints, they couldn’t reach much farther than that. 

According to the study, 65% of business owners of all races got their PPP loans from banks other than their checking account bank, forcing them to establish a new banking relationship. Among these firms, “Black-owned businesses were much more likely to obtain their PPP loan from a non-relationship fintech lender, and much less likely to obtain it from a non-relationship small bank.”

In addition to the study’s emphasis on online loan origination as a solution to a lack of relationships, it’s important to point out that many small business owners in need of funding are busy working during branch hours, and often juggle other commitments that take up their time during the day when banks are open to accept applications. 

At Lendistry, we’ve observed that the typical small business owner with under ten employees signs on to work on their application late at night. Imagine a parent who started a business in 2020 and is ready to grow. From 9-5 she is working in her business, from 5-9, she’s figuring out dinner and the evening routine, and afterwards, she works on the business of her business. But 9-5 are the only hours when the branch is open, and she can’t make it there to apply for the loan she needs to hire employees. With an online application, and all the steps of the process tech-enabled, she can apply on her own time. 

It turns out, by the way, that the time of day when she starts her application is 11pm.

This blog series continues the conversation of fintechs, their undeniable impact in underserved communities, and how PPP provided the perfect test case for subverting human and statistical bias.

Click here to read Part 1, on how high volumes of lower loan amounts suit the fintech model and the Black-owned business community.

Click here to read Part 3, on how automation in underwriting and decision making removes human and statistical biases from the lending process.

While fintechs were the number one PPP lender for the Black community, CDFIs, which are mission-driven and active in underserved communities, were number two. Lendistry is both. An African American-led lender, Lendistry is the only CDFI with end-to-end automation and a national lending footprint. Lendistry SBLC, LLC, a wholly-owned subsidiary of Lendistry, offers SBA 7(a) loans from $50K-$5MM nationwide. Click here to contact Lendistry’s finance team.

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