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.
When the Paycheck Protection Program ended, the numbers revealed the true impact that non-bank, online lenders make on the underserved small business community. 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.
A study out of NYU called “Automation in Small Business Lending Can Reduce Racial Disparities: Evidence from the Paycheck Protection Program” 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 human and statistical bias.
This article focuses on the third reason.
Automation in Underwriting and Decision Making Removes Human Biases
When technology, which doesn’t rely on manual review, decides what loans to prioritize, equity is a clear result. A fintech’s system does not take into account the applicant’s name or driver’s license photo, which are identified as common factors that cause the human eye to associate an applicant with a specific race. The fintech’s algorithms just see the numbers.
The NYU study used several methods to identify areas of racial animus in communities across the country. Tools they used included racially-biased Google searches, records of local housing segregation, and recent surveys like the Nationscape survey and Implicit Association Test, which measured levels of bias toward African Americans in certain communities. The results? Even in areas of the highest racial animus, banking automation has a positive effect on lending rates to Black-owned businesses.
In fact, in areas with the highest degrees of racial animus, Black-owned businesses were especially likely to obtain their PPP loans from fintech lenders.
The more automation each category of lender adopted during PPP, the more equitable they became. Across all types of lenders, adding automation in various steps of their processes increased the lender’s shares of PPP loans to Black-owned businesses by 4.4 to 12%.
PPP’s Built-In Terms and Guarantees Subverted Statistical Discrimination
Both human and statistical discrimination affect African American business owners’ access to responsible lending. When all other business credit variables are equal, minority communities historically experience higher interest rates and lower rates of approval because their loans are seen as riskier for lenders.
The criteria of the PPP program supplied a perfect test case for the impact of detaching statistical stereotypes from the equation. PPP’s terms and guarantees neutralized credit risk concerns, and proved that those concerns are false. For the sake of efficiency, PPP loan sizes were determined by payroll figures alone, and there was no variation in other contract terms. The loans were also 100% guaranteed by the federal government, so lenders didn’t have to worry about credit risk.
Statistical bias also falsely assumes that minority applicants are more likely to commit fraud. This was proven false as well. While fintechs originated the largest share of fraudulent PPP applications (46%), the Black-owned share of fraudulent loans was equivalent to the Black-owned share of all PPP applications. They were no more and no less likely to commit fraud than anyone else.
Lenders That Care About Equitable Practices Have a Lot to Learn From Fintechs
The fact that underwriting algorithms are fed by biased data is still a valid concern. The majority of lending data that is used to define “good” versus “bad” loans is based on loans made mostly to white men. Diversifying the data set is an important element of equitable lending, to be sure. However, it’s now been proven that bringing more diverse communities of business owners into the data set is best achieved by increasing automation.
After all, the ultimate goal is to find more ways to say “yes” to businesses owned by women and people of color.
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 2, on how fintechs overcome geographical limitations to capital access.
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.