Can fintechs build on strong PPP lending to Black businesses?

Though fintech lenders joined the Paycheck Protection Program later than banks, they had an outsize impact in disbursing emergency loans to Black-owned businesses last year, according to an analysis by the Federal Reserve Bank of New York.

Twenty-three percent of Black business owners that sought help from the PPP last year applied to fintechs, the New York Fed said. They weren’t far behind small banks, which captured 30% of the applicants from that segment.

The big question going forward is can fintechs capitalize on the bonds they built with Black businesses as these online-only lenders try to expand their market share.

“I expect to see the fintech lenders that participated in the PPP and are still around will focus on building deeper relationships with new customers that they acquired through the program,” said Alex Johnson, director of fintech research at Cornerstone Advisors. “I’d expect new customers that came in through the PPP to be a priority” for new product offerings like Square’s new business checking accounts.

The figures were included in a series of blog posts Thursday from the New York Fed as part of its economic inequality research series. The posts examined the impact of the pandemic on small businesses and how fintechs stacked up next to banks of all sizes when lending to minority business owners.

The research found that Black entrepreneurs were far likelier to seek help from fintechs (defined in the reports as nonbank lenders that operate online, such as Kabbage and Square) than small-business owners of other races and ethnicities.

Fintechs received 10% of loan applications from Hispanics, 9% of those from Asians and 8% of those from whites.

These findings point to the gaps Black business owners face in the banking system as a whole, and the opportunities fintechs have to fill their needs.

“PPP highlighted, in stark terms, the larger problem that we’ve been dealing with for a long time — that Black Americans have less access to mainstream financial services,” Johnson said. “When the Paycheck Protection Program was introduced, banks and credit unions prioritized their relationships with existing customers. Fintech lenders prioritized growth, which meant a larger percentage of historically underserved customers.”

The vast majority of business owners who applied to banks had an existing relationship with their lenders, while only one in three employers that applied to fintech lenders had a prior connection. This pattern may have put Black small business owners at a disadvantage in accessing the traditional banking system, yet also made them ripe candidates to work with fintechs.

“We have shown in previous research that Black-owned businesses have a notably lower likelihood of having recently borrowed from a bank,” Claire Kramer Mills, director of community development analysis in the New York Fed’s outreach and education group, said during an online presentation Thursday.

There is historic precedent of Black-owned businesses being more likely to apply to fintechs than other groups, she said.

Fintech lenders approved more PPP loans from Black-owned businesses than owners of other races and ethnicities. The New York Fed’s research shows that 82% of fintech approvals went to Black customers, compared with 76% for white, 73% Hispanic and 72% for Asian employers.

These online lenders — which were not admitted into the PPP until mid-April of 2020, or well into the initial round of funding — filled in other gaps as well.

Fintechs had a higher propensity to distribute small-dollar loans, or those below $25,000, according to the New York Fed. These companies approved loans with a median size of $20,000, compared with $50,000 for banks.

John Pitts, head of policy at the financial data aggregator Plaid, says that the fintech model is inclusive of everyone.

“You don’t need a branch — which are historically underbuilt in minority communities — when the phone in your pocket has six lender apps on it, all competing to give you the best rates and service,” he said.