- The Paycheck Protection Program was a lifeline for businesses during the pandemic.
- But it seems not every small business could easily turn to a bank to get the funds they needed.
- A working paper finds many Black-owned firms turned to fintechs to get a PPP loan, not banks.
For Black small businesses to secure the federal funds they needed to survive the pandemic, they disproportionately turned to financial technology lenders.
It shows how for PPP lending, fintech's automation allowed for less bias in the process than in the traditional banking system. The researchers said you can't program racial bias out of the humans who approve loan applications at a bank, or who approved applications for the federal government's $806 billion Paycheck Protection Program (PPP).
According to an analysis from The Associated Press, many minority-owned businesses had to wait until the final weeks the program was open to get the funds they needed (the $525 billion program ended August 8). A Brookings analysis also found that businesses in majority-Black ZIP codes waited 31 days to receive PPP loans — seven days longer than in majority-white areas — while researchers at New York University found Black-owned firms were 12.1 percentage points more likely to get PPP funds from a fintech than from a traditional bank.
Neel Kashkari, president of the Federal Reserve Bank of Minneapolis, said during an October panel that even though PPP was meant to help America's small businesses, history will show that it "exacerbated" the white-Black racial wealth gap, although "not intentionally." Although businesses of color did benefit from the program, he said, "many of them were disadvantaged because we had to go through the banking sector to distribute the money."
Black Americans have experienced lending discrimination for decades, for instance with mortgage lending during the era of redlining, although as in the case of PPP, some discrimination could be de facto instead of intentional, such as when firms lack a preexisting banking relationship.
Marvin Owens, former senior director of economic programs for the NAACP and chief engagement officer at Impact Shares, told Insider that being denied access to credit means Black business owners "aren't given the ability and capacity to grow their businesses and to expand their operations and to be able to take advantage of new markets and new opportunities. That contributes significantly to the Black-white wealth gap."
The fintech research is promising, then, but it's also strange because in separate research, artificial intelligence and automation are shown to actually exacerbate racial bias.
That's where fintechs come in
"I think the [NYU] Stern report kind of points to the fact that the use of automated underwriting helped Black business owners get access to the program in higher numbers," Owens said. "So I think that we have to look at that as a real positive and look at that as a real sort of call to these sort of smaller banks to utilize automated underwriting."
Although Owens added he doesn't know what the cost of automated underwriting would be at small banks, "clearly, fintech firms and these large financial institutions have been using it pretty effectively."
The researchers who looked at fintech-enabled PPP loans found that the top four banks — JPMorgan Chase, Bank of America, Wells Fargo, and Citibank — "exhibited little to no disparity after including controls," possibly also due to higher levels of automation at those banks than at smaller institutions.
Fintechs may have especially been a lifeline in places with higher "racial animus," the researchers said.
"We find that the tendency of Black-owned businesses to borrow from fintech lenders instead of smaller conventional lenders is consistently higher in areas with more racial animus, even after controlling for firm and loan characteristics," the authors wrote. "These results suggest that preference-based discrimination might explain at least some of the substitution of Black-owned businesses towards fintech and away from smaller banks."
The study authors also found that when small banks automated the loan process during PPP, their rate of lending to Black business owners increased relative to their peers.
Owens said automated underwriting may allow for "being more race-neutral in the process." Although Owens said he had been skeptical about automated underwriting because he had seen how it "could in some cases early on contribute to the lack of access to credit for Black families."
To be sure, automation alone is a far-from-perfect solution. According to a November press release, the Select Subcommittee on the Coronavirus Crisis expanded its "investigation into financial technology (FinTech) companies' facilitation of fraud in the Paycheck Protection Program" to include Blueacorn and Womply. Fintechs BlueVine and Kabbage and their partner banks have also been part of the investigation.
Sabrina Howell, an assistant professor of finance at the New York University's Stern School of Business and lead author of the working paper, told The Washington Post that her research found there could be racial equity benefits to hedging against human bias in the lending process.
"You can constrain an algorithm to meet fair-lending standards, and you can ensure the data it trains on isn't biased," Howell told The New York Times. "That may be hard to do, but it's a clear and objective possibility. Whereas when you have a human loan officer who is in front of someone and making a decision, you can never do that."
