Financial-technology companies supercharged their advance on the traditional banking system amid the need for rapid economic relief in the coronavirus age, and are working to cement that progress when the crisis passes.

The Federal Reserve expanded the Paycheck Protection Program Liquidity Facility to non-bank lenders last week. And in mid-April, companies including PayPal Holdings Inc., Square Inc. and Intuit Inc. for the first time gained the right to help distribute Small Business Administration loans.

Now, the firms must convert the victories into longer-term acceptance within the financial system. Julien Courbe, a partner at PricewaterhouseCoopers who focuses on financial services, said the “litmus test” for fintechs will be how they perform through the whole credit cycle.

“It’s not just the acceptance of the loans,” he said in an interview. “It includes the forgiveness process, which is new for everybody, of course. But the banks have infrastructure in place related to forgiveness while fintechs will have to create that process.”

In just a few weeks, fintechs made advances that might have taken years under normal circumstances. Prior to the coronavirus outbreak, non-bank access to any kind of Fed facility could have been a decade-long struggle, said John Pitts, head of policy at Plaid Technologies Inc., a fintech that agreed this year to be acquired by Visa Inc. for $5.3 billion.

“The sound barrier has been broken on a daily basis and no one has pulled back to say, ‘Things that would’ve been a once-in-a-year achievement in a regular environment happen on a daily basis,”’ Pitts said in an interview. The approvals indicate “that the Fed considers fintech lending is on par with bank lending in terms of the government structural support it should receive to ensure that the economy is running smoothly.”

Predictably, the upstarts haven’t handled the kind of transaction sizes seen at the bigger firms. Square’s average PPP loan size so far is $16,000, compared with $123,000 at JPMorgan Chase & Co. and about $110,000 at Wells Fargo & Co.

But the fintechs say one of their strengths is their work with the smallest businesses, including those owned by sole proprietors or minorities, many of whom haven’t been able to get access to the big U.S. banks. Providing assistance to small businesses in crisis can deepen those ties, said Jackie Reses, capital lead at Square.

“This is a moment of reckoning for banks,” Reses said in an interview. “People are feeling a little exposed in where their relationships are and who those relationships are with.”

To be sure, traditional banks are still seen by the government as the primary conduits for distributing funds. PayPal and Intuit, the first fintechs to participate in the PPP, weren’t approved until April 10, just days before the first round of funding was exhausted.

“Fintechs were recognized, but banks were recognized first,” Michael Del Grosso, managing director at Compass Point Research & Trading LLC, said in an interview.

Payment Methods
Even though Congress recognized early the need for fintech lenders in the PPP, no government infrastructure was in place for their participation from the outset, Pitts said. The fintech application form didn’t come until about a week after the PPP launched because the federal government had never qualified a fintech before.

Del Grosso said that the biggest win for fintechs promises to be long-term adoption of digital payment methods that have picked up momentum amid the pandemic. Consumers buying online and picking up in store, tap-to-pay and the decline of cash all may be here to stay even after the outbreak subsides, he said.

The crisis has “shined a light on how truly interconnected our world is and increased use of all things digital,” PayPal Chief Executive Officer Dan Schulman said in an emailed statement. There has never been a greater need for digital payments, he said.

“A huge amount of volumes are shifting to online, e-com and contactless,” Moshe Katri, research analyst at Wedbush Securities Inc., said in an interview. “The traditional banking model is going to continue to get cannibalized by fintechs.”

This article provided by Bloomberg News.