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.