The fintech industry on both sides of the Atlantic has been presented with a huge opportunity and challenge by the US and UK government stimulus packages to help businesses weather the economic storm caused by Covid-19. In this article we compare the government methods and look at the supporting role of fintechs now and there role into the future economic recover.
As businesses scramble for funding, many fintechs see the crisis as an opportunity to showcase their credentials, by providing stricken businesses with funds faster than traditional banks and leveraging cutting edge payment technology to make it easier for businesses to access funds.
On the other hand, the challenge for fintechs Is putting to bed long-standing concern they might struggle to issue loans during the crisis because of their lack of liquidity and dependency on the secondary market.
“We will find out the men from the boys. No doubt there’s going to be some casualties where credit [decisioning] wasn’t robust enough”, Ravi Anand, Managing Director, ThinCats, a peer-to-peer lender told the Financial Times.
The early signs are good for the fintech industry, with fintech bosses talking of the government stimulus packages leading to thousands of new leads and businesses showing goodwill towards the fintech industry for giving them a lifeline in their dire situation.
Vote of confidence by US Treasury
From the get-go, fintechs in the US were told they could play a role in a key plank of the US stimulus effort when US Treasury Secretary Steve Mnuchin said “any fintech lender will be authorised” to make loans through the Paycheck Protection Program (PPP).
This vote of confidence marked the first time the US government agency, the Small Business Administration (SBA), had authorised non-traditional banks to offer government-guaranteed loans.
Like in the US, UK fintechs and peer-to-peer lenders like Starling Bank, Funding Circle and ThinCats were chomping at the bit to play their part in helping funding battered businesses.
Fintechs helping US businesses through PPP
US alternative lenders like Kabbage, Quickbooks Capital and Square and tech payment specialists like Fattmerchant and Temenos are helping businesses lend through the PPP-a $660bn (£534bn) lending scheme which offers businesses with 500 or fewer employees loans from a few thousand dollars to $10m (£8.1m).
PPP loans can effectively become grants if businesses meet SBA guidelines by spending the loan within eight weeks and at least 75 percent of the loan spent on payroll and 25 percent on rent, utilities and other overheads.
Some US fintechs are also wanting to be part of Main Street Loans (#MSL), another Covid-19 rescue scheme, which is being rolled out in the coming weeks and offering $600bn (£486bn) in financing for businesses with less than 15,000 employees.
Fintechs lending through UK coronavirus schemes
In the UK, the stimulus package is made up of several lending schemes and the government’s Job Retention Scheme, in which the government currently pays 80 percent of monthly wages up to £2,500 of those workers on leave because of coronavirus.
Starling Bank, Funding Circle and OakNorth Bank are among those fintechs approved to lend through the Coronavirus Businesses Interruption Loan Scheme (CBILS), with lenders offering 80 percent government-backed loans of up to £5m for companies with a turnover of less than £45m.
Its sister scheme, the Coronavirus Large Business Interruption Loan Scheme (CLBLIS) offers loans up to £200m for companies with a turnover over £45m.
Tide and Starling Bank have also been accredited for the Bounce Back Loan (BBL) scheme, a 100 percent government-backed lending scheme designed to be simpler and quicker than CBILS with loans of up to £50,000 to all businesses.
Contrasts between the US and UK schemes
Fintech executives point out the differences between the US and UK Covid-19 rescue packages.
Keren Moynihan, co-founder Boss Insights, said: “The schemes in the UK and the US were quite different”.
“The US scheme went from looking at businesses’ earnings to see if they could cover debt. To look at their spending and it has fostered more spending. The PPP was a Paycheck Protection Program. So it is how much paycheck are you supporting as a business?
“Whereas in the UK, it was more of a traditional model, where the rules were relaxed and the guarantees were provided for the banks.”
Sean Hunter, OakNorth. Chief Information Officer, believes a UK-type furlough system would not resonate in the US.
He said: “I think the US did the PPP the way they did because they already had the SBA in place which was already doing a type of small business lending.
“I think they thought this is the easiest way to get going fast. Whereas in the UK, they didn’t have anything that was usable. I think also the concept of direct government assistance for paying people’s salary in the US was politically unpalatable.”
Disappointment at big banks being accredited ahead of fintechs
Fintechs on both sides of the Atlantic complained about the lateness in getting approval to lend through the schemes, compared to traditional banks.
Kathryn Petralia, co-founder Kabbage, expressed annoyance at “the head start the large banks had over the smaller banks”.
In some cases, fintechs were so late in getting approved in the US, that the first tranche of PPP funding had run dry.
UK fintechs also expressed unease at highstreet banks being accredited first.
Oliver Prill, CEO of fintech Tide, which is now BBL accredited, told the Financial Times: “We have a market where a lot of money has been spent to introduce competition; what this programme is at risk of doing is inadvertently reducing that by forcing people to move their [primary banking] relationship to the big banks.”
However, some of these complaints have been eased as more fintechs and alternative lender have now been approved.
US case studies-Temenos, Fattmerchant, Quickbooks Capital and Kabbage
Banking software provider Temenos teamed up with Atlantic Union Bank to make it quicker and easier for businesses to complete a “difficult” PPP loan application process.
On the first day, the SBA began accepting loans, April 3, bank employees using Temenos’s web-based tools help process more than 2,000 applications by midnight.
Derek Corocan, Chief Experience Officer, Temenos, said: “The banks and fintechs that helped small businesses secure loans have in turn secured customers for life- they were for the small business clients when they needed help the most. That won’t be forgotten quickly.”
Another US payment specialist Fattmerchant teamed up with software company Womply to develop a speedy PPP loan application tool.
Over 1,000 loan applications came through Fattmerchant, which submitted “north of 200” full applications, the company said.
Sal Rehmetullah, Fattmerchant co-founder, said: “In 10 years, the fact that we can say we helped hundreds of businesses survive during this time is obviously great internally, it’s great for our brand.”
US lender QuickBooks Capital says it had made available over $875m (£708m) of SBA-approved loans to its customers between April 30 and May 20.
Luke Voiles, Vice President, QuickBooks Capital, believes the SBA has done a good job.
He said: “We think the SBA, one of the US government’s smallest agencies, moved quickly to help small businesses gain access to federal relief during these unprecedented times.”
Softbank-backed Kabbage says it can process PPP loans within two hours and it has processed more than $3.5bn (£2.84bn) in PPP loans-eclipsing its total $2.8bn volume of lending last year.
It has also got approval to access the Federal Reserve’s PPP Liquidity Facility (PPPLF), meaning it no longer has to fund new credit with external capital.
Petralia said “almost everybody” within Kabbage is working on PPP loans and the relief scheme has helped it generated “hundreds of thousands” of new business leads.
UK case studies-OakNorth and Starling Bank
Starling Bank is the only fintech to be CBILS and BBL accredited and has also teamed up with Funding Circle to provide further lending through CBILS.
It has lent £363m via the two schemes, but it has been criticised for stopping accepting new sole trader business accounts owing to “record demand”.
Anne Boden, Starling CEO, told The Times: “We knew very well that when we entered this scheme it wasn’t going to be easy. We knew people would be declined and some of those would be angry with us.”
OakNorth, one of the first fintechs to be accredited for CBILS, has now been allocated a further £160m cash to lend through CBILS and CLBILS on top of the original £50m it was issued.
Hunter said OakNorth is not solely focused on CBILS during Covid-19.
He said: “Since the lockdown began, we’ve done £36m of CBLS loans, we have approved over £60m of new lending [outside of CBILS. Definitely, there is an impact from the coronavirus on the pace of new lending. But we are continuing to lend.”
The level of lending via fintechs in the US and UK compared to traditional banks is still small.
For example, JPMorgan Chase recently said it expected to make around $29bn (£23.5bn) of PPP loans, dwarfing the levels that fintechs have lent out.
But experts believe that fintechs on both sides of the Atlantic have upped their credentials by playing a pivotal role in the helping businesses through the pandemic.
And the fintechs themselves believe they have generated goodwill –and new business leads- from businesses they have helped, which will stand them in good shape in the long-term.