Did Fintech Save Minority-Owned Businesses in the PPP? With NYU’s Dr. Sabrina Howell
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In the wake of the PPP, there was a lot of scrutiny into who was getting (and not getting) access to crucial government aid. With loans gatekept by financial institutions, ranging from Wells Fargo to fintechs, small businesses were mostly left at the mercy of institutions. So it begged the question, who did these institutions choose to allocate their money to? And did the data differ across institution types and loan applicants? If so, why?
NYU Stern’s Dr. Sabrina Howell, her colleagues, and a consortium of partners including Ocrolus, set out to dig into the data with a focus on which lenders were extending loans to minority-owned businesses.
The result was a fascinating paper titled ‘Which lenders had the highest minority share among their PPP loans?’
Let’s get to the results:
Who was lending to minority-owned businesses?
Stunning, stunning findings. You can imagine Dr. Howell and her colleagues’ reactions when they saw this data. However, this data was uncontrolled. Surely, there would be explainers and lurking variables. Before anyone jumped to conclusions and the horrifying lending history of banks, she wanted to see what her data showed and control for everything she could.
Their first thought was firm size. Black-owned businesses are smaller than white-owned businesses on average, and more likely to be self-employed. Banks were compensated with a 5% flat fee on loan size, so major institutions likely only targeted the largest loans to maximize profit. However, even after controlling, that was not the case.
Then came zip codes. Relationships and location matter in lending, so they controlled for branch locations in proximity to black business owners, but they still found the same disparities.
What about industry? Maybe black-owned small businesses tended to be hardware stores, who weren’t seeking loans (hypothetical). However, that was not explaining it away. See the fully controlled data below:
I don’t think a chart can show data much clearer.
But why was this happening?
A complicated, tough question that Dr. Howell talks through. There could have just been more application volume and demand from minority-owned businesses to fintechs (but that also seems problematic). The most likely explanation? Banks were prioritizing existing relationships with business owners, especially those they were already lending to. That way, the businesses could keep paying the pre-existing loan they have with the bank. Are businesses with pre-existing bank relationships more likely white? Probably…which points toward just another symptom of longstanding racial inequality in the US.
A big moment for fintech.
Dr. Howell discusses the opportunity here for fintechs. First, they have just built trust and a touchpoint with business owners in probably one of the most traumatic periods of their lives. That phenomenon is the grounds for a strong, long-standing relationship.
In addition, fintechs are starting to fill a market need that other institutions are not (pretty much the whole industry’s thesis). Due to high fixed costs and inflexible technology, banks are not finding it profitable to service small loans and small businesses. Fintechs have flexible and lean technology in comparison, and have been a bit quicker to harness advanced techniques such as Machine Learning.
Takeaways & where we go from here.
Dr. Howell lists many, but a key takeaway is observing how powerful fintech can be when empowered and lightly regulated. Of course, regulations come from a place of good and necessity, but she hopes these results will keep people open to fintech moving forward. She acknowledges constraining risk-taking (especially in depository institutions) is crucial, but perhaps the same laws and bodies should have fintechs play to a different set of rules. She proposes a more bifurcated regulatory approach.
And her recommendations to the Biden’s administration if there’s PPP II? Set up fees in a graduated system so they steeply decline in loan value (vs. 5% flat fee). Second, lenders should not be allowed to prioritize clients with credit relationships. I pushed back a bit here — it’s unlikely that banks and their lobbyists allow that to pass, and she agreed. But it would be the right thing.
We don’t often have professors on the show, but perhaps we should because Dr. Howell was fantastic. Breakdown below:
- 4:40 Her previous research in ICOs and the ‘joke’ ICO she saw that hit $15M in market cap (it’s even stranger than Doge Coin)
- 8:07 The basics of the PPP and the abstract of her paper
- 11:21 Why Fintechs were able to more effectively lend to minority-owned businesses, and why this giant lending gap existed
- 15:50 What data they used to triangulate the race of business owners
- 17:48 How the PPP can be a turning point for Fintechs to build relationships with small businesses
- 21:10 What the government, fintech, and small business should take away from the PPP
- 25:00 Her two key recommendations for the ‘next PPP’
- 28:07 What’s taught in her NYU fintech class
About Sabrina Howell
Sabrina Howell is an Assistant Professor of Finance at the New York University Stern School of Business and a Faculty Research Fellow at the National Bureau of Economic Research. Professor Howell’s research focuses on entrepreneurial finance, innovation, energy, fintech, and China. A theme throughout her work is a focus on analysis that is relevant for policymakers and practitioners.
Howell received her B.A. from Yale University in 2008 and her Ph.D. from Harvard University in 2015. In between, she worked as an energy consultant for Charles River Associates in Houston, and on energy security policy for Securing America’s Future Energy (SAFE) in Washington DC. She is the recipient of the AQR Top Finance Graduate Award at Copenhagen Business School, the National Science Foundation Graduate Research Fellowship, the Kauffman Foundation Junior Faculty Fellowship, and the AQR Asset Management Institute Young Researcher Award. Howell lives in New York City with her husband, Rob Berschinski, and her two-year-old son Jack.
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Ryan Zauk
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Ryan Zauk is an MBA Candidate at The Wharton School, where he runs the Wharton FinTech Podcast. He currently works with the US International Development Finance Corp looking at technology impact investments in developing markets. After graduation, Ryan will join Morgan Stanley’s Menlo Park Office working with the world’s largest technology companies. He has a passion for music, media, and all things FinTech.
You can reach him at rzauk@wharton.upenn.edu or on Twitter.
