Statement for the Record — Financial Technology Association to the Senate Committee on Small Business (March 22, 2023)

Summary

The Financial Technology Association (FTA) submits this statement for the record to the Senate Committee on Small Business & Entrepreneurship hearing on March 22, 2023, on oversight of the Small Business Administration and the President's Fiscal Year 2024 Budget Proposal. The statement supports the SBA's proposal to lift its moratorium to license new Small Business Lending Companies (SBLC) to participate in the 7(a) Loan Program. FTA argues that fintechs can streamline the application and underwriting process for small businesses and that fintechs are subject to state and federal regulatory oversight. A footnote cites a paper finding that fintech lenders were responsible for 53.6 percent of PPP loans to Black-owned businesses while accounting for 17.4 percent of all PPP loans.

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                                Statement for the Record from the
                                Financial Technology Association

                                           Before the
                   U.S. Senate Committee on Small Business & Entrepreneurship
                                           hearing on

              Oversight of the U.S. Small Business Administration and Review of the
                          President’s Fiscal Year 2024 Budget Proposal
                                          March 22, 2023

Chair Cardin, Ranking Member Ernst, and members of the committee, thank you for the
opportunity to submit a statement for the record in support of the Small Business Administration’s
(SBA) recent efforts to expand participation in the 7(a) program. The Financial Technology
Association (FTA) represents industry leaders shaping the future of finance. We champion the
power of technology-centered financial services and advocate for the modernization of financial
regulation to support access, inclusion, and responsible innovation. Our members include
consumer and business financial services providers, domestic and international payments
companies, data aggregators, Buy Now Pay Later providers, earned wage access providers, AI-
driven credit underwriting solutions, income verification providers, digital investment advisors,
and low-cost investment platforms.

FTA believes that customer choice, trust, and protection is the cornerstone of financial services.
By using technology like digital platforms, machine learning, automation, and other modern
technologies, financial technology companies are improving efficiency and transparency,
broadening equity, access, and inclusion, reducing costs, and increasing choice and opportunities
for small businesses. Fintech solutions have emerged as critical tools to bridge physical and virtual
activities as people have become increasingly accustomed to digital access.

FTA supports the SBA’s proposal to lift its moratorium to license new Small Business Lending
Companies (SBLC) to participate in its 7(a) Loan Program.1 Since the 1980s, the number of SBLC
licenses available to non-depository lending institutions, authorized by the SBA and subject to
“certain prescribed standards,”2 has been limited, and we agree with the agency that expanding the

1
    87 Fed. Reg. 66963
2
    46 Fed. Reg. 41523.


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number of licenses, in line with SBA oversight resources, can “accomplish the goal of expanding
capital opportunities to underserved businesses.”3

Innovative fintech products and services provide convenient and expanded access points into the
financial system for small businesses. These services range from mobile banking services and
payments to access to digital applications for securing small-dollar loans. For example, a 2022
research paper documents that finance companies and fintech lenders increased lending to small
businesses after the 2008 financial crisis. By 2016, nonbank lenders had a market share of close to
60 percent which coincided with a reduction in traditional bank lending.4 Lifting the moratorium
on the SBA’s non-bank licensing capacity and creating a viable pathway, subject to SBA
resources, for additional lenders to participate in the program will expand small business access to
much needed capital. This is especially true for those that have been un- or underserved by legacy
players in the financial system.

Leveraging Technology and Nontraditional Data, Fintechs Can Better Serve Small Business
Borrowers

Financial technology companies are uniquely positioned to leverage innovative technology and
nontraditional data to facilitate additional access to SBA programs. For example, the borrower
application process for SBA lending can be protracted and difficult. Micro-businesses do not have
the time or staff support to compile business financial history, tax returns, and the plethora of other
documentation required to obtain a 7(a) loan. Instead, fintechs can leverage technology to bring
efficiency to the application process.5 Many fintechs use APIs to enable applicants to directly,
quickly, and securely share their cash-flow data from their bank with lenders, which in turn can
streamline the application process. By expanding the number of non-banks in the program, the
SBA can leverage innovation to provide a more streamlined application process, which reduces
complexity and time-to-completion for small businesses.

In addition, fintechs can introduce efficiencies into the underwriting process by making it easier
for underserved small businesses to obtain funding by automating access to additional funds while
eliminating many of the friction points associated with traditional lenders or banks. Traditional
lenders and banks typically underserve many small businesses because the companies have been
in business for less than two years and therefore lack the revenue or credit history to gain access
to the capital they need. However, by leveraging sophisticated analyses and automated processes
that better assess a business’s health and credit worthiness, fintech companies are able to have a

3
  87 Fed. Reg. 66964.
4
  Gopal, M. & Schnable, P. (2022). The Rise of Finance Companies and FinTech Lenders in Small Business
Lending, The Review of Financial Studies, 35 (11), 4859–4901. https://doi.org/10.1093/rfs/hhac034.
5
  One way that the SBA could further reduce the threshold to obtaining SBA financing is by segmenting or
correlating required information for a loan with the size of the loan. This will ensure the smallest lenders will be
actively participating in 7(a) and therefore, serving the customers that need these loans the most.


                                                         Page 2
more complete view of a small business. This helps open up funding for underserved businesses
that likely would not qualify for capital elsewhere through traditional determinations.

A recent working paper from the Federal Reserve Bank of Philadelphia found that fintech
platforms’ internal credit scores were able to predict future loan performance more accurately than
the traditional approach to credit scoring.6 Ultimately, by leveraging technology and additional
data sources, fintechs are able to use data-backed risk models to enable the youngest and smallest
firms to access credit, which can be further amplified if the SBA increases, in line with its
resources, the number of Small Business Lending Company licenses it grants.

Fintechs Are Subject to Robust Regulatory Oversight

Fintechs that directly engage in small business lending are subject to certain state licensing and
registration requirements, with state regulators conducting examinations, imposing capital and
liquidity requirements, defining permissible investments, and enforcing laws that protect
customers. For those that offer services through partner banks, they are overseen by their bank
partners and are subject to the third-party risk management guidance issued by the federal banking
agencies. In these scenarios, the bank partner, as the lender, provides an additional layer of
oversight for compliance with applicable federal and state laws. Furthermore, under the 7(a)
program, SBLCs are subject to “specific regulations regarding formation, capitalization, and
enforcement actions” and enter into a written agreement with the SBA imposing control and
funding expectations.7 Finally, the SBA’s Office of Credit Risk Management provides additional
oversight to SBLCs by managing program credit risk, monitoring lender performance, and
enforcing lending program requirements. These state and federal regulatory requirements create
strong guardrails for any fintech that may become an SBLC under an expanded program and differ
from expectations set forth under other programs.8 While not all fintechs are the same, those with
robust controls and governance processes and strong bank partner oversight relationships, will be
the strongest candidates for participating in any SBA program. In addition, the longstanding state
and federal guardrails will provide the credit and compliance parameters necessary to ensure the
safety and soundness of the SBA’s 7(a) program, while reaching additional small businesses and
streamlining the application and underwriting process.

6 Cornelli, G., Frost, J., Gambacorta, L., & Jagtiani, J. (2022). The Impact of Fintech Lending on Credit Access for

U.S. Small Businesses, Federal Reserve Bank Philadelphia, WP 22-14. https://doi.org/10.21799/frbp.wp.2022.14
7
  Supra n. 2 and 13 CFR § 120.470.
8
   While the SBA’s 7(a) program and PPP are significantly different, it is important to note that fintech participation
in PPP was critical to ensuring that underserved customers, who banks either could not or would not serve, were
able to access PPP funds. In particular, independent research shows that participating fintechs’ use of
technologically advanced techniques and alternative data in PPP increased access for underserved small businesses.
See Howell, S., Kuchler, T., Snitkof, D., Stroebel, J., & Wong, J. (2022). Lender Automation and Racial Disparities
in Credit Access. http://dx.doi.org/10.2139/ssrn.3939384. The paper finds that (i) the automated loan vetting and
processing systems used by fintechs significantly improved approval rates for Black borrowers during PPP and (ii)
fintech lenders were responsible for 53.6 percent of PPP loans to Black-owned businesses, while only accounting for
17.4 percent of all PPP loans.


                                                        Page 3
Conclusion

Fintechs play an important role in filling the credit access gap for small businesses, especially
when no other options are available, and support the SBA’s efforts to expand 7(a) program
participation. We believe that by leveraging technology and nontraditional data, fintechs can better
serve small business borrowers while maintaining the high credit and compliance standards set by
established participants. Thank you for the opportunity to submit this statement.




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