‘Leave room for the little guys’: Square's advice for PPP 2.0

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Online lenders, which were approved to make emergency government-backed loans to small businesses less than a week before the Paycheck Protection Program ran out of money, hope it will quickly get more funding so they can help steer relief to the smallest companies.

The Small Business Administration began the $349 billion program just two weeks ago. It let approved lenders give loans to small businesses that the government would back and, eventually, forgive if they were used for the intended purpose of keeping workers paid. The SBA approved nearly 1.7 million loans before the money ran out. Congress is considering adding another $250 billion to the program, but has not pushed it through yet.

Banks that were already approved SBA lenders made most of the loans, which averaged $240,000.

Fintechs like Square Capital, PayPal, Intuit QuickBooks Capital and OnDeck Capital were approved a week after the banks were and had only a few days to submit loans.

Square had only just begun its rollout when the initial program dried up. The company declined to disclose how many loan applications it was able to get approved by the SBA. Square Capital head Jackie Reses said she is hopeful the SBA will receive additional funding for the program, at which point Square would resume seeking approvals for loans to its merchants.

OnDeck processed some PPP loan applications that were funded through its partner, Celtic Bank, a small industrial bank in Salt Lake City; OnDeck declined to say how many.

Fintech online lenders and others point out that with its relatively large average loan size, the program has been serving large companies.

Ninety-three percent of U.S. small businesses in America did not have a chance to be funded via PPP, OnDeck estimates.

Jackie Reses, Square Capital lead
"I hope they make sure that they leave room for the little guys: the sole proprietor, the plumber, the electrician, the hairstylist, the massage therapist, people who are the lifeblood of the American economy," says Jackie Reses, Square Capital lead.

Square Capital's average loan size is $7,000, a fraction of the $240,000 average for PPP loans.

“We really do serve the most needy, the smallest, and a population that has otherwise been overlooked or excluded from the financial system,” Reses said. "I hope they make sure they leave room for the little guys: the sole proprietor, the plumber, the electrician, the hairstylist, the massage therapist, people who are the lifeblood of the American economy.”

Kathryn Petralia, chief operating officer at the online lender Kabbage, made a similar point in an interview this week.

“If you look at the 30 million small businesses in the U.S., 90% of them have fewer than 20 employees and 80% have less than 10,” she said. “So these small businesses are looking for very small amounts. The problem is, it's the long tail that's going to be left behind. The larger businesses that already have lines of credit with the top banks will eat up the money.”

John Pitts, policy lead at Plaid, said the data aggregator has heard from several small businesses that most banks are unwilling, unable or uninterested in originating loans under $15,000.

“For the very smallest businesses, who unfortunately are also the ones who are most severely impacted by this, the fintech lenders are their go-to,” Pitts said. “The very small mom-and-pop businesses were only able to engage once the fintechs started to get approved, which was Friday of last week. Hopefully more money will be available for those small businesses because they are the ones who are on the first rung of that economic ladder and are in desperate need.”

Why the fintechs were approved so late

“In some ways it's unfortunate that the fintech lenders had a one-week delay behind the banks in terms of when they could participate,” Pitts said.

But he does not blame anyone for it.

“I think everyone was acting in good faith as quickly as possible,” he said. “It was a watershed event for Congress to say as part of this rescue package that fintech lenders could participate in the SBA program. That had never happened before.”

The SBA and the Treasury Department were looking to move as quickly as possible.

“The fastest and easiest thing for them to do was approve existing SBA lenders for the program,” Pitts said. “So they did that first, then the next fastest thing to do was approve non-SBA depositories for the program. The thing that was the newest and therefore the hardest was figuring out the approval for fintechs with whom the SBA had never had a relationship. And that took time. It is to the credit of SBA and Treasury that they were able to spin up an application process in a week for a category of lenders who had never been permitted to participate in the program before."

"It's just unfortunate that over the course of that week, half the money had already been loaned out just because of the immense demand and time pressure that the program was under,” Pitts continued.

Building a new platform for PPP

Square, meanwhile, set aside all regular lending and software development when it got the go-ahead to join the PPP initiative Monday.

“Our engineers have been working on this nonstop every day,” Reses said, including through last weekend.

One reason Square built a new online lending platform for this rather than use its existing technology was that the SBA program calls for different methods of data collection, underwriting and verification than Square normally uses.

“There are enough changes in the way business logic has to evolve in this process that it made more sense to create an entirely new product than to work with something that exists,” Reses said. Square was able to use existing technology for certain components of the loan process, such as risk assessment and compliance with Office of Foreign Assets Control, Bank Secrecy Act and anti-money-laundering rules.

Square's PPP lending platform runs on mobile phones and tablets.

“Most of our sellers use mobile devices,” Reses pointed out. “Your bagel shop or hair salon typically has an iPad or a phone for taking payments. You don't think of it as a mobile device, but that's often how people use Square.”

Square took a data-driven approach to the PPP loans. The company has millions of merchants and reached out with emails and dashboard alerts to those most likely to qualify first. To some, it sent out applications prefilled with data.

“We know who our sellers are; they're already on our system,” Reses said. “They have been through our compliance check.”

All of Square’s document uploads are done through photo capture. Some data elements can be extracted automatically to meet PPP requirements.

Square decided to launch its program through Celtic Bank because it was already an SBA lender and Square did not know when it would be approved and get access to the SBA's e-transfer system. Even after it was approved to participate in PPP directly, Square decided to continue working with Celtic. It sends Celtic XML files that the bank uploads to the SBA.

Pitts gave props to Square’s software.

“The reason Square can specialize in a $7,000 loan to a single-chair barbershop is because they have built a lending program on technology that uses data that gives them greater insights into how likely that loan is to default, and can do so more cheaply than many traditional underwriting programs,” Pitts said.

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