Federal systems' tech flaws laid bare by coronavirus crisis

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The coronavirus pandemic didn’t break the government’s technology, but it has exposed the many ways in which government systems were already broken.

Just look at the pleas by state governors, from New Jersey to Kansas, asking for engineers trained in Cobol — a computer language that was created over 60 years ago — to manage the spike in unemployment claims. People are beginning to see the many weak links in our technological infrastructure, which have been actively ignored for decades.

The financial impact of COVID-19, including the mass closure of small businesses and the highest unemployment rate since the Great Depression, has laid bare how the digital infrastructure supporting government agencies and regulatory bodies is outdated, restrictive and unadaptable. The U.S. is facing a 21st-century crisis with 20th-century technological infrastructure, which must be modernized for the financial services and regulatory systems.

There are several obvious and urgent technological deficits that have been spotlighted in attempt to distribute relief funding for consumers and small businesses: inefficiencies in the automated sign-up for unemployment, the digital application access to the Paycheck Protection Program (particularly for smaller banks and credit unions) and the inability of the Small Business Administration’s E-tran system to manage volume and velocity, to name a few.

Urgently needed financial support for both consumers and small businesses has been hampered by technological limitations. And it doesn’t have to be this way.

Several European nations — as diverse as Switzerland and Latvia — have digital financial systems far more advanced than the U.S., with capabilities that take in coronavirus-relief applications in minutes and deposit funds into bank accounts within the hour.

Fair access to small-business relief has been hindered by smaller banks' lack of participation in the PPP. The result is that unserved customers have fewer options since almost all the banks participating in the program prioritized existing customers in order to meet the “know your customer” authentication guidelines required by anti-money-laundering regulations.

Fintech lenders recently admitted into the program also face difficulties after most of the funds had been committed, even though these firms disproportionately serve the smallest of small businesses.

Most important, when this crisis is over, there will be a reckoning about whether or not the relief programs were effective: if unemployment and stimulus payments helped to keep America fed, or if the PPP actually saved small business.

Over the next eight weeks, many more questions will begin to crop up, such as: How will small businesses and banks account for the loan forgiveness permitted by the program? And if the SBA requires documentation, how will it be collected, uploaded and submitted to the SBA and reviewed?

It’s possible borrowers might simply have to attest for forgiveness. In such a case, it’s unclear whether banks would still need specified documentation for back-end audits and review, and what technology would be required to perform this.

There are also many unanswered questions surrounding demographic and geographic makeup of small businesses served by the PPP, and whether or not they survive, or go bankrupt. It’s important to know whether the surviving companies were already well capitalized or needed a capital injection, and how those relief monies were used in either case.

For businesses that do not survive, it’s important to understand what was missing from the PPP and what additional program elements could have been developed. Also, whether money was lost to fraud and if customers’ data security was protected.

Yet with the patchwork of federal and state legacy technology systems, the data needed to answer these many questions will not be easily accessible.

There are three time horizons that require consideration for digital solutions:

First, one must look at the immediate stopgap technological fixes required to deliver relief. Second, the process of forgiving the loans in 60 days if borrowers maintained payroll needs to be effective and efficient.

And third, longer-term, the government regulatory agencies must work with market participants to collectively transform the financial system to a digitally native design. The benefits would include lower cost to market participants, better effectiveness for regulators, increased protection for consumers and financial inclusion for more Americans.

The pandemic and concomitant economic shutdown has shined a light on the inadequacies and limitations of the current system. It has emerged as an urgent call to action for the immediate rescaling of the financial system to effectively respond to the massive economic challenges before us.

After the U.S. government has a chance to catch its breath, it will start making plans for the future. First among these plans should be an urgent and ambitious modernization of the digital infrastructure for financial services and the corresponding regulatory policies that govern it.

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Paycheck Protection Program Fintech Small business lending Small business Community banking Community banks Law and regulation Coronavirus