How fintech can save small businesses on the brink

The enduring image of the global coronavirus pandemic is a “closed” sign in every storefront, with formerly bustling Main Streets turned into ghost towns thanks to shelter-in-place orders and mandatory lockdowns.

The foot traffic is gone but rent, payroll and other expenses are not. The novel coronavirus is stressing the global economy in unprecedented ways — and some small businesses may never recover.

It may seem a cliche to claim that small businesses are the “lifeblood” of the American economy; but there is nothing “small” about small business. America’s 30.7 million small businesses employed nearly 60 million people, or 47.3% of the private workforce, according to the U.S. Small Business Administration’s 2019 profile.

Even in good economic times, America’s small businesses typically operate with a thin margin for error. Unlike larger companies that have cash cushions to help weather short-term dips in revenue, the median small business has only 27 days of cash to survive without income.

A Goldman Sachs study released in March found that more than half of small businesses have less than three months of cash reserves. Swift action is needed to provide small businesses with cash infusions and other support.

Congress is taking action with a $2 trillion stimulus package that allocates funds for small business. In reality though, the government will be hard-pressed to fulfill its own directives, due to its agencies' reliance on aging processes and technology. Similar challenges face banks and fintechs tasked with distributing the funds.

To illustrate the challenge, a McKinsey report projects that processing of loans under the Small Business Administration’s Section 7 program — the primary relief vehicle for most small firms — will need to increase from the $4.5 billion in the past two months, to $350 billion in the next 60 days. That is an eightyfold increase that must occur almost instantly.

Government agencies are simply not built to handle the vast numbers of inquiries, applications and decision-making that will be required to distribute these funds, soundly and in time.

Fundamentally, government agencies are built on 20^th-century technology that is not ready for a 21^st-century crises like a global pandemic. For small businesses, bottlenecks and delays are likely to arise through the process of disbursing relief funds.

Success will also require onboarding new lenders, including fintechs, into SBA programs. The number of small businesses that need help is staggering, so any solutions must be able to withstand a national scale at launch.

Fortunately, there are technological tools to help solve these challenges. However, most agencies don’t have ready access to these tools, and will be challenged to stand it up in the next few weeks.

Creative solutions are cropping up. Arnold Kling has proposed that banks should automatically add an overdraft line of credit to every account — for both businesses and consumers — backed by the federal government.

Ideas have surfaced for using chatbots to relieve stress on overloaded SBA (and unemployment) call centers. A proposal that the Federal Reserve issue “digital dollars” was not included in the new stimulus package but has sparked dialogue on expediting flows of payments using the technology of cryptocurrency and stable coins.

In this problem-solving spirit, the Alliance of Innovative Regulation, or Air (my nonprofit), hosted a hackathon this weekend to build prototype tools to accelerate and scale up small-business rescue funds.

Eight teams — consisting of more than 60 people from banks, fintechs and nonprofits in the U.S. and Europe — teamed up for 48 hours to build solutions. At the end, the teams demonstrated their prototypes to each other, and observers from industry and government.

Each team tackled a different problem. Some proposed front-end tools to help applicants navigate eligibility and document requirements for obtaining rapid approval. Others built tools that can quickly disburse the funds. Still others created ways to manage forgiveness requirements, prevent fraud and dovetail new tech with existing infrastructure.

A report will come out later this week that captures the initiatives, along with a follow-up event to help fine-tune the teams’ starter ideas as government guidance is more concrete.

This is just one example of how the private and public sector can come together quickly to aid small-business owners facing the prospect of mass extinction. This is the time to bring the government's relief resources to these small companies, using digital-age technology.