What makes a great partnership?
There are a number of examples of great partnerships that have worked toward a common goal. In the sports world, think of Michael Jordan and Scottie Pippen or Joe Montana and Jerry Rice. In business, there is the recent success between Apple and Goldman Sachs in launching the Apple Card.
With the PPP closed to new applications, fintechs could play an important role in the MSLP.
As small and medium-size businesses struggle with the economic slowdown, they have looked for a partner as well. And many found one in the federal government, which extended a financial lifeline with the Paycheck Protection Program.
After a rocky start, the Department of the Treasury and U.S. Small Business Administration expanded the Paycheck Protection Program to include nontraditional lenders like fintechs to either originate or partner with traditional banks to process these loans.
The result was more businesses participating in the program, which provided a much-needed injection of liquidity in the real economy.
Now, with the Paycheck Protection Program closed to new applications, fintechs may have a similar opportunity in the Main Street Lending Program – if, that is, the government makes some prudent changes to the program.
Paycheck Protection Program: By the numbers
If the PPP showed anything, it’s that it wasn’t just banks that participated in the program. According to the Aug. 8 report provided by the SBA for lenders with less than $1 billion in assets and non-banks, the top three lenders by loan count are banks, fintechs and credit unions.
A total of 19 fintech lenders participated in the program, issuing more than 250,000 loans for more than $6.0 billion. Traditional banks issued more than a million loans, but the data does not reveal whether a fintech partnered with a bank to process the loans.
A number of fintech companies, like like the small business loan platform Kabbage, partnered with traditional banks to act as their loan agent.
The SBA data does not reveal the extent of the impact that fintechs had on this lending program.
But that’s not necessarily the end of the story. Now that the PPP has stopped accepting applications, the liquidity discussion shifts to the Main Street Lending Program.
Main Street Lending off to a slow start
The Main Street Lending Program became fully functional on July 6. The $600 billion program, the crown jewel of the CARES Act, is a joint effort between the Federal Reserve and Treasury Department and will serve as the liquidity backstop to middle market businesses as we head into the later months of the year.
On July 15, the Federal Reserve opened up the program to lender registration and encouraged lenders to start taking in applications. But it has yet to gain wide acceptance in the marketplace.
Recently, the Boston Federal Reserve’s president, Eric Rosengren, reported that more than 500 lenders had either registered or were in the process of registering for the Main Street Lending Program.
To put this into perspective, more than 5,000 lenders participated in the Paycheck Protection Program.
According to the Federal Reserve’s latest weekly reserve balance, the central bank has purchased $472 million, which represents 95% of all loans issued through this program.
Looking to fintech partnerships
But while the Paycheck Protection Program found broad acceptance in the market, the MSLP has been slower to be find its footing. One reason may be its complexity, which may have turned off a number of participants to apply for the program. But other reasons, including high borrowing costs, minimum loan size or payoff period, may have had an affect as well. Whatever the reason, the Federal Reserve and Treasury Department will need to reexamine the program if it is to make it more attractive to small and medium-size businesses.
In addition, based on the success that fintechs played in increasing the exposure of the Paycheck Protection Program, this could be an opportunity for fintechs to play a bigger role in the MSLP. The current FAQ released on the program does not close the door on nonbank financial institutions, but the Treasury Department has said it will consider including them in the future.
If that day comes, fintechs will have an opportunity to gain greater mainstream acceptance. On top of participating as a lender, fintechs would be able to partner with banks to help gather the quarterly and annual information required as part of the certification, and then organizing that information.
The signs are promising. The Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation recently issued a number of requests to the public regarding fintechs’ involvement with partnering with a bank or being a chartered bank – a strong signal that fintechs will play some type of role in the future of banking.
The economic slowdown and continued progression of COVID-19 have created a level of uncertainty as we head into the latter half of the year. The Main Street Lending Program offers the financial backstop for small and medium-size enterprises and can help support those firms struggling to stay afloat or to push forward with needed innovation efforts.
While traditional lenders are a little hesitant to sign up for the MSLP, this might be a chance for fintechs to participate in rebuilding the real economy.
For more information on how the pandemic is affecting midsize businesses, please visit the RSM Coronavirus Resource Center.