Who has benefited from PPP loans from FinTech lenders? -Liberty Street Economics

In the previous article, we discussed the inequalities in access to credit from the Paycheck Protection Program (PPP), showing that although fintech lenders hold a small share of the total volume of PPP loans, they have provided strong support for underserved borrowers. In this article, we ask whether small businesses received the amount of PPP credit they requested and whether the loans went to the hardest hit areas and mitigated job losses. Our results indicate that FinTech providers have been a key channel in reaching minority-owned businesses, the smallest of small businesses, and borrowers most affected by the coronavirus pandemic.

Have small businesses sought and received PPP loans?

A small loan application, defined as $ 25,000 or less in the Federal Reserve Small Business Credit Survey–May indicate a demand for credit from small businesses who deem these loans best suited to their business needs. In support of this interpretation, we find that firms with fewer employees, lower annual incomes, and female owners were more likely to apply for small loans, in accordance with previous research that businesses owned by women are on average smaller than those owned by men. For example, the median amount requested by non-employer businesses (those with no employees other than the owner) was only $ 12,000. Non-employer firms were also more likely to go to fintech lenders, possibly because banks have higher fixed costs of processing small loans than fintech firms. Since PPP lender fees are a percentage of the loan size (eg 5% for loans up to $ 350,000), banks may not have enough incentive to provide small PPP loans.

Among Small Business Credit Survey participants with one to 499 employees, the median amount of P3 funds sought by applicants to fintech lenders was $ 32,000, compared to around $ 60,000 for bank applicants (see graph below). Fintech lenders approved loans with a median size of $ 20,000 (around 63% of the amount requested) while banks approved loans with a median size of $ 50,000 (around 83% of the amount requested). The lower shares of requested amounts that have been approved for fintech lender applicants may reflect the smaller size of these companies and their less familiarity with PPP rules. For example, the smallest companies were less aware of PPPs and less likely to apply, and, if they applied, they were more likely to apply late and face longer processing times.

Who has benefited from PPP loans from FinTech lenders?

Could small loan sizes indicate Credit rationing by fintech lenders? This seems unlikely since applicants have applied for smaller loans. Historically, fintech companies have provided small dollar loans but at high interest rates, perhaps prompting applicants to apply for smaller loans. However, since the rates are fixed in PPP, this incentive seems absent.

The survey results are corroborated with the data on PPP loans. The chart below shows that fintech loans were concentrated in smaller loans, especially those under $ 25,000. The share of FinTech lenders in loan volumes during wave 1 of the PPP (April 3-16, 2020) was around 7% and 1% for loan amounts below USD 25,000 and above USD 1 million, respectively, and increased to 29% and 4%, respectively, during wave 2 (April 27 to August 8, 2020). The shares of small loans for large and small banks were respectively 30% and 57% during wave 1 and 36% and 29% during wave 2. In other words, the increase in fintech loans during wave 2 mainly occurred in the smallest loan. sizes. While all lenders increased their share of small loans from Wave 1 to Wave 2, the relative increase was larger for fintech lenders than for banks. Previous research also noted a substitution between fintech lenders and banks, but not that this was happening for small loans.

Who has benefited from PPP loans from FinTech lenders?

Have Fintech Loans Reached Hard-Affected Borrowers?

Some PPP program design features and the importance of pre-existing banking relationships may have prevented PPP lenders from reaching borrowers most affected by the pandemic, at least during Wave 1, but small banks did better than the big banks. Have fintech lenders outperformed banks by targeting lending to the poorest borrowers?

To answer this question, we regress a lender’s loans in a county as a share of its loans in the state against the share of a race or ethnic group residing in the county and measures of characteristics. county (such as its level of education and income relative to the state). We find that fintech lenders provided more small loans (less than $ 25,000) in counties with a higher proportion of black residents during wave 1. By comparison, small loans made by banks during wave 1 had a higher proportion of black residents. negative or no correlation with the fraction of black county residents. These results highlight the disproportionate impact of the few fintech lenders who were authorized to grant PPP loans during wave 1.

Have fintech loans gone to counties with higher COVID deaths? In the regressions, we include an additional explanatory variable: the county death rate from COVID-19 on May 4, 2020 (for wave 1) and May 27, 2020 (for wave 2). The dates were selected to take into account that deaths from COVID-19 are lower than the incidence of the disease. We find that fintech lenders have made more small loans (less than $ 25,000) in counties with higher mortality rates. This is illustrated in the scatter plot below where the difference in death rates between the highest and lowest death rate counties in a state is compared to the difference in the share of fintech lenders in small loans for those same counties. The share of small loans from fintech companies has a strong correlation with death rates, especially in states where death rates are widely dispersed geographically. For example, in New York City, the share of fintech lenders in small loans was almost twice as large in counties with the highest mortality rates as in counties with the lowest mortality rates. For comparison, the shares of bank loans were statistically uncorrelated with mortality rates during wave 1. In wave 2, loans from all lenders had a similar correlation with mortality rates. that corresponds to other research.

Who has benefited from PPP loans from FinTech lenders?

Were PPP loans associated with more rehires?

Companies that have requested emergency assistance (PPP or other government programs such as the EIDL) were hit harder by the pandemic than those that were not. Half of the businesses that filled out a request cut their workforce, compared to around 27% of businesses that did not request emergency assistance. This was especially true for black-owned businesses. About two-thirds of black-owned businesses that requested emergency aid had downsized, while less than half of white-owned businesses had done so.

When candidate companies received PPP loans, they were more likely to rehire employees. More than three-quarters of companies that have received PPP funds have taken action to rehire employees, compared with just over half of companies that have not requested or received PPP funds. Black-owned businesses that received P3s were as likely as white-owned businesses to have attempted to rehire their employees. However, among the companies that did not receive PPP funds (either because they did not apply or because they applied but were not approved), the companies belonging to blacks were less likely than white-owned companies to attempt to rehire.

Our results do not establish that PPP loans caused more rehires since we do not take into account the effects of credit demand. Our data also cannot speak to the extent of the job loss prevention measures, but previous research has shown that the PPP had modest effects on employment. However, this may have helped in other ways – for example, to allow companies to meet non-PPP loans and other non-salary obligations and to improve their chances of survival.

Final words

While fintech lenders made up a small share of the total PPP loan volume, they played an important role in serving minority homeowners and businesses that needed small loans but were less likely to receive them from other sources. These smaller establishments are essential to support vibrant shopping districts and have higher shares of female and minority entrepreneurs. Reflecting this, special efforts were made as part of the last round of PPP funding in order to make the program more attractive to sole proprietors, independent contractors and self-employed workers.

Jessica battistoJessica Battisto is a Senior Research Analyst in the Federal Reserve Bank of New York’s Outreach and Education Group.

Nathan GodinNathan Godin is a Senior Research Analyst in the Bank’s Research and Statistics Group.

Claire Kramer MillsClaire Kramer Mills is Assistant Vice President and Director of Community Development Analysis in the Bank’s Outreach and Education Group.

Asani SarkarAsani Sarkar is Deputy Vice-President of the Bank’s Research and Statistics Group.

How to cite this article:

Jessica Battisto, Nathan Godin, Claire Kramer Mills and Asani Sarkar, “Who Benefited from PPP Loans from FinTech Lenders?”, Federal Reserve Bank of New York Liberty Street Economy, May 27, 2021, https://libertystreeteconomics.newyorkfed.org/2021/05/who-benefited-from-ppp-loans-by-fintech-lenders.html.

Additional articles in this series

COVID-19 and Small Business: Unequal Patterns by Race and Income
Who Has Received PPP Loans From FinTech Lenders?

Related reading

Economic inequality series


The opinions expressed in this post are those of the authors and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System. All errors or omissions are the responsibility of the authors.

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