Excluding Fintech Lending in the Time of COVID
By: Gary Schwartz, President of the Canadian Lenders Association
This article originally appeared in the Globe & Mail
While governments globally have actively engaged their fintech lenders to help deliver loans to shuttered Main Street merchants, our government has chosen to exclude this burgeoning sector. It seems counterintuitive to ignore companies that pre-COVID had been the lenders of record to this higher-risk sector.
Fintech lenders have helped grow mom-and-pop enterprises for the past decade. We helped expand SMEs pre-COVID-19, and we should play an essential role during the present crisis and in providing lending continuity through the recovery.
COVID should be an accelerator, blurring the lines between incumbent and fintech lenders. Unfortunately, the government has soft-pedalled proposals from fintech lenders, claiming operational and reputational risk.
The Birth of Fintech Lending
After the 2008 financial crisis, global banks reduced their lending to SMEs and consumers as their “credit box” shrank and new measures from the bank regulators made unsecured lending uneconomic. Fintech companies emerged to fill this gap. The story is similar to innumerable disrupted sectors, such as retail, entertainment and media: Fintech innovation provided new and innovative solutions. Companies across the globe reinvented payment, international money transfers, personal investment, and business and personal loans.
From 2009 to 2019, non-bank fintech lenders developed solutions to provide private credit to certain segments in the marketplace that were underserved by the banks and could be serviced through the use of technology. Legacy underwriting practices and heightened bank regulations made it too difficult for incumbent lenders to service this market. Through the use of innovative underwriting practices, intelligent risk-assessment tools and properly risk-adjusted credit granting, fintech lenders were better able to serve higher-risk borrowers who did not meet the traditional lending criteria.
Suddenly, the world was no longer delineated by borrowers that could and could not get credit at their corner bank. Fintech lenders could now provide a spectrum of lending options to up to seven million Canadians who were historically unable to access loans from traditional banks.
Finally, we had a diverse marketplace of solutions for borrowers. Fintech lenders had made access to capital more inclusive, timely and affordable, avoiding the painful costs of last-resort options such as payday loans.
As in the 2008 crisis, the 2020 bank’s credit box has shrunk, constraining lending to SMEs and consumers. For small businesses, the Canadian government has responded by providing the sovereign backing to traditional financial institutions to enable them to effectively deliver the Canada Emergency Business Account (CEBA) initiative and Business Credit Availability Program (BCAP) co-lending program.
While these programs are effectively provisioned to keep small businesses on life support, the key questions to consider are: How will borrowers be able to access capital as we drive toward economic recovery? What happens post-COVID as the sovereign safety net recedes and incumbent lenders are no longer a viable lending resource?
We know it is challenging for an entrepreneur to maintain a good credit score while investing in their small business. We know it’s challenging to get access to capital if their annual revenue or personal credit score is not up to the bank’s credit standards. Pre-COVID, fintech lenders had filled in the gaps with a variety of funding options.
Oh (no) Canada
While Canada vacillates on proposals from various fintech lenders, including the Canadian Lenders Association, governments globally are looking to their fintech platforms as a means to effectively adjudicate and distribute aid to small businesses.
- In the United States, the Paycheck Protection Program (PPP) asks fintech lenders that qualify with specified requirements to underwrite loans and has deployed $511-billion to date.
- In the United Kingdom, the Coronavirus Business Interruption Loan Scheme (CBILS) is open to accredited lenders, which will include fintechs, and has provided £8.9-billion to eligible businesses.
- In Australia, the Coronavirus SME Guarantee Scheme’s goal is to enhance lenders’ willingness and ability to provide credit up to 40-billion Australian dollars in loans, which will include fintechs.
The Future of Lending
Moving forward, we need to consider how we, as a lending ecosystem, can support lending continuity in Canada. If a consumer or business has a historic relationship with a fintech lender, it is essential the government recognizes that cultivating this relationship is critical for the short- and long-term financial viability of small business in Canada.
By removing this option, the federal government is isolating local entrepreneurs from realistic financing options and in the process is squandering the nation’s last decade of investment in fintech innovation.
The Canadian government needs to support the sector now so we will be here to service Canadians as they remove their shutters, begin to grow their businesses and feel confident to spend for the future.