The impacts of fintech on small business borrowing

Abstract

Consolidation in banking raise concerns about exclusion and predatory practices in small-business lending. Fintech lenders, largely unregulated credit providers with lending decisions and loan terms determined primarily by algorithm, have rapidly increased their lending to small businesses. I analyze loan-level data on consumer and small business loans from Fintech lenders and a comparison sample of small-business loans from regulated bank lenders. Fintech small-business loans charge average annual interest rates 3 percentage points higher than consumer loans from the same lender and 4 to 7 percentage points higher than small business loans from regulated banking entities. The large interest-rate premium points to the need for regulatory clarity and additional supervision to protect this crucial market segment from predatory non-bank lenders.

RÉSUMÉ

La consolidation du secteur bancaire suscite des inquiétudes concernant l’exclusion et les pratiques prédatrices dans le domaine des prêts aux petites entreprises. Les prêteurs de Fintech, des fournisseurs de crédit largement non-réglementés, dont les décisions et les conditions de prêts sont principalement déterminées par des algorithmes, ont rapidement augmenté leurs prêts aux petites entreprises. J’analyse les données sur les prêts à la consommation et aux petites entreprises des prêteurs de Fintech et un échantillon comparatif de prêts aux petites entreprises provenant de prêteurs des banques réglementées. Les prêts aux petites entreprises de Fintech font l’objet de taux d’intérêt annuels moyens supérieurs de trois points de pourcentage aux prêts à la consommation du même prêteur, et de quatre à sept points de pourcentage aux prêts aux petites entreprises provenant d’entités bancaires réglementées. L’importance de la prime de taux d’intérêt souligne la nécessité de clarté réglementaire et de surveillance additionnelle pour protéger ce segment de marché crucial des prêteurs non-bancaires prédateurs.

Keywords:

• Fintech
• small business credit
• small business loans
• SBA loans

MOTS-CLÉS:

• Fintech
• crédit aux petites entreprises
• prêt aux petites entreprises
• prêts SBA

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1 Lending Club data are available in the ‘Data’ section of their website. Complete data are restricted to those who create a Lending Club profile, but no financial commitment is required to maintain a profile on their site.

2 2018 is also excluded from this analysis, as data for the full year was not available.

3 It is beyond the scope of this paper to propose a specific threshold. Ideally, Congress would authorize the appropriate rulemaker, here the CFPB, to propose both a threshold and a mechanism for adjusting it over time.

4 This level should be determined by rulemaking after a period of study by the CFPB.

5 Unfortunately, although Section 1071 was passed as part of Dodd-Frank to collect critical data on small business borrowers, the rule has not yet been implemented.

Additional information

Notes on contributors

Lenore M. Palladino

Lenore M. Palladino is Assistant Professor of Economics & Public Policy at the University of Massachusetts Amherst. Her research focuses on the impacts of finance on small business, corporate governance, and labor.