PYPL PayPal Holdings Inc

By Peter Rudegeair 

The lending machines of Silicon Valley are running at half-speed.

Financial-technology companies including PayPal Holdings Inc. and Square Inc. were eager to participate in the government's $350 billion lending program designed to keep small businesses afloat during the coronavirus pandemic. But some aspects of the government programs render much of the industry less effective.

The stakes are high for small businesses desperate for cash, especially since the program is close to running out of money.

A new Federal Reserve facility that will finance billions of dollars of the loans excludes lenders that aren't banks. What's more, fintech lenders got a late start compared with banks. The Treasury Department and Small Business Administration didn't start letting the fintech companies into the first-come, first-served lending program until after roughly half of the funds had already been claimed.

And the SBA's loan portal is ill-equipped to plug into the automated lending software developed by startups and tech companies. The portal, for example, often requires lenders to insert applicants' information manually.

"It's kind of like they built a maglev train and had to reverse-engineer it into a handcar, because that's the track they've been given," said Brian Peters, executive director of Financial Innovation Now, an industry association whose members include Intuit Inc., PayPal and Square.

Fintech companies have ramped up their lending to small businesses over the past five years, filling a void left by banks that backed away from the sector following heavy losses during the financial crisis. For many small businesses, they are the only way to get a loan. But with the pot of money reserved for payroll loans running out as soon as this week and with no agreement in Congress to add more funding, many small businesses, especially those that were turned away by banks, could be left behind.

"We're doing our best, but the timelines are tight and the demand is high," said Luke Voiles, vice president and business leader of Intuit's lending arm, QuickBooks Capital.

The $350 billion recovery effort, called the Paycheck Protection Program, allows small businesses to apply for forgivable loans that can be used to cover eight weeks of payroll and other expenses. Businesses apply to lenders, and the SBA guarantees the loans.

From the start, policy makers wanted to expand the pool of approved SBA lenders to reach more small businesses, and fintech companies spotted an opportunity. In mid-March, Square Chief Executive Jack Dorsey reached out to Treasury Secretary Steven Mnuchin to express interest in joining the program, according to people familiar with the matter.

Among the companies that received the go-ahead in recent days to start making payroll loans were Intuit, PayPal and Square, as well as the specialized online lenders Funding Circle USA Inc. and On Deck Capital Inc. But the first of them only got approval a week after banks started accepting loan applications on April 3.

Fintech companies bring vast customer networks to the table. In the U.S., PayPal serves more than 10 million small businesses while Intuit's QuickBooks accounting software counts about six million users.

Many small businesses have complained that big banks won't even consider applications from businesses that aren't existing customers. The ability to apply for a loan through a tech vendor they use gives them more options.

It also helps that many fintech companies already have vast amounts of information on their clients, which they say lets them make lending decisions quickly. Square and Intuit, for example, also make payroll software for businesses, so they can produce the documentation themselves for the government-backed loans without applicants having to calculate anything.

The volume of small loans to businesses on big banks' books fell more than one-fifth from mid-2015 until mid-2019, according to data from the Federal Deposit Insurance Corp. During that span, PayPal expanded its holdings of loans it made to businesses by more than 10-fold, to $2.4 billion.

To receive the government guarantee, loan applications are submitted through an SBA portal called E-Tran. The bulk of those often require loan officers to enter applicants' information manually, according to lenders.

Last fiscal year, about 52,000 loan requests for the SBA's flagship program were approved through E-Tran, according to the agency. In just the past two weeks, the SBA has approved more than one million payroll loans.

Banks resorted to assigning thousands of employees to the task of filling in fields in E-Tran by hand to handle the flood of interest in the payroll-loan program. Fintech companies, which operate with fewer people and more automation, can't easily do the same.

The SBA is developing an application-programming interface, a way for two pieces of software to exchange data without human involvement, for payroll loans that would allow lenders to upload applications in batches, according to people familiar with the matter. Certain lenders are testing that interface, but it was unknown when the SBA would start accepting actual applications through it, the people said.

How to fund the loans is another challenge for fintech lenders. Banks can choose to make the loans using their depositors' money or use the loans as collateral to borrow from the Fed. Fintech companies, because they aren't banks, can't avail themselves of either option.

Many fintech lenders rely on outside investment managers to purchase the loans they do make. But the government-set interest rate on the payroll loans -- 1% -- is too low to appeal to many investors.

Some fintechs, including PayPal, work with a bank to make their loans, and the bank can access the Fed funding.

Fed officials have discussed opening its payroll lending facility to nonbanks but haven't released details or a timeline.

--Coulter Jones contributed to this article.

Write to Peter Rudegeair at Peter.Rudegeair@wsj.com

(END) Dow Jones Newswires

April 16, 2020 08:14 ET (12:14 GMT)

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