(This post originally appeared on The Guardian)
Online lending has been a controversial topic over the past few years. And with good reason. The industry, led by well-known names such as Fundbox, Balboa Capital and Lending Club, frequently comes under fire – justifiably so – for the very high interest rates they charge on the loans they offer. When I say high, I mean … high. Like as much as 99% annually, depending on the financing provided. And no, I’m not kidding.
Whether you want to argue the merits of these companies or not, and you need, as always, to keep an eye on the small print, there is certainly one thing that’s not up for debate, and that’s how these lenders stepped up to fill a critical need during this pandemic, when our banks – particularly our big banks – have dropped the ball.
I’m talking about the stimulus funding available under the paycheck protection program – the loans with forgiveness program that’s part of the recently passed Cares Act. Banks are supposed to be integral to the success of this program. Instead, they’ve been an obstacle.
“Banks are playing games on loans, leaving small businesses out in the cold,” said Mark Cuban in a recent interview. “They’ve implemented all these hurdles that were not supposed to be a part of the program.”
Cuban couldn’t be more accurate. Big banks have been slow to meet the needs of many desperate business owners in the wake of the pandemic, with some capping funds and others imposing new rules and regulations well outside of what the government had intended.
But online lenders have also been given the opportunity to provide these loans. And they’re doing a better job than the banks. Why?
The reason has to do with technology. Whereas banks have notoriously been slow to upgrade their systems and adopt the latest in fintech, today’s leading online lenders have built cloud-based platforms and scalable infrastructure that’s geared to do exactly what the Treasury and the Small Business Administration needs at this moment: handle lots of data and distribute lots of money.
“Our technology is specifically designed to process thousands of applications in minutes,” says Sam Taussig, head of global policy at Kabbage, one of the first online lenders to jump on the bandwagon. “Fintech is the best tool to help the SBA in this enormous task, and we’re rising to the occasion.”
I’ve personally tested the application process at both banks and online lenders and my experience working with companies like Kabbage has far exceeded that of the banks. Kabbage’s online processing for entering loan information and uploading documents is more user-friendly. Its communications and updates via emails are what you would expect from a tech company in 2020. The fact is that companies like Kabbage, as well as Lendio, PayPal, Square and Intuit, who are also among a group of fintechs now accepting and processing paycheck protection program applications, are just better at doing this than traditional banks.
It’s not as if the banking industry wasn’t warned. For years, traditional banks have been standing by while smaller, nimbler fintech companies have built better, quicker and more reliable systems to offer small business loans, checking and other banking services in a much more user-friendly manner, without branches and using mobile apps.
Many small businesses, loyal to their banks and reluctant to make any changes to how they handle their money, have resisted these fintech companies. But that perspective is rapidly changing, thanks to the coronavirus pandemic. Which is bad news for the banks.
That’s because those very same small businesses who were uncertain about fintech companies will now have an opportunity to get to know them better. These companies – who were just recently regarded with suspicion – are now doing what the banks aren’t: providing a vital service in a time of need. And at the same time, they’re introducing themselves and building relationships with thousands of prospective small business customers. They’ve stepped up when small businesses needed them the most and are providing a superior service.
As I write this, the funds in the initial round of the paycheck protection program are running low. If you own a small business and need this money, don’t be discouraged. I’m very certain that more will be provided in another stimulus bill. So go ahead and apply for the money you need. But, don’t go to a bank. They don’t want your business. Go to an online lender instead. So far they’ve shown that they do.