Ann Marie Mehlum is a member of several boards, including Summit Bank, and is a senior advisor at FS Vector, the advisory partner of Fenway Summer. Previously, she was an Associate Administrator for Capital Access at SBA.
Javier Saade is a member of several boards of directors, a venture partner at Fenway Summer and a senior advisor at FS Vector, Fenway Summer's consulting firm. Previously, he was Associate Administrator and Chief of Investment and Innovation at SBA.
We both oversaw the US Small Business Administration Capital, investment, credit, and innovation programs for America's small businesses. The nation has roots for our 30 million small businesses. They employ more than half of the country and create most new net jobs. 80% of them have less than 60 days of cash.
The world has never experienced a shift in labor and business on this scale and at this speed. We welcome Congress and the White House for providing a $ 2 trillion aid package, of which $ 350 billion will go to America's small businesses. Another $ 250 billion is being considered and negotiated as we write this.
Washington has spoken regularly to the financial sector, and for the relief to be effective for small businesses, banks of all sizes, fintechs, other technology companies, community banks, and other capital lines must be involved in the solution. There is an urgent need to use the funds, and technology will be crucial to this end.
On Wednesday there were two encouraging developments: 1) SBA introduced a new AWS-based gateway for an optimized entry point for lenders and 2) submitted an application for non-bank-related, uninsured (fintech) lenders. Certainly good steps, but retrofitting is always limited.
In retrospect, the 2008 crisis was in many ways a "dress rehearsal" of what we are now experiencing. Although there are some similarities, the massive pandemic burden is happening in almost all economic sectors at the same time, as evidenced by the fact that 17 million people have applied for unemployment.
The financial crisis was triggered by an excessive risk in the financial system, the shock of which hit our economy with a certain degree of predictability. The number of exogenous factors affecting the impact of the pandemic on our economy is more interconnected, more widespread, and faster than in 2008.
This 21st century problem requires 21st century solutions, and that requires new thinking from politics to execution. The majority of our economy, which lives at the interface between small businesses and the financial system, expects this thinking and execution.
It should be noted that some restrictions and restrictions on the implementation of the CARES law are not of a regulatory nature – they are based on old technologies that slow down banks. The outdated systems of our government agencies, like SBA's much discussed and clunky E-Tran system, don't help either.
Government agencies, let alone their systems, were not built to cope with something of this magnitude and urgency. But the inherent scalability, penetration, infrastructure, algorithmic ability, and installation of financial technology should come into play, and now! More on this below.
The financial system is experiencing significant technology delays, organizational inertia, and regulatory constraints, all of which add to the chaotic nature of program implementation. The design of a possible fourth relief phase should take this into account. While pumping more money into small businesses is a good decision, the process and its basics need to be improved.
We want regulators and agencies to help minimize the impact on small American businesses and implement the CARES law in line with Congress. We do not believe that a lot of money has reached taxpayers or small businesses at this point. According to the latest figures, SBA has guaranteed 25% of the relief. While this is an encouraging marker, it is still a small fraction of the $ 350 billion.
It is probably more important for people to understand that when banks secure loan guarantees, it does not immediately lead to financed loans that bring cash to small businesses.
In order for cash to move, a few things would help smooth the CARES law glide towards small businesses: 1) finalize the final guidelines for banknotes; 2) improve secondary market liquidity; 3) Development of a digital interface of the 21st century for optimized contact points for everyone involved; and 4) open the way to new players, including fintech companies as service providers, rails or lenders themselves.
This is important because SBA has been asked to increase its capacity by a factor of 50. All loan programs combined have annual sales of $ 25 billion. The task: $ 350 billion in 8-12 weeks. We know that SBA – along with Treasury, FRB, and other agencies – worked around the clock on systems, technology, and execution, but there are real points of friction that work against solving the problem at hand.
The Federal Reserve's liquidity freeze on SBA loans is welcome news, but it will take some time for it to develop. The FDIC news are also welcome Loosening the debt ratios of the community banks. Regulators are considering loosening additional prudent and temporary requirements and limits. All of this supports the effort, but there are still unanswered questions that keep lenders of all types marginal.
The use of digital constructs and technologies of the 21st century is imperative due to the size of the dollars, the number of loans and the short time window in which we have to use them. We urge the SBA, other agencies and regulators to use energy and resources to leverage digital finance and financial technology.
Financial technology can help streamline applications, comply with customer knowledge and money laundering rules, and automate applications. The technology also improves origination, underwriting, loan disbursement and lending and should be used effectively. Millions of small businesses at greatest risk do not use bank loans. For example, many use Square to accept payments. Fintech now has an open door to participate – good! We encourage regulators to take full advantage of the technology's collective capabilities.
Not everyone has a printer, let alone the ability to enter a bank – but most small businesses and their owners have cellphones and a digital footprint. A number of fintech companies provide technology to the banks themselves. In these cases, banks should use this time quickly to use these skills. With the $ 200 billion invested in financial technology since the financial crisis, fintech is no longer an innovation experiment.
On the one hand, there is immense pressure to pull out capital, on the other hand, strict regulations ensure an equally strong attraction. COVID-19 has highlighted the need to establish a financial system that works for everyone, and technology plays a key role in this. If there is time to try new constructs, now is the time!
The problem with losing a job is that it is very difficult to recreate it. Conservation, which is the guiding principle of all recent government measures, is better energy consumption. Let us concentrate on preserving jobs and relieving the beating heart of our economy – small businesses.