Karen Mills, who served in President Barack Obama’s cabinet as the administrator of the US Small Business Administration from 2009 to 2013, says the arrival of fintech firms at the start of the financial crisis a decade ago helped save many small businesses in America.
In her new book Mills, now a senior fellow at Harvard Business School, says many of America’s 30 million small businesses who wanted modest loans were being ignored by banks until fintechs catered for that market.
In her book - Fintech, Small Business & the American Dream: How Technology Is Transforming Lending and Shaping a New Era of Small Business Opportunity - she explains how fintechs move spurred established providers like Wells Fargo and new players like Amazon to catch up.
When Mills arrived to serve in President Obama’s administration in 2009 the country lost 1.8 million small-business jobs in the first quarter of the year because credit markets froze at the height of the crisis.
“I saw how devastating it was when lending froze, and how much of a lifeline it was when we could revitalise the lending marketplace,” said Mills in an interview with Harvard Business School’s Working Knowledge.
After joining Harvard five years ago, Mills and her academic team looked at what caused the lending logjam for small firms.
She said: “It was clear there were structural issues. It was not cost effective to make a small-dollar loan using a traditional relationship manager. We identified a funding gap in the smallest dollar loans—those under $100,000. The smallest businesses who wanted the smallest loans were not being well served, in part because it was hard to know whether they were actually creditworthy.”
Changing the status quo
Mills said the speed with which fintechs who entered the market at around the time of crisis were able to work with small businesses changed the status quo.
She added: “When owners were able to go online, fill out an application in minutes, and get an answer the same day and money in their bank account the next day, they flocked to the new lenders. Some issues arose quickly, though, such as high prices and bad actors charging hidden fees.”
Small businesses in the US, as in most nations, are the backbone of the economy.
There are 30 million small firms in the US, of which 24 million are sole traders. Four million are high street retailers, such as coffee shops or dry cleaners. The remaining one million are business-to-business suppliers. Collectively, these firms employ half the country. A small business is one that employs fewer than 500 staff, according to the US Census.
Mills said with the stakes this high, rivals began to respond to the challenge fintechs presented.
She said: “Soon, however, big banks woke up and realised they did not have to cede this market to the disruptors. JP Morgan, Bank of America, and Wells Fargo all started working on new solutions. Big tech companies also got involved. Amazon, PayPal, and Square developed lending operations, and American Express and Capital One entered the field. Now there is a wide array of large and small companies investing deeply in tech, all centered around recreating the lending experience for small businesses.”
UK fintech expansion in the US
The administrator and academic adds that big data and artificial intelligence presents opportunities and regulatory challenges.
She said: “This trend will be transformative. With the ability to aggregate and organise data and analyse it rigorously, lenders can have more predictive algorithms about who is creditworthy, and small business owners can have a dashboard that will help them understand and predict their cash needs. These two activities could perhaps improve small business longevity and maybe turn around this worrisome trend in small business starts.”
Mills adds that US fintechs will have to take account of innovative UK and European rivals.
In February, British digital business bank OakNorth landed $440m of investment led by Japanese conglomerate SoftBank to expand into the US market.
She said: “The UK and Europe are ahead of the US, making it clear that customers own their banking data and can designate it to be available to a third party. Open data and open banking are important so that data streams are available to multiple financial institutions and entrepreneurs who could provide new products and services. We have a long way to go in Washington to be fully engaged and intelligent about these issues.”