The earliest small business loan on record dates back to Mesopotamia, when a royal baker borrowed capital—suggesting that small-business owners have been wrestling with access to capital literally since the dawn of civilization, says Senior Fellow Karen Mills. In her new book, the former head of the US Small Business Administration says we are on the brink of a radical transformation. Fintech players like Amazon and Square, powered by big data and AI, have the potential to bring about a golden age for small business, she says, simplifying the loan process for the borrower and lender alike.

Imagine if small businesses had access to AI-enabled insights—picture a dashboard informed by a business’s bank accounts, payment systems, taxes, and accounting software. The business owner could see their future cash needs, making it less likely that they would have a life-threatening cash crunch. But if it were to happen, they would have more options to borrow at affordable rates. Fintech is going to create more access for everyone, across the board, including women and minority-owned businesses that are often not well-served in today’s credit markets.

Photo by Susan Young

photo by Susan Young

I also believe this will decrease risk for lenders, which will lower the cost of capital and create a virtuous cycle. Community banks, in particular, could be big winners: Imagine if they introduced these fintech solutions into their core systems. Now instead of saying, “Can you bring me another set of old tax returns so I can put it in my credit model?,” they could say, “I have this whole understanding of your business and have preapproved you for a loan. But is $20,000 the right amount of money, or should you maybe take $40,000 and expand next door?” They could go back to relationship banking and maintain that role as the trusted local advisor.

Regulation is one of the greatest concerns as we move into this next stage of innovation, but the question is not more or less regulation. We need smart regulation. These algorithms introduce a whole set of new concerns. Who owns your data? If the algorithm has bad information about you, do you get to fix it? Does the regulator get to look at the algorithm? What if it leads to discrimination and creates disparate impact?

If we get it right, this revolution in financial services could spur a powerful transformation in access and opportunity. If we can foster an environment where innovation comes together with capital markets and lending and reduces the barriers and frictions in small business lending, we can help this critical part of our economy grow and prosper.

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