Stories
Stories
Fintech, Small Business
& the American Dream
Drawing on her experience leading the US Small Business Administration as a member of President Barack Obama’s Cabinet, Senior Fellow Karen Gordon Mills explores the ways technology is changing financial institutions’ relationships with small businesses. Mills’s research is highlighted in her new book: Fintech, Small Business & the American Dream.
KEY THEMES
- Small business is critical to the American economy.
- Artificial intelligence and big data will transform financial services, particularly small business lending.
During the economic crisis, in the first quarter of 2009 alone, Mills points out that 1.8 million small business jobs were lost. Heavily dependent on credit, small businesses were unable to access capital markets as banks reeled from the crisis and lending froze. With half of the workers in the US either owning or working for a small business, Mills asked, “How do we keep this piece of the economy vibrant?”
As Mills’s research demonstrates, small business lending hadn’t changed in 50 to 100 years. Traditional banks failed to deliver a positive customer experience and struggled to profitably make small-dollar loans that small firms needed, largely due to two issues: information opacity—the difficulty in gathering accurate information and determining if a small business was actually making money, and heterogeneity—the reality that not all small businesses are the same.
Beginning in 2010, a number of disruptors—fintechs such as OnDeck, LendingClub, and Kabbage—entered the marketplace. They revolutionized the customer experience by providing a streamlined application process and faster decision-making. It seemed as if these new entrants would someday dominate the market, but banks still maintained competitive advantage, with large customer bases and a low cost of capital.
In 2016, the landscape shifted even further when major platform players such as Amazon, PayPal, and Square entered the space. In spite of these disruptions, Mills says that one can’t discount the banks and traditional lenders. Today’s financial services landscape for small businesses is vast, including banks and credit cards, Big Tech, fintechs, and infrastructure players (Plaid, Yodlee, nCino, etc.).
FUTURE SCOPE
One thing is clear, Mills says: Artificial Intelligence (AI) and big data will transform financial services, providing lenders with faster and more sophisticated information streams from bank transaction data, tax payments, and industry comparables. This same data feed can not only promote better credit underwriting, but it can also enable small business owners to be more knowledgeable about their own business operations, avoiding threatening cash flow issues.
On the flip side, new questions arise, such as what is in the algorithms being written and who owns a customer’s data? How we choose to use and share our financial data will be the key regulatory questions of the next few years.
Mills believes that the winners in this landscape will be determined by who has the customers, brand recognition, necessary capital, and best technology experience. One unexpected winner could be the community banks, whose “Main Street” relationships with local small businesses can be leveraged even further by using the new insights technology will provide.
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