Washington, D.C.— Today, the House Small Business Committee Subcommittee on Oversight, Investigations, and Regulations held a hearing examining the current state of small business fintech lending. Chairman Dean Phillips (D-MN) gathered lenders and small business stakeholders to testify on the advantages of fintech lending as well as the risks posed to small businesses in the rapidly evolving space.
“Massive developments in financial technology, have shown real promise for expanding access to credit for small firms. New technology can expand access to timely credit for underserved entrepreneurs, increase financing options, and improve day-to-day operations for small businesses,” said Chairman Phillips “As the FinTech sector evolves, Congress must keep pace and ensure industry practices aren’t unfairly taking advantage entrepreneurs, especially those who may be vulnerable to abusive practices.”
Financial technology, commonly known as FinTech, has shown promise in expanding access to capital for small businesses. Over the years, entrepreneurs have relied on fintechs for capital, often due to their speedy approval process, diverse financing options, and alternative metrics for creditworthiness. One study found that by 2016, non-bank lenders had a market share of close to 60 percent in small business lending. Fintechs also showcased their ability to reach small businesses during the Paycheck Protection Program, when fintechs were able to make small-dollar PPP loans to small businesses more effectively than traditional banks.
While fintech lending has helped many small businesses, entrepreneurs have raised concerns about the lack of transparency and predatory tactics deployed by some lenders in the sector. APR for Fintech loans and other financing products can start at 7% and climb higher than 100%. These unconventional terms aren’t always clear to borrowers as many online lenders provide little to no information upfront about the loan or product. The opaque methods around fintech underwriting has also come under scrutiny. Small business advocates warn that automatic underwriting has the potential to unfairly deny credit to protected groups or make those products more expensive.
During the hearing, witnesses testified on these issues and discussed steps Congress can take to protect entrepreneurs attempting to access capital online.
“Because we are a digital-first company, transparency has been critical to our success. I know today’s hearing is on fintech and transparency in small business lending. And while I’m not here to talk about our competitors, what I can tell you is that transparency is critical to our business,” said Sean Salas, Chief Executive Officer and Co-Founder at Camino Financial in Los Angeles, CA. “Whether it’s to our investors or borrowers, our credibility is based on our transparency with both costs and risks. We know our members shop around for the best deal, and by being transparent, our clients feel reassured they’re comfortable with the payment structure and making the right decision.”
“Better information is critical to enabling businesses to succeed over the long term, and in driving price competition. We believe it is vital that small businesses who are seeking financing have the information to fully understand the cost and terms of each offer, and to easily compare across products, so that they can make the best choice for their business and their financial circumstances,” said Joyce Klein, Senior Director of the Business Ownership Initiative at Aspen Institute. “Central to the ability to easily compare is disclosure of the annual percentage rate (APR), which is the only metric that allows borrowers to compare cost across various pricing approaches and terms.”
“The biggest issue in Fintech lending practices is the lack of transparency in the price of their products. As consumers, we are accustomed to seeing rates of 3.5% to 4.5%, APR. This commonly understood Annual Percentage Rate terminology is familiar- it makes sense,” said Diane Paterson, Regional Director at the Twin Cities Small Business Development Center in Minneapolis, MN. “Fintech borrowers READ rates ranging from 3.5%-4.5%, and assume they are APR. What they do not realize is that the Fintech rates are regularly calculated on a daily basis. This results in a lending relationship that subjects the borrower to an interest rate in the range of 58-63%. Simply put, Fintech’s lending practices are an issue, with this daily calculation the first of several fine print problems.”