How are "new" tech lenders impacting access to credit for small businesses?

In a session on their paper, Boston Fed senior economists Wang and Landoni discussed how small businesses who had existing relationships with banks were able to access Paycheck Protection Program, or PPP, loans more quickly during the COVID-19 pandemic.

Wang said fintech companies and merchant cash advance lenders - many of which provide immediate loans with high interest rates - became important lenders, especially in underserved counties, after banks generally reduced their lending from 2007 - 2019 following the global financial crisis.

But both banks and these newer credit sources scaled back on lending during the height of the pandemic in 2020 - 2021, Wang said. Then, when businesses looked to secure emergency loans through the Paycheck Protection Program, small businesses who had existing relationships with banks not subject to stress testing got loans earlier than those who used fintech companies, Landoni and Wang found.

A longer wait for credit can hurt small businesses depending on loans to pay employees, so technological advancement in lending needs to be better understood and government programs may need to better take new lenders into account, Wang said.

Keynote: What are the benefits and challenges of using AI to assess credit risks?

The conference's keynote address was delivered by Adair Morse, a professor of finance at the University of California, Berkeley's Haas School of Business.

In her presentation, "AI Innovation for Credit: Frontiers of Benefits & Red Flags," Morse said lenders can use AI to maximize profitability in several ways, including targeted marketing, authenticating data, and creating more efficient "underwriting" models, which financial institutions use to assess credit risks.

But Morse said the use of AI in credit also poses several "red flags," such as the potential for deception, price collusion, and discrimination. She said that if AI technologies are used to gather and analyze detailed data about a particular community, they could essentially become "local lenders," replacing community banks. That could create problems for small businesses, which account for roughly half of all private employment in the U.S., she said.

Morse said small businesses often depend on long-term relationships with local banks to access loans, especially during economic downturns. Will AI lenders support a community's small business needs, she asked, or will they prioritize profits?

"We've got to think holistically about AI," she said. "We've got some red flags, and we should pay attention to those red flags … so that we can move safely into this next era."

Learn more about the conference participants, read the papers, and watch the presentations on bostonfed.org.

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