Please rotate your device to landscape mode to view the charts.

Can FinTech Reduce Disparities in Access to Finance? Evidence from the Paycheck Protection Program

Journal: Journal of Financial Economics

Date: 20221001

Author: Erel, Isil; Liebersohn, Jack

Abstract:
New technology promises to expand the supply of financial services to small businesses poorly served by banks. Does it succeed? We study the response of FinTech to financial services demand created by the introduction of the Paycheck Protection Program. FinTech is disproportionately used in ZIP codes with fewer bank branches, lower incomes, and more minority households, and in industries with fewer banking relationships. It is also greater in counties where the economic effects of the COVID-19 pandemic were more severe. Substitution between FinTech and banks is economically small, implying that FinTech mostly expands, rather than redistributes, the supply of financial services.

Link: Google Scholar

Background and Context

The COVID-19 Crisis & PPP Program

In response to the COVID-19 pandemic, the U.S. government created the Paycheck Protection Program (PPP) offering $669 billion in potentially-forgivable loans to support small businesses.

FinTech Participation

The Small Business Administration (SBA) made the unprecedented decision to approve non-traditional FinTech lenders to distribute PPP funds alongside traditional banks.

Research Methodology

The study analyzes detailed loan-level PPP data, comparing lending patterns between traditional banks and FinTech lenders across different geographic areas and borrower characteristics.

FinTech PPP Lending Growth During Program Phases

  • Shows dramatic increase in FinTech lending share from Phase 1 to Phase 3
  • Traditional banks dominated early lending but FinTech share grew significantly
  • Demonstrates FinTech's expanding role in government loan programs

Higher FinTech Lending in Areas with Fewer Bank Branches

  • Shows inverse relationship between bank branches and FinTech lending
  • ZIP codes with fewer branches saw significantly more FinTech lending
  • Demonstrates FinTech's role in serving underbanked areas

FinTech Lending to Underserved Demographics

  • Shows higher FinTech lending in areas with lower incomes and higher minority populations
  • Demonstrates FinTech's role in expanding financial inclusion
  • Highlights demographic patterns in PPP loan access

Small Business Focus of FinTech Lenders

  • Shows FinTech focus on smaller loan amounts compared to traditional banks
  • Demonstrates FinTech's role in serving smaller businesses
  • Highlights differences in lending patterns between lender types

COVID Impact Response by Lender Type

  • Shows stronger FinTech lending response in areas with higher COVID impact
  • Demonstrates FinTech's greater responsiveness to economic shock
  • Highlights differences in crisis response between lender types

Contribution and Implications

  • FinTech lenders expanded access to PPP loans in underserved areas and demographics rather than just redistributing existing access
  • Results suggest FinTech participation could improve efficiency of government loan programs even in non-crisis periods
  • Findings have important implications for financial inclusion and the future role of FinTech in government programs

Data Sources

  • Phase lending data from Table A.1 showing PPP lending by phase and lender type
  • Branch density analysis from Table 3 showing relationship between bank branches and FinTech lending
  • Demographic patterns from Tables 3 and 4 showing ZIP code level statistics
  • Loan size comparison from Table 1 Panel B loan-level statistics
  • COVID response data from Table 2 showing geographic correlates of PPP provision