Transforming Small Business Credit: Technology and Data Adoption in Mission-Based Lending
Working Paper
Report Summary
This report details the experiences of mission-based lenders such as community development financial institutions (CDFIs) and minority depository institutions (MDIs) as they adopt electronic bank account data and lending platforms to increase lending to minority-owned businesses and other underserved entrepreneurs. The paper provides both a practical snapshot of how lenders manage data and technology adoption today and a broader analysis of issues that will shape their ability to serve substantially larger numbers of entrepreneurs going forward.
The paper finds that mission-based lenders are using electronic feeds of bank account data and lending platforms to reduce paperwork burdens and cut processing times from months to days, helping to provide more entrepreneurs with alternatives to high-speed, high-cost online credit products that can trap small businesses in debt. Mission-based lenders are seeing significant inclusion and efficiency benefits as they use these tools. As lenders gain experience, they are considering further underwriting and technology changes to deepen credit access and substantially expand their programs.
To scale the sector’s impact on small business lending markets, the paper focuses on the importance of broader technology-adoption initiatives, customer acquisition, and increasing access to liquidity for mission-based lenders that are seeking to substantially expand their impact. The paper concludes with a discussion exploring mission-based lenders’ efforts to translate their “high-touch” ethos into “high-tech” channels and examining the evolving relationships with other lenders, funders, and technology partners.
FinRegLab expects to issue a final report in early 2025 that will include additional insights from pilot program implementation, other current initiatives, and stakeholder engagement.
Acknowledgments
This report is part of a broader research project to evaluate ways to improve credit access through the use of non-traditional data sources and mission-based lenders. We are working with Sabrina Howell of New York University and Emmanuel Yimfor of Columbia University on related empirical analyses.
Many of the insights in this report were derived from interviews with mission-based lenders, intermediaries, vendors, and other stakeholders in the financial services, technology, and civil society sectors. FinRegLab would like to thank stakeholders who participated in interviews and discussions, including members of our project Advisory Board.
We would also like to thank individuals who provided valuable feedback on this report. They include:
Lastly, we would like to acknowledge the FinRegLab team for their work in writing this report:
With Support From
This research initiative is funded by a grant from the U.S. Department of Commerce, Minority Business Development Agency, and support from Visa. In addition, Plaid is providing free account connectivity services to the pilot programs to allow loan applicants to authorize their account data to be accessed for underwriting.
Minority Business Development Agency
The mission of the Minority Business Development Agency is to promote the growth of minority business enterprises through the mobilization and advancement of public and private sector programs, policy, and research.
Visa Inc.
Visa (NYSE: V) is a world leader in digital payments, facilitating transactions between consumers, merchants, financial institutions and government entities across more than 200 countries and territories. Our mission is to connect the world through the most innovative, convenient, reliable and secure payments network, enabling individuals, businesses and economies to thrive. We believe that economies that include everyone everywhere, uplift everyone everywhere and see access as foundational to the future of money movement. Learn more at visa.com.
Plaid
Plaid is a global data network that powers the tools millions of people rely on to live a healthier financial life. Our ambition is to facilitate a more inclusive, competitive, and mutually beneficial financial system by simplifying payments, revolutionizing lending, and leading the fight against fraud. Plaid works with thousands of companies including fintechs like Venmo and SoFi, several of the Fortune 500, and many of the largest banks to empower people with more choice and control over how they manage their money. Headquartered in San Francisco, Plaid’s network spans over 12,000 institutions across the US, Canada, UK and Europe.
Events
Related Publications
-
From Crisis to Opportunity: Financing for Underserved Small Businesses Since COVID-19
This report delves into the evolving landscape of small business lending following the pandemic, identifying significant trends that are shaping the lending ecosystem. As the economy improves, lenders will face critical decisions about how to meet the capital needs of more small businesses, including record numbers of minority- and women-owned startups since 2020.
-
Technology Solutions for PPP and Beyond
This Research Brief catalogues uses of new data and technologies to make it easier for small businesses to access federal Paycheck Protection Program (PPP) funds and other forms of credit. Solving PPP enrollment challenges is important to laying the foundation for a rapid and inclusive recovery and to building a more resilient small business sector…
-
The Use Of Cash-Flow Data In Underwriting Credit: Small Business Spotlight
This report details the evolution of the use of cash-flow data in small business lending. It explains the reasons why electronic cash-flow data may be particularly useful in the small business context, presents evidence of its increasing use by a diverse range of incumbents and new entrants, and notes market and policy issues that may…