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‘PPP may end up being the straw that breaks the camel’s back’: Small businesses increasingly turn to smaller banks and fintechs during the pandemic

  • SMBs are finding larger banks busy servicing larger clients rather than their applications for government aid.
  • Smaller banks and fintechs are attracting new customers with technology and a stronger orientation toward service.

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‘PPP may end up being the straw that breaks the camel’s back’: Small businesses increasingly turn to smaller banks and fintechs during the pandemic

When the U.S. government approved a $350 billion aid package in April to help small businesses weather the coronavirus pandemic, Happy State Bank in Texas immediately rolled out a digital platform for distributing the special loans. The platform, designed and executed by Lightico, allows business-owners to complete the entire application process online, eliminating the need for face-to-face interaction or leaving home.

Happy State is just one of many regional banks and fintechs that are stepping up — and teaming up — to help small-and-medium businesses apply for the government assistance, known as the Paycheck Protection Program, which lends money to businesses to enable them to keep their employees on payroll during the pandemic. These smaller banks and fintechs see this as a chance to prove themselves, and show how they can serve small businesses more effectively than bigger banks, said Ron Shevlin, director of research at Cornerstone Advisors. A recent Barrons report found that 89% of the Paycheck Protection Program loans have come through U.S. banks that are not among the top 25, as measured by asset-worth.

“This is definitely an opportunity for smaller banks and fintechs,” Shevlin said. While it’s too early to tell if small banks and fintechs are actually gaining more long-term customers, their push to do so comes as small and medium businesses, of which about 80% rely on megabanks, seem eager for new banking options. In a recent Cornerstone survey, about 60% of small businesses with employees said they were very likely to seek a new bank.  

When it comes to the Paycheck Protection Program, small businesses, typically applying for smaller loan amounts, have complained that big banks have been favoring the loan applications of larger businesses applying for bigger dollar amounts, and in April filed a class-action lawsuit against banking giants like Bank of America, JPMorgan Chase and Wells Fargo. Some small businesses have also said that banks were only processing the applications from those who had previous loans and an established credit history, and looked on with frustration as big publicly-traded companies received the loans


“The Paycheck Protection Program may end up being the straw that breaks the camel’s back,” when it comes to small businesses relying on big banks, Shevlin said.

The PPP administration policy has also given small banks and fintechs a boost. During the second round of loan funding, in May, the U.S. Small Business Administration,  which processes the applications, set aside a time window for loan requests made through small banks, and earmarked $30 billion of $310 billion to be granted through financial institutions with less than $1 billion in assets.  

In another pivot from the traditional reliance on big banks, the government also said it would grant some of the loan money through fintechs like Paypal and Square. Those fintechs have touted their all-digital application processes and history of working with small businesses to draw in small business owners affected by the COVID-19 related economic downturn.  

Kabbage, which specializes in online small business loans, is the fourth-largest granter of PPP loans volume-wise, although most of their loans are small. The company said that because its process is fully-automated, it does not lose money or resources granting relatively tiny loans to small businesses, many of whom said they were rejected when applying for the same amount from bigger banks.  

“This is a gap we have always filled,” said Kabbage co-founder and president Kathryn Petralia, saying the company’s average PPP loan is $14,000. “But now we are seeing huge demand, not only from our customers, but from new customers as well.” 

Small business loan marketplace Lendio, which uses an automated process to match potential borrowers with banks and credit unions, said that so far it has facilitated more than $8 billion in PPP loans, with an average loan of $80,000.

“Many (customers) noted that their banks were either unable or unwilling to help them submit a PPP loan application,” said Lendio co-founder and CEO Brock Blake. “But as a marketplace, Lendio can funnel a business owner’s application to the right lender for their situation. Some lenders are specialized for certain industries, business types, and loan amounts, and we help match borrowers with the right loan provider for their needs.”

Lendio has relationships with more than 300 banks making PPP loans, showing how fintechs are working with existing financial institutions to develop digital solutions.

The pandemic, resulting in shelter-in-place orders and and social-distancing globally, has significantly increased demand for online banking and payment options.  In fact, Paypal recorded its largest transaction day of the past year on May 1, with the total dollar amount sent over the platform surpassing that of Black Friday, traditionally the busiest day.

“The coronavirus pandemic has led to a tremendous shift from physical to digital activity,” said Joseph Gallo, senior communications manager at Paypal.

Lightico, which built Happy State’s PPP application platform, said it has seen an uptick in demand from banks of all sizes for fully-digital solutions to processes like loan applications so customers do not have to visit a bank, post-office or make phone calls. “For many banks, being able to bridge the gap of certain critical customer-facing interactions meant keeping customers during a difficult time,” Lightico CEO Zviki Ben Ishay said.

Looking to the next step, now fintechs and banks are also working together to create tools to help business owners access the loan-forgiveness part of the program. On May 31, entrepreneur Mark Cuban and Jill Castilla, president of Citizens Bank in Edmond, Oklahoma, launched, a free site where PPP borrowers can submit loan-forgiveness applications.

“It really shows the changing nature of the fintech-bank relationship, from adversarial to complementary,” Shevlin said.

1 comments on “‘PPP may end up being the straw that breaks the camel’s back’: Small businesses increasingly turn to smaller banks and fintechs during the pandemic”

  • The big banks failed America’s small businesses. Community banks have been there for small business owners during COVID-19, and long before. The benefits that they bring to communities around the country are only heightened during times of crisis. The next challenge for community banks is to foster these new relationships and make it easy for SMBs to migrate more of their business digitally. This is a huge opportunity to truly gain back market share that shouldn’t go to waste.

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