Small firm lending

Big Tech, Fintech, and the Future of Credit

Lenders want to know that borrowers will pay them back. That means assessing creditworthiness before making a loan and then monitoring borrowers to ensure timely payment in full. Lenders have three principal tools for raising the likelihood of that firms will repay. First, they look for borrowers with a sufficiently large personal stake in their enterprise. Second, they look for firms with collateral that lenders can seize in the event of a default. Third, they obtain information on the firm’s current balance sheet, its historical revenue and profits, experience with past loans, and the like.

Unfortunately, this conventional approach to overcoming the challenges of asymmetric information is less effective for new firms that have both very short credit histories and very little in the way of physical collateral. As a result, these potential borrowers have trouble obtaining funds through standard channels. This is one reason that governments subsidize small business lending, and why entrepreneurs are forced to pledge their homes as collateral.

Well, new solutions have emerged to overcome this old problem. In this post we discuss how technology is increasing small firms’ access to credit. By using massive amounts of data to improve credit assessments, as well as real-time information and platform advantages to enforce repayment terms, technology companies appear to be doing what traditional lenders have not: making loans to millions of small businesses at attractive rates and experiencing remarkably low default rates.

The biggest advances are in places where financial systems are not meeting social needs….

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The Treasury's Missed Opportunity

Last week, the U.S. Treasury published the first of four reports designed to implement the seven core principles for regulating the U.S. financial system announced in President Trump’s Executive Order 13772 (February 3, 2017).

Seven years after the passage of Dodd-Frank, it’s entirely appropriate to take stock of the changes it wrought, whether they have been effective, and whether in certain cases they went too far or in others not far enough. President Trump’s stated principles provide an attractive basis for making the financial system both more cost-effective and safer. And much of the Treasury report focuses on welcome proposals to reduce the unwarranted compliance burden imposed by a range of regulations and supervisory actions on small and medium-sized depositories that—if adequately capitalized—pose no threat to the financial system. We hope these will be viewed universally as “motherhood and apple pie.”

Unfortunately, at least when considering the largest banks, our conclusion is that adopting the Treasury’s recommendations would sacrifice resilience to achieve cost reductions, yet with little prospect for boosting economic growth. Put simply, implementation of the Treasury plan would reduce regulation of the most systemic intermediaries, and in so doing, unacceptably reduce the resilience of the U.S. financial system....

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