Three weeks ago, the Bipartisan Policy Center (BPC) hosted a discussion about small business. One of the participants was Javier Saade, who served as Associate Administrator, Chief of Investment and Innovation at the Small Business Administration (SBA) under President Obama. Saade boasts a long and varied resume that includes experience as an entrepreneur, investor, operating executive, and strategic advisor. In addition to sitting on several boards, he is a partner at Fenway Summer, a fintech-focused VC firm.
During the BPC discussion, Saade made several interesting observations especially about the promising role technology could—and should—play in responding to the COVID-19 crisis, upgrading our financial system, and reforming future policy.
I had the chance to catch up Saade to dig a bit deeper into his thoughts on the crisis, the financial system and small businesses, the role of technology, and the impact on underserved communities.
Q: Let’s start with the macro view. We’re in uncharted waters, with upheaval across the economy. With the multiple perspectives you bring to this, what do you see?
- Saade: COVID-19 is not yet contained and that is mostly due to biology. It would be an understatement to say that there has been a patchwork of policy and guidance at the federal level. This has led to a lackluster national response to the health crisis specifically. On the economic side close to 30 million people have filed for jobless claims, GDP is expected to contract at least 10%, and the combined federal intervention is in the $7 trillion range. The lack of clarity about what’s next has all of us on edge.
Q: Capital is the fuel that powers the economy—access to it is critical for growth. What are your thoughts on capital access today and in the future?
- Money is a medium of exchange and store of value—but it’s based entirely on trust. There is a mind-blowing volume of it flowing through the economy. American banks hold about $16 trillion in assets; our national debt registers above $24 trillion. Real estate, derivatives, GDP—the numbers just get harder to comprehend. The problem is that the piping that carries these massive trust-based flows is creaky, clogged, and inefficient. The last few months have magnified friction points, which especially hurt small businesses.
Q: Let’s talk about those small businesses: what are you seeing?
- Small businesses are an enormous force in the economy, accounting for 99% of companies and nearly half of private-sector employment. Young small businesses create the lion’s share of net new jobs. But most small businesses don’t have the cash cushion to weather COVID-19’s ravages. At the smallest end of the spectrum, many don’t use credit at all. This has kept many from availing themselves of emergency loans.
Q: How does the federal policy response, which has been as unprecedented as the crisis, compare to the financial crisis?
- The government is rightfully putting its shoulder behind massive efforts to stem damage to the economy. The Federal Reserve, Treasury, and SBA are deploying—and creating from scratch—a Swiss-army knife variety of tools. There are, however, consequences to the scale and scope of response because the mode of distribution involves those creaky pipes I mentioned. The pipes of the financial system did their job in 2008 and 2009, even amidst political blowback and resentment from Main Street.
Q: How has the 2008 crisis influenced today’s?
- After every crisis of the last several decades, we’ve come out with new and transformed institutions. The Great Depression led to Social Security and other programs; September 11th led to a strengthened infrastructure to combat terrorism; the financial crisis gave us Dodd-Frank, which helped put banks in a stronger position today. Those were silver linings. One of the things I’m looking for now is what the silver lining will be for Main Street. So far, I’m not sure.
Q: You’ve mentioned “creaky pipes” a couple of times now. During the BPC panel, you talked about the promise of fintech for improving those pipes. Can you elaborate?
- The solutions being deployed today are structurally mismatched with current needs. Witness the banking sector’s struggles to push capital to Main Street, especially the businesses that need it most. There are understandable reasons for this, but it puts into focus the need for all stakeholders to play a role. One of those stakeholders is fintech companies, which have the potential to usher in long-needed upgrades to our financial system for consumers and small businesses.
Q: Such as?
- As we’ve seen recently, the most vulnerable businesses are the smallest who need the least amount of cash but need it the fastest. Our financial system is not built to quickly deliver small amounts of capital to tens of millions of people and businesses. Fintech has a real advantage: many are encouraged that Washington opened the door for fintech companies to participate in the current process. Looking out, that hopefully means greater integration into the financial system.
Q: What are some of the other dimensions of small business vulnerability in the financial system?
- The millions of small businesses owned by minorities are in a tough spot. Look, the capital formation process for small businesses is inefficient and clunky in general. That’s part of what makes the pandemic and shutdowns so daunting. The shock is highlighting disparities that have calcified over decades. The digital divide, lack of access to financial services, microscopic levels of wealth accumulation in communities of color, implicit and explicit bias—these are just a few of the disparities.
Q: Where does fintech come into this?
- Financial technology, fintech, is no longer an experiment. It’s a “mature” startup subsector, with $200 billion invested since 2008. It’s become ubiquitous and used by hundreds of millions every day. The majority of Main Street businesses—and many of those owned by minorities—have less access to capital because of lower wealth and fewer risk-taking resources. This asymmetrically hampers their ability to scale. An archaic set of piping and wiring renders us with a clunky apparatus when what we need is as efficient a conduit as possible. To illustrate this clunky apparatus, let’s look at the life of a PPP loan: 1) A small business applies for a bank loan, then the bank 2) underwrites the loan, 3) gets a loan guarantee from the SBA, 4) funds the loan, 5) sells the loan back in a secondary market, and 6) if the loan meets forgiveness criteria, the guarantee is exercised. Fintech would be able to introduce speed and improvements at every step.
Q: What do you propose? I’ve heard you talk about the use of technology in fraud prevention, know-your-customer compliance, underwriting, etc. Where do you think we’ll be post-crisis in terms of fintech, traditional banks, and small and young companies?
- Fintech offers solutions for capital to flow much more smoothly, especially to the smallest businesses with the most acute needs. Paradoxically, speeding things up with technology could help stem potential fraud and abuse. It’s easy to falsify a signature; it’s very hard to falsify a fingerprint. The same goes for a digital footprint that allows for a clear look at payment data, potentially a good predictor of creditworthiness.
- My sense is that the convergence of traditional and regulated financial services companies with those that operate digitally has been further catalyzed by this crisis. The fintech sector is jumping on the opportunity to efficiently deliver capital to our citizens and small businesses, especially the most vulnerable ones. Many are partnering with banks.
- Demographic trends, online channel growth acceleration and efficiency, increasing digital trust, cloud computing power increasing while costs decreasing—all lead you to believe there is a better way. Big data availability, ubiquity, and usability are much more robust. Combine all this with smartphone penetration and predictive analytics and one can start to see the issues with the legacy system inflexibility of vertically integrated banks. Their traditional branch footprint is a drag on returns while clients demand 24/7 service in all facets of life—now more than ever evident in financial services. Those are just some markers about the potential opportunities here.
- Our country needs Main Street—and Main Street needs a 21st century financial system that works for them. Banks, fintech, CDFIs, insurance companies, payment companies, data companies, and tech platforms all have a role to play here.
Q: In a recent blog post, you talked about CDFIs and fintech being somewhat lumped together but also being underleveraged. What are your thoughts there for helping the businesses that need it the most?
- Structural deficiencies are being magnified by the crisis. Take the Latino community. Before the crisis, Latinos were the fastest-growing population of new business owners. You look at the demographics: by 2050, Latinos will be a third of the country’s population. Yet only about 4% of Latino-owned businesses generate more than $1 million in revenues. Almost two-thirds of Latino-owned businesses don’t apply for financing or seek credit, so they’re structurally under-financed. This reflects underlying dynamics: median income and net worth of Latino households are far below that of the average household. These are the reasons we’re hearing so much about this challenge—and a good example of where more fintech can expand access.
For a longer discussion of the crisis and its effect on business owners of color, see the summary takeaways from another recent BPC event.