When the coronavirus pandemic stalled much of the nation’s economic activity, employees at TruFund Financial Services worked feverishly to get emergency Paycheck Protection Program loans to cash-strapped small businesses in New York, Texas, Alabama and Louisiana.
But the community development financial institution did not have the technology platform to support PPP lending. So each application had to be handled manually, from start to finish.
“The staff was working a herculean effort to get those small-business loans processed,” TruFund President and CEO James Bason said. “We had loan officers, underwriters, credit people, people from other markets, even some non loan officers helping us close the loans. We got it done, but the realization was that we needed to embrace technology in order to do this.”
When it comes to digital capabilities, CDFIs like TruFund — which are funded by the Treasury Department, private-sector entities and religious institutions — historically lag behind traditional banks and credit unions because the cost to implement such systems can be burdensome as organizations prioritize capital-raising, staffing and equipment.
But the combination of the COVID-19-induced recession, which crushed many small businesses, and civil unrest that has reinforced the nation’s racial wealth gap is now driving CDFIs to digitize banking services to increase efficiency and help more minority and underbanked communities.
Dan Letendre, CDFI executive at Bank of America, said CDFIs are “absolutely” thinking about technology differently than they did last year. BofA, which has a portfolio of $1.6 billion in loans to 254 CDFIs across the country, pledged $50 million to CDFI banks and minority depository institutions as part of its $1 billion commitment to address social and economic inequalities and this fall announced the completion of equity investments in 10 of these entities.
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“First, the volume is fundamentally different. The amount of people they’re trying to serve … is many times larger than what they were working with before, and the only way to ramp up volume efficiently is to add technology,” Letendre said.“And second, most of the loans now are being done virtually because you have to. So you have to have a technology front or entry point to be able to collect that information and deal with borrowers on a virtual basis.”
The technology upgrades at CDFIs — a collection of more than 1,100 private banks, credit unions, loan funds and venture capital funds whose mission is to serve underbanked communities — come as calls for financial inclusion and economic justice grow louder.
Subsequently, CDFIs are feeling pressure to get as much money into their communities as possible. In the District of Columbia, the Washington Area Community Investment Fund, known as Wacif, is exploring ways to bring its lending services onto one platform. Next spring, First Independence Bank in Detroit expects to go live with a streamlined digital experience for customers and upgrade its legacy core system. And next month, TruFund — which wound up processing a total of 491 PPP loans over the course of four months — will go live with a new credit processing system that reduces manual work by digitizing certain parts of the loan-approval process including credit and financial analysis and loan-closing document work.
The “sheer volume” of loan inquiries in the COVID-19 environment and the anticipation of a third round of PPP lending in coming months “made it crystal clear to us that in order to effectively provide services and deploy capital, we needed a technology solution,” said Bason, whose organization has closed about $25 million in emergency-response loans since the start of the pandemic. In a typical year, TruFund’s lending total for all programs including emergency-response loans ranges between $11 million and $12 million, he said.
It will be getting some financial help soon. On Thursday the Citi Foundation, Citigroup's philanthropic arm, announced that TruFund is one of 30 CDFIs selected by the foundation to receive $500,000 apiece in unrestricted funding. The $15 million fund comes from processing fees that Citi collected from PPP loans it made.
Donna Gambrell, chair of the African American Alliance of CDFI CEOs and a former director of the Treasury’s CDFI Fund, has for years advocated for state-of-the-art technology for CDFIs. The pandemic, recession and civil unrest created “a perfect storm” that laid bare inequities not only in different communities, but also among organizations supporting those communities, she said.
“I had CDFIs literally processing PPP applications one by one and by hand putting them into the system,” said Gambrell, who since May 2017 has served as president and CEO of Appalachian Community Capital, a 7-year-old CDFI that raises funds for 23 member CDFIs in a dozen states including West Virginia and parts of Pennsylvania, Kentucky, North Carolina and Alabama. “You know by doing that you won’t be able to do the number of loans you want to do … and because of that you end up having lots of small-business owners, particularly Black and brown owners, that simply fall out of the loop.”
According to a report by Robert Fairlie, an economist at the University of California, Santa Cruz, the number of Black-owned small businesses declined 41% between February and April, more than any other racial or ethnic group during that time period, while the number of Latino-owned small businesses declined 32%, nearly twice the rate of decline of white-owned businesses.
To assist CDFIs with their mission, technology vendors such as Finastra are stepping in to help. In response to the crushing demand for the first round of PPP funding, the London-based fintech company said it helped 575 smaller regional banks and CDFIs automate their loan -processing capabilities to get PPP funding into their communities. It did the same thing for the second round of PPP money, bringing on even more CDFIs and minority-owned banks.
Chris Zingo, general manager of Finastra’s Americas field operations, said the company, in partnership with Microsoft, is committed to bringing low-cost technology solutions to CDFIs in order to improve customer onboarding and support digital transactions such as loan execution.
“It really became apparent that we had an opportunity to enable the democracy of all institutions through PPP,” Zingo said. “We had to support the high volume of applications.”
One of the CDFIs getting help from Finastra is First Independence, a Black-owned bank that operates three branches. Chairman and CEO Kenneth Kelly said the bank, which serves low-income areas in metro Detroit, was already deep into planning a technology overhaul when the pandemic struck. Building on an existing relationship with Finastra, First Independence turned to the company for help processing PPP loans and ultimately signed on with them.
Kelly hopes the upgrades will help First Independence reach more customers, particularly those who live in so-called banking deserts and may have more access to costly alternative lenders than traditional bank services. Doing so, he said, will bring more people into the banking system and
“Having this digital platform allows us to synthetically reach a broader base of customers,” Kelly said. “Someone who doesn’t have a bank branch in the neighborhood can bank with us using a cellphone.”
Unlike First Independence, Wacif could not process any PPP loans because it was not a designated lender for the Small Business Administration, which managed PPP funding.
But Wacif — which provides financing to small businesses, primarily ones that are woman- and minority-owned, in greater D.C. — still wants to make technology improvements, in part to get ready for the loan demand that CEO Harold Pettigrew Jr. anticipates when the economy fully reopens after the pandemic is over.
“I think we’re going to see not only pent-up demand, but people getting out more, spending more, local economies opening up again, and businesses are going to need working capital to provide services,” Pettigrew said. “So we’re preparing for that increase not only by raising investments to meet the demand, but also through the systems and processes underpinning our ability to deploy that capital.”
Wacif hasn’t yet decided on a vendor and Pettigrew declined to discuss costs, except to say the organization is prepared to invest “whatever [it] needs” to bring in the right technology solutions.
Gambrell acknowledged the cost factor as a challenge in rolling out new technology to more CDFIs. She said organizations have to be ready for the initial expense as well as the cost of staying up to date.
“This is a major effort,” she said. “We’re talking about revamping an industry.”
