Funneling PPP money to the smallest businesses: A fintech exec's plan

John Pitts, policy lead for the data aggregator Plaid, has been one of the vocal critics of the Paycheck Protection Program who have complained that too many of the loans in its first round — which ran out of funding late last week — were made to larger companies like Shake Shack and Ruth’s Chris Steak House instead of smaller businesses.

The Senate on Tuesday passed legislation that would provide $310 billion in additional PPP funding — including $60 billion available for loans made by banks with less than $50 billion of assets, half of which is designated for banks under $10 billion of assets. The House is expected to vote on the bill later this week.

Pitts in an interview this week before the Senate vote offered two ideas to ensure that as Congress pumps more money into the program, some of it is steered to the smallest businesses through fintech lenders.

There are a chorus of people criticizing the Paycheck Protection Program, which was meant to help small businesses but ended up making mostly large loans to bigger businesses. Do you think there might be some requirements or boundaries put around the size of the loans and who gets them?

JOHN PITTS: I have heard members of congressional offices talk about setting aside $100 billion for loans under $50,000, to address exactly this problem. However, as of today, I have not seen that in the final bill that apparently is under negotiation and may be voted on as soon as Tuesday by the Senate. There appears to be a set-aside for minority- and women-owned businesses.

In the first round, 4% of the loans resulted in 44.5% of the overall value of the loans.

So they were enormous.

The other thing that I saw was that the 26,000 largest loans accounted for $96 billion, which is 27% of the overall loan volume. And the average loan size for those 26,000 largest loans was over $2 million.

And 1099 filers, who are independent contractors, were permitted to participate five days before the money ran out, but the guidance was only put out on the last day funding was available. I have not seen any story of a 1099 filer successfully being able to apply for a loan under this program. The Uber drivers and gig-economy workers are looking for $10,000 or $15,000 loans. That's where you need someone who can handle a high volume of very small loans in order to be effective.

We ran a chart that shows 74% of loans made in the PPP were less than $150,000. Is there any merit to that?

There absolutely is. For fintechs like PayPal, all their loans are less than that. There have been all these stories about how companies like Potbelly and Shake Shack and Ruth’s Chris had the sophistication to apply for $20 million loans. They had good bank relationships, and they got their loans. I don't think this is the banks’ fault for the way they did this or the government's fault for the way the program was structured. I think the reality is, it was just a giant pool of money and given that there was more demand than there was actual funds to give out, by necessity, what you're going to see is the biggest and most sophisticated players who can qualify for the most are going to receive an outsize benefit over the scope of the program.

What do you think would be a good remedy?

We think Congress should set aside a portion of the loans to be capped at $50,000. That appears to be the threshold between when people have relatively easier access and when small businesses struggle to get someone to originate a loan for them.

Another recommendation we've made is the Federal Reserve facility should be up and available to nonbank lenders before this program reopens. The large banks have such a backlog of loan applications that the additional funds could be spoken for in 48 to 72 hours. There are some approved fintech lenders who are also holding applications to be ready for when the program restarts. The difference of even a couple of hours to have an equal access to this Fed facility may make a huge difference. If the fintech lenders don't have access to that Fed facility that banks have access to, they won't be able to recapitalize and originate to the same degree that banks will.

Does Plaid have any skin in this game?

No. Since we’re giving away the tool that we built that provides access to payroll data for free, if anything, we have negative skin in the game because we're technically not making any money and spending time on it. But we think it's important. Interest in our PPP product from banks has been equal to the interest from our existing fintech customers.

The only thing I care about is getting the money out as quickly as possible and making sure that the small, unsophisticated mom-and-pop operations don't miss out on this, because they're the ones who have the shortest runway and they’re the ones who have had the greatest impact in terms of the financial costs of coronavirus. I just want to make sure that they get taken care of here.

Do you think there’s a moral obligation on the part of the Treasury, the Small Business Administration and Congress to gate this so that larger businesses can’t get this money? And for argument's sake, why shouldn't bigger companies get this money?

I think it's really important to remember how this money is going to be used. It's largely meant to cover the payroll of people who would otherwise be furloughed or fired because their employer has gone out of business or has temporarily stopped functioning. So I don't see a moral difference between the employee of a Potbelly sandwich shop versus the local mom-and-pop deli from the perspective of the employee who should get paid. So I don't at all begrudge an employee of a midsize or large small business getting the benefits of this program. What I do think is the clear moral imperative is that employees who happen to work for a small business should not lose access simply because the money is going too quickly and larger players are better positioned to get access for their employees first.

This story was updated to reflect Senate passage of additional PPP funding late Tuesday.