Mark Cuban’s alternative to PPP: Fed-backed overdraft protection

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WASHINGTON — It didn't take Congress very long to write another check to replenish the Paycheck Protection Program. But one notable small-business expert thinks the government's approach to helping firms reeling from coronavirus pandemic — providing them with forgivable bank loans — is inefficient.

Mark Cuban, the billionaire investor and entrepreneur, has pitched a new approach to government relief in response to the pandemic that would effectively eliminate the loan application process. He says seeking Small Business Administration loans through the PPP creates too much hassle in a full-blown economic crisis and forces businesses to know how much they need ahead of time.

A more efficient plan, Cuban says, would be a special overdraft protection program for small businesses. Instead of banks approving loans financed by the Federal Reserve through the PPP, Cuban proposes allowing businesses to run negative balances on their bank accounts to cover expenses and having the Fed make banks whole on a day-by-day basis.

“The way [Congress] went with PPP—it turned into a traditional banking application with all the concerns that banks are going to have about dealing with credit,” Cuban said on a recent episode of the "Banking with Interest" podcast, from Promontory Interfinancial Network. He was interviewed by Rob Blackwell, Promontory's chief content officer and the former editor-in-chief of American Banker.

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"The key to me was to make it as friction free as possible for small businesses," said Cuban. "Because timing is everything, getting that money to them so they can continue business as usual and retain as many employees as possible, if not all, was critical."

Cuban, who owns the Dallas Mavericks basketball team and is part of a White House advisory group on how to reopen the economy, has argued recently that two principal features of the PPP — that the relief stems from a limited pool of funds allocated by Congress, and that the relief must be distributed by banks after approving an application for a loan — will inevitably hamper economic recovery.

He says among the features of his proposal, overdraft protection for a firm's expenses could provide a more real-time data snapshot of what companies need in the crisis. Rather than having lenders approve individual applications for funds that run out in a matter of days, banks could work with the small-business customers they know, which would give financial institutions a sense of what to expect in terms of a firm's regular expenses.

“The things that you could spend money on — rent, utilities, basic overhead, and payroll and affiliated payroll costs — those things could be overdrafted,” Cuban said.

"The good thing about having a relationship with a bank, and the way banks work with money laundering and fraud and know-your-customer [rules], they get to look at what you've done historically in your statements and know what you've spent money on. And they get to check because they get to see every check that goes through on one level or another."

After the recent enactment of additional Paycheck Protection funding, the SBA lending effort has appropriated a total of $660 billion.

Cuban acknowledges the price tag for a Fed-backed small-business overdraft protection plan could be significantly higher, suggesting it could be in the trillions. "It would depend on when businesses are able to start coming back at any level," he said. He pointed out, however, that a signficant drawback with the PPP right now is "you have no data" on what companies are spending with their loan proceeds.

"There's nothing that instructs us how companies are using the money other than" the requirement to use 75% of proceeds on payroll, he said.

Cuban said many of the same parameters included in the PPP could apply to his idea. “Here’s your limit on terms of payroll, whether it’s 75% of something that’s adjusted, based off the individual business," he said. "Here’s your other expenses. And oh, by the way, we have your statement. So we can just go through and look to see what you are already spending money on.”

But some analysts say unlimited overdraft protection with federal backing isn’t necessary at this point in the crisis. “What Cuban is suggesting is the right direction and the wrong implementation,” said G. Michael Moebs, economist and CEO at the financial research outfit Moebs Services Inc. in Lake Forest, Ill.

Moebs agreed that changing overdraft policy could open up a new wellspring of relief, but he argued that bringing in the Fed to shore up bank losses isn’t the answer. Instead, if banks simply increased overdraft limits and reduced overdraft penalties, consumers and small businesses alike could effectively use overdrafts as a form of small-dollar lending.

“All that’s necessary is to use what credit we have in the system right now,” Moebs said. He estimates that banks and credit unions currently sit on $46 billion in credit via overdraft lines, and said that doubling limits and halving fees would cover cash-strapped customers.

Such an approach could also reduce regulatory burden, Moebs said, by freeing banks from having to scrutinize every overdraft transaction for suspicious activity. “To work, you have to keep the regulators out of this,” he said.

Yet Cuban said his own plan basically amounts to government relief for bank customers to spend what they need to retain employees and meet other recurring expenses, while avoiding the uncertainty of Congress needing to authorize new rounds of SBA funding for the Paycheck Protection Program.

“If we have to go through this process with banks every time—banks are already undermanned,” Cuban said. “They don't want to put themselves out and they’ve got capital concerns as is, particularly as these loan amounts build up.”