Bank for International Settlements Publishes Fed Study Findings on Impact of Fintech Lending on Credit Access for US Small Businesses
Research finds that fintech platforms for small businesses have the potential to create a more inclusive financial system
DENVER – October 3, 2022 – The Bank for International Settlements (BIS) and the Federal Reserve Bank of Philadelphia recently released research that analyzed proprietary loan-level data from Funding circle, the leading online platform for small business loans and other small business fintech data. The data showed that small business lending (SBL) fintech platforms are using alternative data to improve credit scoring and increase access to capital at a lower cost for borrowers who are less likely to receive credit from traditional banks.
The study found that compared to traditional banks, fintech SBL platforms lent more often in zip codes with higher unemployment and higher corporate bankruptcy filings. Using internal credit scores allowed Funding Circle to lend to many business owners who would not have had access to bank loans because of their FICO scores, improving small business owners’ access to capital and offering greater financial inclusion.
During the pandemic, the banks prioritized processing existing business customers’ OPS loan applications, so that smaller businesses were at risk of bankruptcy. Fintech SBL platforms stepped up to fill this credit gap by pursuing a peer-to-peer lending strategy and by partnering with community banks to reach new customers. These partnerships allowed smaller banks to come together to create a larger share of PPP loans, accelerating loans to small businesses that did not have existing relationships with banks at the start of the pandemic.
“Small businesses continue to face post-Covid challenges, financial uncertainty and inadequate access to credit,” said Angus Sanders, Chief Revenue Officer and Vice President of Product at Funding Circle US. “The results of this study reinforce how critical small business fintech lending platforms are to the current and future health of the nation’s small businesses. Funding Circle is proud to support and expand access to capital for small businesses across the country.”
The results of the study also found that internal credit scores used by fintech SBL platforms, and more specifically the risk assessments assigned to loans by Funding Circle, were able to predict future loan performance more accurately than the conventional method of credit scoring, leading to better loan performance. In addition, the study results confirmed that the information used by Funding Circle to risk rate loans is superior to that of risk measures from FICO or VantageScore.
Overall, the findings from this study underscore the integral role fintech SBL platforms play in supporting small businesses and creating a more inclusive financial environment. Today, the role of fintech SBL lenders is more important than ever as small businesses seek support to navigate inflation, rising interest rates and volatile markets.
As the report notes, “we have demonstrated the potential of what fintech platforms and their use of alternative data can do to move us towards a more inclusive financial system. As collaboration and partnerships grow between traditional banks and fintech firms, they will become more efficient in using borrower data using today’s technology and likely work together to improve financial inclusion and overall financial performance.”
For more information and to learn more about Funding Circle’s solutions, visit www.fundingcircle.com/us.
About Funding Circle
Funding circle (LSE: FCH) is the leading online lending platform for small and medium-sized enterprises (“SMEs”). Since its launch in 2010, investors and lenders – including banks, community development financial institutions, special finance companies, asset management companies, insurance companies, government-backed entities and funds – have invested approximately $19 billion into over approx. 130,000 businesses globally.
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