This is a reprint of an article and podcast originally published in Business Reporter. March 13, 2023.
By necessity, policymakers in Washington, D.C., have spent much of the past two years focused on resolving short-term crises. The unprecedented scale of the economic impact of COVID-19 has prompted the government to quickly enact stimulus programs and loan facilities to mitigate the financial impact of the pandemic, especially for the small business community, a sector of the U.S. economy that employs more Americans than any other. This is why such a narrow lens was needed.
Now that the worst of the pandemic is behind us, Washington can start thinking long-term about how to significantly and efficiently improve access to affordable credit for small businesses. The first step in the right direction is implementing open banking.
At the height of the pandemic, millions of small business owners, especially in rural and minority communities, had to rely on emergency loan programs. These programs certainly had their problems, but they demonstrated how important open banking is to the U.S. economy.
The most notable example is the Paycheck Protection Program (PPP). Deployed across the lending infrastructure of thousands of banks and private and private lenders in collaboration with the U.S. Treasury, IRS, and Small Business Administration (SBA), the PPP experiment successfully combines the best capabilities of the private and public sectors and creates a digital, customer-powerful underwriting environment. Consider how the federal government can leverage its PPP experience and begin the transition to an open banking system that gives small business owners full control over their financial data held in a variety of places, including their banks, the IRS, and credit card companies. – To get cheap credit.
One of the biggest challenges to scaling and automating affordable small business acquisitions today is the difficulty of collecting standardized financial information from loan applicants that can feed into credit decision models. Unfortunately, there is currently no quick or secure way for lenders to universally verify the information provided by small business credit applicants.
Although the IRS has important data that can help resolve this issue, small business loan applicants often have to submit paper copies of tax-related documents to their lenders and then wait several days for the lenders to receive confirmation from the IRS. A time-consuming and labor-intensive process – if the documents are verified at all. This problem would be addressed by allowing small business lenders, with the consent of small business loan applicants, to easily access taxpayer data in machine-readable formats stored in sources controlled by the federal government.
Fortunately, the CFPB has issued rules to implement Section 1033 of the Dodd-Frank Act, which gives consumers and small businesses the right to access their financial data electronically and share this information with third-party financial providers. I’m making an offer. their choice. By breaking down the barriers that currently prevent small businesses from sharing financial data believed to increase their chances of loan approval, the CFPB could unleash a wave of cheap credit availability on the market, especially as federal economic support dwindles.