The Liberal Party government has blocked FinTech companies from distributing aid to businesses affected by the pandemic. In the age of cryptocurrencies and Robinhood, Ottawa clings to banks and relics such as cheques by mail.
PayPal, Wave, and the Canadian Lenders Association have offered support with several public loans for small and medium enterprises (SMEs), early-stage firms, and entrepreneurs coping with the lockdowns.
Federal officials have sided with the banking oligopoly and rejected all proposals, including one from FundThrough, a Toronto-based startup willing to advance funds to troubled businesses at no extra cost. Nevermind that plenty of SMEs do not qualify for traditional lending criteria with banks and credit unions. Nevermind that across the border, FintTechs are among the top lenders of the Paycheck Protection Program.
Ottawa is seemingly content with hoping that somehow, somewhere, the help will trickle down to those who need it before it is too late.
Small Businesses: the Heart of Canadian Economy
Despite the rebuff, FundThrough has pledged to waive $10 million of invoice-factoring fees. “We felt it was incumbent on us as a fintech focused on small businesses to step in, where the government has not, to directly help these struggling businesses,” said CEO Steven Uster.
The sense of urgency is prescient. Companies with fewer than 10 employees, which concentrate 73 percent of private-sector workers, have suffered the largest layoffs during the health crisis, according to a Statistics Canada survey. SMEs account for 41 percent of GDP and created over half of all new jobs from 2013 to 2018.
Not going the extra mile for them will have consequences. Even those SMEs not facing insolvencies have to deal with broken supply chains at home and abroad. Most firms with up to 19 workers told the survey that their first-quarter revenues in 2020 plummeted by more than 20 percent year-to-year.
Fintech Boon Goes to Waste
Since the 2008 global crisis, non-bank financial institutions (NBFIs) have made strides in personal and business loans, investment, money transfers, and more. Thanks to artificial intelligence and innovative underwriting practices, credit granting through NBFIs is swifter. The so-called shadow bankers, which include fintech firms, now manage $1.5 trillion in Canada.
“Fintech lenders have made capital more inclusive, timely, and affordable,” argues Gary Schwartz, president of the Canadian Lenders Association. They have opened up lending opportunities to 7 million unbanked Canadians.
Before COVID-19, only 15 percent of SMEs in fast-growing economies were able to access credit in the traditional financial sector. The pandemic is widening that gap, with tight regulations leaving banks little room to accommodate products for small customers.
SMEs have scant access to credit in Canada. The C. D. Howe Institute recently reported the nation lags behind OECD peers in the share of total business lending going to SMEs. Canada also has one of the highest interest rates for SMEs.
Financial-sector productivity is also lower, mainly due to red tape. Fintech firms are subject to virtually the same regulatory framework as banks in Canada, so their competitive advantage has been technology. Nevertheless, fintech companies are better positioned than a decade ago to help SMEs recover with tailored products and services, such as pre-approved credit lines and longer terms.
“By removing [fintech lenders],” Schwartz believes, “the federal government is isolating local entrepreneurs from realistic financing options and in the process is squandering the nation’s last decade of investment in fintech innovation.”
Digital and Remote: The New Normal
In the midst of the pandemic, it is no wonder 62 percent of Canadians are using less cash. Electronic payment methods are the default during social distancing. Not only the young are making the transition; PayPal reports its fastest-growing user base is people aged 50 or more.
As of October 2019, PwC has identified 86 fintech companies headquartered in Canada, nine of them lenders. According to a TransUnion study, roughly half of fintech borrowers are over 40, which dispels the myth that this industry caters mainly to the tech-savvy youth.
The United States, Australia, and the United Kingdom have acknowledged the role of fintech lenders in this emergency. Not only have sensible governments allowed them to lead the post-lockdown lending to small businesses and solopreneurs, they have also eased regulations to facilitate it.
More people than ever are willing to give financial alternatives a try. Banks might be the less risky option, but this crisis, which has upended economies overnight, calls for agility rather than certainty. Leaving the quickest players out of the race is to leave SMEs behind.
Paz Gomez is a research associate with the Frontier Centre for Public Policy.