Fintech, small and medium-sized enterprises and the response to the Covid-19 crisis. Challenges, opportunities and proposals for action

Karen Mills and Mercedes Delgado

The Rafael del Pino Foundation organised, on 16 April 2020 at 18.30, the live dialogue through entitled "Fintech, small and medium-sized enterprises and the response to the Covid-19 crisis. Challenges, opportunities and proposals for action" in which Karen Mills and Mercedes Delgado participated.

Karen Mills a Senior Fellow at Harvard Business School, worked until the arrival of President Trump in the White House executive team, known as the Cabinet of the United States. She was nominated by President Barack Obama to lead the U.S. Small Business Administration and was unanimously confirmed by the U.S. Senate. She is Chair of MMP Group, Vice Chair of Envoy, Chair of the Private Capital Research Institute's Advisory Committee, Co-Chair of the Bipartisan Policy Center's Main Street Finance Task Force and a member of the U.S. Securities and Exchange Commission's Small Business Capital Formation Advisory Committee, as well as the Milken Institute's Fintech Advisory Committee. He is also a member of the Board of Directors of the National Bureau of Economic Research and the Harvard Corporation. Karen G. Mills is an expert on competitiveness, entrepreneurship and innovation and an undisputed authority on the role of small and medium-sized enterprises in today's economy, a knowledge that she has poured into a number of publications, including her latest book "Fintech, Small Business & the American Dream. How Technology Is Transforming Lending and Shaping a New Era of Small Business Opportunity".

Mercedes Delgado is Associate Professor of Strategy and Innovation at the Copenhagen Business School and Research Scientist at the MIT Innovation Initiative. In 2007 she completed a postdoctoral fellowship in strategy and competitiveness at Harvard Business School. She began her career as an assistant professor at Temple University. She then worked at MIT Sloan School of Management as an associate at Harvard Business School, where she continues to work. She was also Director of Research and Innovation Scientist at the MIT inovation initiative lab.


On 16 April 2019, the Rafael del Pino Foundation organised the online dialogue on "Fintech, small and medium-sized enterprises and the response to the Covid-19 crisis. Challenges, opportunities and proposals for action". Karen G. Mills, Senior Fellow at Harvard Business School and Head of Small and Medium Enterprise and Entrepreneurship in the Cabinet of President Barack Obama, participated in the dialogue, together with Mercedes Delgado, Associate Professor of Strategy and Innovation at Copenhagen Business School and Research Scientist at the MIT Innovation Initiative, who led the dialogue. Karen Mills noted that she had never seen times as difficult as these for small and medium-sized businesses. Because of the health crisis around us, many companies have had to close down. We know that SMEs account for 50%, 70%, even 80% of employment in different countries around the world. As a consequence, there have been redundancies in order to survive this situation. SMEs have few economic buffers. In the United States, most of them have less money in their coffers than they need to meet a month's expenses. Spain has been facing the crisis longer than the US, and because small businesses have no income, they lack liquidity. When small businesses don't have liquidity, they die. It has to close and, perhaps, this closure will be permanent. But if small businesses close, it is very difficult for the economy to revive. This can totally change the nature of the recovery. So we have to do everything we can quickly to help SMEs in these very difficult times. SMEs are often not perceived as an important player in the economy. They do not even appear in macroeconomic models. These models look at investment, large companies, government policies. SMEs. This crisis is forcing us all to realise how important they are, partly because of the effect on employment. For many people, this is their world of work. In the United States they have had a hard time understanding the importance of SMEs, because they don't even measure their contribution to the economy. But there is one good thing there now, that the relief measures that are being taken are starting to focus on SMEs. Every country has a different universe of SMEs because SMEs are not necessarily the same. When the economy is doing well, everyone focuses on the small businesses that are doing fantastically, thinking that they are going to be the next Google. This is great because these companies drive innovation, they drive economic activity and, in the future, they could become giants. But the truth is that there are very few such SMEs. Only less than 1% of these SMEs get the necessary venture capital investment. Most of them, instead, are one-person businesses, without employees, or are small neighbourhood businesses, such as shops, which are part of our reality. These are the companies that are most affected by the crisis. The companies most exposed to COVID-19 are the smallest of all. Unfortunately, banking and financial institutions have neglected these businesses. Now, everything is very difficult for these companies because there is no big investor willing to help them. Moreover, they are rarely supported by banks. One positive thing in the formulation of the policy to overcome the crisis is that, this time, the SMEs have not been forgotten and the relief measures for them will come in time. Many of these companies are living on the edge, they are very vulnerable. These next few weeks will be decisive for their survival. Each country has formulated its policies according to its capacities. Germany, Denmark and other countries are considering direct payments to companies. This may be a brilliant idea, but other countries cannot come up with such measures. The United States, for example, cannot because they don't have a record of these SMEs, of their employees, of the payments they have to make. So, if the United States were to consider aid like Germany, it would not be possible because they do not have such a register. It is a pity not to have such systems because, in this crisis, they may be the most effective. In the UK and other countries, Fintechs have been a very important solution. They can provide a very important access point to finance. Fintechs are also very agile. In the US, they are working with programmers so that SMEs can access a portal and get help. In the US, Fintech has been part of the solution from the beginning. Where there are not many banks, or where there are many people who do not have a bank that serves them well, Fintech can be an excellent solution. Banks can see significant results, after the changes that are coming, because they have strong relationships with their customers. As they embrace technology, they can have a better SME dashboard that allows them to detect and meet the needs of SMEs. The downside is that banks are not very agile. Banks' technology systems tend to be very stable, rigid, difficult to change. We are trying to change those systems in a matter of days. What we see in banking is that they have tried to struggle to create the capacity to distribute new aid to SMEs. One of the greatest assets in the United States is the network of banks. We have over 5,000. Many of them are state-owned banks. There are also some very important big banks, which have been incorporating this technological know-how for a long time and are doing their best to get some good Fintech tools. Maybe they didn't support SMEs as quickly as they should have because they were first serving their customers. But days have passed and now their systems are working at full capacity. In this sense, this week is going to be very interesting, with banking versus Fintech. We have seen that these new competitors of the banks have been authorised to grant loans directly to SMEs. This is something completely new because, in the past, these new non-bank lenders were not authorised by the federal authorities. But now they have the go-ahead to do so. Quickbooks, for example, has a product called TurboTax, which is an application that helps you fill out tax forms. Intuit, the company that owns it, has spent two and a half weeks putting together a new programme designed to enable SMEs to complete the requirements of the PPP (Paycheck Protection Program), a very generous US payment protection programme. This is what SMEs wanted, because the amount of paperwork is staggering. It's difficult for SMEs to know what form they need to fill in to access the programme, what if they don't have a bank. So we are going to see more activity from banks and Fintechs. SMEs are going to see that Fintechs are making it much easier for them to access the PPP programme and they are going to think that they can do their banking with them. At the moment, there is a big debate in the US Congress about this second way of financing. In the US, they think of going to the bank first. Those who tend to go to the bank first are established businesses. Businesses owned by women or minorities, on the other hand, tend to be neglected by banks. In the United States, when Twitter founder Jack Dorsey launched the Square payment system, he did so because he saw that small businesses were not getting credit cards. Ten years ago, he thought he could make it more viable for smaller, newer, immigrant-owned SMEs, street food vendors and flea market vendors to have access to credit cards. Thus was born Square, which has millions of small businesses. Paypal, as a network, has ten million small businesses. That's a third of the thirty million SMEs in the United States. So they're going to be able to establish these links with payment systems with many of the small businesses. Square started lending money. It lent an average of six thousand dollars, which is a very small amount. A typical bank loan would be $125,000. Banks are not interested in six thousand dollar loans. That's why the permission to Paypal, Intuit or Square by the federal regulator is a good thing. If we want to reach the smallest, the most vulnerable, we have to consider a path that already exists. They already have Square, they already have the Paypal account, which are going to be very important access routes. The regulator has understood that it is essential that we all come together, that everyone participates, if we want to ensure that all these important parts of the market can access money. One of the victims of this crisis is going to be the Fintech lenders who have overextended themselves the most, who have reached out to the most vulnerable companies. There has been a period of a lot of growth. They were much more aggressive than the traditional options. These lenders can see very high default rates. All over the world we are going to lose a lot of vulnerable SMEs because it is too big an impact. I hope it won't be like that for everyone, but we're going to see some of the Fintechs not make it, because these levels of delinquencies are too much for them. The ones that are more solid in terms of structure provide systems for banks. They, perhaps, can take advantage of this moment. For example, Numerated, which is a software for SMEs that was developed within a bank, Eastern Bank. What they did was to invite a group of entrepreneurs who told them to create an automated product for small loans. This bank was not very modern. It was a two hundred year old bank, with a very traditional environment, but it created this Fintech. Numerated provides automated systems to small state-owned banks so they can, in turn, develop other technology. The Fintech was doing well, it had a hundred or two hundred customers, but it was difficult to get state-owned banks to sign up. Within two weeks, however, they got another two hundred banks because those banks realised that, in this crisis, they couldn't deliver for their customers. Without this technology, they could not. So, the unintended consequence is very positive feedback for some Fintechs and maybe they are able to develop their business faster. The United States has passed a law authorising three billion for SMEs. That is a lot of money. In 2009, the Obama administration faced a terrible situation. Two million jobs were lost. Now the numbers are much higher. Then very aggressive measures were taken to turn the tide and in the first year thirty billion dollars were allocated to SMEs. Now we are looking at 349 billion in one month! What has happened is that the drafters of the law have thought about going with the banking network that they already have, working with the banks that are already licensed because they don't want fraud, because they want to work very quickly if they want to guarantee the aid, and then they will get that money through the banking channel. But it was not easy because the pipelines of the banking system are not designed for these volumes of money. These banks are not so flexible, the rules were not clear, so there were difficulties. But we have also seen that some of the big Fintechs are authorised by the federal authorities to be able to guarantee these protected loan programmes that what you do is help SMEs with, for example, two and a half months of payroll, or certain fixed expenses like rent. These programmes are designed so that the money goes directly to the SME. But many businesses are too small and do not work with a bank. That's why allowing these Fintechs is going to have a more far-reaching and longer-term effect. Everyone will understand that they are now part of the infrastructure and, therefore, we have to rethink the regulations that, until now, have been slow or refused to allow Fintechs to act as lenders. But if they comply correctly, we will see how they gain credibility with the regulator and with SMEs, who will entrust their business to them in the future. We are going to see the same thing in Europe as a result of this crisis. Kabets is one of the largest small Fintechs. It has 250,000 customers and has been able to quickly develop multiple programmes. One very good thing it did was to create a portal for SMEs to offer a gift card, a voucher. What everybody is trying to do today is to put money in the hands of SMEs, so one way to do that is to buy a gift card, a voucher. We give them money today and if, for example, it's a restaurant, in September or October we go for dinner, when that restaurant has reopened. A lot of SMEs didn't have the capacity for those cards, those vouchers. Kabets set it up and launched it on Facebook. So different Fintechs do different things. There is a Fintech called Oculus. Their infrastructure allows you to read documentation automatically. Now, a lot of banks are looking at machine-reading. Something that we are going to see happening more and more is represented by a company called Alainable, which is a network of SME owners that has four and a half million members in the United States, who have come together to help each other, to advise each other in these times of crisis. For example, they tell each other which banks are helping, which states have programmes that focus on SMEs, and so on. When, in the recovery, SMEs start to consider whether they can reopen, these companies, these platforms, are going to have a very important influence. SMEs are going to talk to each other, they are going to share information as part of a community. The current situation can get regulation unblocked, especially in the United States. In the UK we have seen Fintech legislation being considered immediately, encouraging innovation in banking. Now that is serving them very well. Secondly, we are going to see that the data aspect is more valued. In Denmark there is a lot of information about SMEs. To be able to have this data, to be able to use it, would be invaluable. I think we are going to look differently at how data is collected in relation to SMEs so that we can take better care of them. Customers are going to see that there have been Fintechs that have served them well, they are going to trust them, they are going to accept them. This is going to force banks to innovate and incorporate this technology more quickly. We are going to see a lot of changes, at breakneck speed. As far as supply chain companies are concerned, they are a very important part of the economy. Small businesses are also an important part of the supply chain. These types of businesses need other kinds of help, because they are also going to be affected. We need to pay suppliers quickly, because these businesses often suffer from a lack of liquidity. This allows these businesses to recover more quickly. They were able to pay their employees, their suppliers, and grow. It is important to pay these small businesses immediately, because they are critical for our countries. We cannot let their liquidity disappear. The Spanish government must see which are these companies and pay them more quickly. We should also think about aid so that they can guarantee employment. We have to make sure that these companies hold on. Many of them allow us to talk on the internet, others finance biotechnology research. They are critical companies and in the future it will be difficult for them to get help from banks because they often do not have tangible assets. What they do have is human capital and banks don't like to lend on the basis of human capital. These companies need to know that they can keep their employees because they are their main resource. So some help is needed to keep banks lending to these companies. That would be something that Madrid could look at. We have to recognise that SMEs are essential, but they are not identical. The ones in the neighbourhoods are an incredible source of employment and they are the bedrock of communities. If they fail, it is going to be very difficult to get them back on their feet, to revive the economy. They need policies and funds so that the engine doesn't stop. But the most important thing is for the government to consider that SMEs are very important elements, that they are critical for our countries. It will be essential to help them overcome the crisis.

The Rafael del Pino Foundation is not responsible for the comments, opinions or statements made by the people who participate in its activities and which are expressed as a result of their inalienable right to freedom of expression and under their sole responsibility. The contents included in the summary of this conference, written for the Rafael del Pino Foundation by Professor Emilio González, are the result of the debates held at the meeting held for this purpose at the Foundation and are the responsibility of the authors.

The Rafael del Pino Foundation is not responsible for any comments, opinions or statements made by third parties. In this respect, the FRP is not obliged to monitor the views expressed by such third parties who participate in its activities and which are expressed as a result of their inalienable right to freedom of expression and under their own responsibility. The contents included in the summary of this conference, written for the Rafael del Pino Foundation by Professor Emilio J. González, are the result of the discussions that took place during the conference organised for this purpose at the Foundation and are the sole responsibility of its authors.