Automation in Small Business Lending Can Reduce Racial Disparities: Evidence from the Paycheck Protection Program

81 Pages Posted: 11 Oct 2021 Last revised: 19 Jul 2022

See all articles by Sabrina T Howell

Sabrina T Howell

New York University (NYU) - Leonard N. Stern School of Business; National Bureau of Economic Research (NBER)

Theresa Kuchler

New York University (NYU)

David Snitkof

Ocrolus

Johannes Stroebel

New York University (NYU) - Leonard N. Stern School of Business; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Jun Wong

New York University (NYU)

Date Written: July 19, 2022

Abstract

By enabling smaller loans, broader geographic reach, and less human bias in decision-making, process automation may reduce racial disparities in access to financial services. We find evidence for all three channels in a setting where private lenders faced no credit risk but decided who to serve: the Paycheck Protection Program (PPP), which provided loans to small businesses during COVID-19. Black-owned firms disproportionately obtained their PPP loans from fintech lenders, especially in areas with high racial animus. After traditional banks automate their loan application processes, their PPP lending to Black- owned businesses increases. Using application data to a marketplace lending platform, we show that Black applicants are less likely to get any PPP loan at all when conditionally randomly routed to conventional lenders, but equally likely to get a PPP loan when routed to fintech lenders, representing a real effect of the disparity across lender types. Our main findings also cannot be fully explained by racial differences in pre-existing banking relationships, contemporaneous firm performance, or fraud rates.

Keywords: Fintech, Automation, Small business loans, racial discrimination, PPP

JEL Classification: G21, G23, G28, G41, J15

Suggested Citation

Howell, Sabrina T and Kuchler, Theresa and Snitkof, David and Stroebel, Johannes and Wong, Jun, Automation in Small Business Lending Can Reduce Racial Disparities: Evidence from the Paycheck Protection Program (July 19, 2022). Available at SSRN: https://ssrn.com/abstract=3939384 or http://dx.doi.org/10.2139/ssrn.3939384

Sabrina T Howell (Contact Author)

New York University (NYU) - Leonard N. Stern School of Business ( email )

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National Bureau of Economic Research (NBER) ( email )

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Theresa Kuchler

New York University (NYU) ( email )

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David Snitkof

Ocrolus ( email )

101 Greenwich St
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Johannes Stroebel

New York University (NYU) - Leonard N. Stern School of Business ( email )

44 West 4th Street
Suite 9-160
New York, NY NY 10012
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Jun Wong

New York University (NYU) ( email )

Bobst Library, E-resource Acquisitions
20 Cooper Square 3rd Floor
New York, NY 10003-711
United States

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