Fintech and Racial Barriers in Small Business Lending

70 Pages Posted: 27 Oct 2021 Last revised: 15 Nov 2021

See all articles by Celine Yue Fei

Celine Yue Fei

University of North Carolina (UNC) at Chapel Hill - Frank Hawkins Kenan Institute of Private Enterprise

Keer Yang

University of Minnesota - Twin Cities

Date Written: October 24, 2021

Abstract

Using a linked database of Paycheck Protection Program (PPP) loans and Yelp-listed restaurants, we document that businesses owned by minority racial groups are more likely to use fintech lenders than traditional lenders. We develop a simple two-sided matching model to show that this phenomenon can be potentially attributed to differences in performance among borrowers, racial disparities in lending relationships, and race-dependent values of borrower-lender matches. Empirically, we do not find consistent evidence that operational performance is an explanation. We find that minority-owned restaurants are less likely to have lending relationships and that restaurants without lending relationships are more likely to use fintech lenders. We also find a more negative minority-non-minority gap in operational performance for fintech lenders, suggesting minority-owned businesses have higher matching values with fintech lenders. We do not find a similar pattern for first-time bank participants, community development financial institutions, credit unions, or other non-federally insured lenders. Overall, our results suggest that there are racial barriers in traditional loan distribution channels and this can be at least partially addressed by fintech lenders.

Keywords: Racial Barriers, Minority-owned Businesses, Paycheck Protection Program, Small Business Lending, Bank Lending, Nonbank Lending, Fintech

JEL Classification: D63, G2, G21, G28, H25, M14

Suggested Citation

Fei, Celine Yue and Yang, Keer, Fintech and Racial Barriers in Small Business Lending (October 24, 2021). Available at SSRN: https://ssrn.com/abstract=3949148 or http://dx.doi.org/10.2139/ssrn.3949148

Celine Yue Fei (Contact Author)

University of North Carolina (UNC) at Chapel Hill - Frank Hawkins Kenan Institute of Private Enterprise ( email )

Campus Box 3440, The Kenan Center
Chapel Hill, NC 27599-344
United States

Keer Yang

University of Minnesota - Twin Cities ( email )

Carlson School of Management
321 19th Avenue South
Minneapolis, MN 55454
United States

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