Up Next

ki-logo-white
Market-Based Solutions to Vital Economic Issues

SEARCH

ki-logo-white
Market-Based Solutions to Vital Economic Issues
Research
Nov 15, 2021

Fintech and Racial Barriers in Small Business Lending

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.


View Working Paper

You may also be interested in: