Technology Investments Improve CDFIs’ Small Business Lending and Make Them More Competitive
Small business lending during the pandemic put community development financial institutions in the spotlight like never before. Amid the existential threat of COVID-19, CDFIs were at the financial front line in the effort to sustain the smallest and most disadvantaged businesses. Together with other community lenders, CDFIs lent approximately $34 billion dollars under the Paycheck Protection Program, reaching underserved businesses more effectively than all other PPP lenders.
To respond to the unprecedented demand for emergency capital, CDFIs tapped into their flexibility, problem-solving, and deep relationships in local communities to make sure no business and no community — no matter how small — was left behind.
When supportive policies, adequate capital, and CDFIs come together, CDFIs excel at providing affordable finance to historically marginalized communities and people.
New research from the Urban Institute shows that technology investments can help CDFIs serve their small business clients even more effectively and efficiently. In fact, CDFIs that received technology grants before the pandemic were better positioned to respond to the crisis, according to 2021 research also by the Urban Institute.
“Technology solutions to improve CDFI efficiencies — both on the operational side and the borrower experience side — can help ensure CDFIs remain competitive and trustworthy alternatives to mainstream banks and other lenders in the small business space,” said Brett Theodos, senior fellow and director of the Community Economic Development Hub at the Urban Institute and the paper’s lead author.
Interviews with technology firms, philanthropies, and CDFI small business lenders showed that technology platforms and tools affect CDFIs’ profitability, efficiency, and growth, but investing in technology is a challenge.
Although the “gold standard” for CDFIs is a single technology platform that works seamlessly across the entire loan lifecycle, there are affordable options that link multiple systems that work together to meet business needs. However, these systems require staff capacity and specific expertise to implement. No matter the system, the upfront costs require significant investment, and philanthropic support for these kinds of infrastructure investments is hard to come by.
Given the recent recognition of CDFIs’ significant role in the nation’s small business ecosystem, it is important to continue to strengthen CDFIs’ operations, so they are positioned for success, in times of stability and in times of crisis.
The research was conducted as part of the Diverse Community Capital program, funded by Wells Fargo. The five-year program (2015–2020) was designed to build the capacity of CDFIs to support small businesses, especially diverse businesses. The full research brief, Leveraging Technology to Scale Up Small-Business Lending: A Guide for Community Development Financial Institutions and Their Funders, is available on the Urban Institute website.