July 7, 2020

Debunking the American Dream: Did the PPP Fail Small Businesses?

Many economists have suggested that the Paycheck Protection Program, or PPP, failed Americans on at least one major front: prioritizing lending to business owners in underserved markets. The Small Business Administration’s inspector general admitted as much back in May.

The question now is why. Why did just 12% of Black and Latinx business owners who applied for PPP loans report getting what they asked for? Why does the Center for Responsible Lending estimate upwards of 90% of businesses owned by people of color have been or will be shut out of the PPP?

The answer is complicated, systemic, and deeply rooted in a norm of occupational segregation that’s plagued American capitalism for centuries. But if there’s anyone who can speak to the PPP’s intersection with economic and racial justice, it’s Joyce Klein, director of the Business Ownership Initiative at the Aspen Institute.

Today on Business Casual, Klein explains the hurdles to accessing capital and achieving economic mobility for minority groups, from racial to gender. If you want to understand…

  • How traditional banks are failing small businesses in the U.S.
  • Why future stimulus spending from Congress needs different design
  • When we might face a systemic failure of small businesses…

Listen to this episode now.


Kinsey Grant, Morning Brew business editor and podcast host [00:00:07] Hey, everybody, and welcome to Business Casual, the podcast from Morning Brew, answering your biggest questions in business. I'm your host and Brew business editor, Kinsey Grant. And now, let's get into it. [sound of a ding]

Kinsey [00:00:19] The United States is a country known for symbolic sayings. Life, liberty, and the pursuit of happiness. A new nation conceived in liberty and dedicated to the proposition that all men are created equal. Ask not what your country can do for you. These all combine to create the framework for the, quote, American dream. The dream that anyone can make it so long as they're willing to put in the hard work. But lately it's become clear that the American dream is really more like the American dream, but only for some. 

Kinsey [00:00:47] In the wake of both an enormous and somewhat surprising recession and a newfound conversation about injustice—systemic injustice here in the United States—we've come to better understand that we have left behind entire swaths of this nation who are continuously and regularly siphoned off from the tools needed to succeed in business in our modern economy. Anyone who started a business knows that it takes more than just putting in the hours to create your own success story, your own American dream. It takes access to capital, access to information, access to fairly priced labor, and so much more. And not everyone has that access. 

Kinsey [00:01:23] That's been evident in recent months as minority-owned businesses report significant barriers to securing loans from the government, the same government that passed a historical relief package that was supposed to keep the lights on for all of the small businesses that make up the backbone of our economy. Turns out, might only keep the lights on for some. And my guest today will explain why and how and why it matters in just a few moments. Joyce, welcome to Business Casual. How are you doing today? 

Joyce Klein, Director of the Business Ownership Initiative at the Aspen Institute [00:01:49] I'm doing great. Thank you. Thanks for having me today. 

Kinsey [00:01:51] Yeah, I'm happy to chat with you. I'm excited for this conversation. Joyce Kline is the Director of the Business Ownership Initiative at the Aspen Institute, which is an international nonprofit think tank. And her team works to advance business ownership as an economic opportunity strategy. She has more than 20 years of experience studying and supporting micro-enterprise and entrepreneurial development programs in the U.S. You're the expert when it comes to things like this. I'm really excited to get a little bit deeper into this conversation around entrepreneurship in general and why we have seen so many barriers to that entrepreneurial success for minority populations here. 

Joyce [00:02:30] Well, thanks. I'm really glad to be talking about this. As you said, [laughs] I've been working on this for a long time. And but this is really a moment where I think both because of what's happening in the economy and our business sector and what's happening in terms of racial justice and equity issues, we need to tackle this issue. So. 

Kinsey [00:02:44] Right. And, you know, we wanted to do an episode about paycheck protection program and the Cares Act. PPP has been something that we have tossed around so much. And I think that right now is exactly the time to be having this conversation. We know that all the money has been put on the table, but how it's been distributed has not exactly been, you know, what was supposed to happen. 

Kinsey [00:03:04] So, I want to dig deeper into that. But to start out, let's try to establish a little bit of a better understanding of what exactly is at stake. So I want to get your perspective on precisely how business ownership in general can serve as a means of creating economic opportunity. Can you explain that a little bit? 

Joyce [00:03:21] Yeah, sure. If we think about what we care about in terms of economic opportunity, we want people to be able to generate money that covers their daily expenses. And a lot of times, when you think about the American dream, one of the critical factors in people's ability to achieve economic mobility, to get to a better place, to do better than their parents did, has to do with their ability to generate wealth. And we're a capitalist economy, and one of the ways people generate wealth is by owning businesses. 

Joyce [00:03:50] And so as we think about how that ability to start and grow a business and generate value from it that supports yourself and your family, the question of who has access to that opportunity to generate and build and own businesses is a really critical question. And it's one where we've seen a lot of disparities in terms of access related to issues of race and ethnicity. 

Kinsey [00:04:12] Right. So what exactly, when we think about these issues along racial lines, what groups are being cut out of this conversation or are losing access to the things that they need to further themselves in terms of wealth building and entrepreneurship, etc.? 

Joyce [00:04:28] This is an area where we've seen—I'm glad you asked that question that way, let me just say that first, [laughs] because it is important. We've seen general issues in terms of access to entrepreneurial resources for people of color in the U.S. and also for women in the U.S. for a long time. But there are different experiences for different racial and ethnic groups, and it's important to understand that. And so I'll try to call that out a little bit as we talk about that today. 

Joyce [00:04:55] In particular, when we look at issues of business growth and business success and how much wealth people own in terms of businesses, it's been particularly challenging for Blacks and for Latinx populations and folks in the U.S. Asian Americans have fared better, although I will note that that also varies to some extent by which Asian subgroup you may be part of. And also depends in some cases on how recently you or your family may have come to this country, because often folks who were newer to the U.S. have challenges establishing themselves. Not always true, but sometimes. 

Joyce [00:05:28] And then the other thing I will note is I'm not going to, unfortunately, not going to talk a lot about the Native American experience in the U.S. or the indigenous experience, which has also been really challenging, partly because there's just not as much data in the U.S. We're really bad about collecting data about what the experience of Native American is in a lot of different ways, and it also exists in the business space. So there's just a lot less research and data to be able to talk about that experience. 

Kinsey [00:05:51] Right. Like you said, I'm glad we're going about it this way. I think that grouping or lumping any minority group together is a dangerous game to play. Every experience is different. I want to focus a second here on the Black and Latinx experience. One interesting concept that I came across when I was preparing for this interview is this idea that so often, especially in Black and Latinx communities, people who are entering the labor force are often put into lower-wage jobs or like that is the most available employment for them at any given moment compared to the experience of being white and looking for employment right off the bat. Why does that matter? And how does that impact the ability to eventually participate in this owner class of the economy? 

Joyce [00:06:37] It's really important. And the language we use is like the wonky language of us researchers. We talk about occupational segregation, which is really sort of pushing people, or only allowing people to work in certain kinds of jobs. And so this is one of those things that has sort of deep roots and longstanding roots in the U.S. And it's also something that's intersectional. So it also applies very much to women. So if you think about, for a long time, women and people of color were forced into certain kinds of jobs. They were forced into service jobs. They were forced into agricultural jobs, caregiving jobs. They weren't really allowed into either the educational systems or the jobs that were more sort of professional jobs. 

Joyce [00:07:15] And the reason that's important is really twofold. One reason is that people tend to start businesses in industries where they've built occupational and industry skills and experience. So you work as a construction worker. You then, after a while, you learn about it, you make connections, you build skills, you start a construction business, or you have a set of skills around caretaking or cleaning or cooking. And those are the skills you build a business around. So if you haven't been in a finance job, if you haven't been in a manufacturing job, you're not going to start businesses in those industries. So that's one big piece. 

Joyce [00:07:49] The other big piece is a lot of the ways that we generate wealth in our economy is partly through wages and benefits. You get income, you get retirement savings. You use that to build wealth. So if you haven't been in jobs that have allowed you or your family to build wealth, it's really hard to have money to invest in your own business. And that's a lot of the way that people invest in their own businesses—is either is through wealth that they or their family have generated. That occupational segregation has huge impacts and sort of a double-whammy for Black women, who get it from both the gender and a race perspective. 

Kinsey [00:08:26] Right. And I want to draw attention to this concept of it's all cyclical. That so often the ability or the freedom to start a business, or even to just branch out and do something different than you had been previously, is all a matter of your family's ability to support you or to have that safety net to fall back on. So at a certain point, we get into this feedback loop where everybody's kind of stuck in the same sector, they're stuck in the same class, socio-economic class. And it's, I think, part of what contributes to this idea of systemic issues, that the system is broken in that certain groups can't access what they need to break that feedback loop. 

Joyce [00:09:01] Right. So, if you look at the key ways that people finance their business, when they start off, they start off by putting their own money into it, and they start off by putting in their friends' and families' resources. If you haven't had a chance to build wealth, if your family hasn't had a chance to build wealth, then you've tapped out those sources, then you're forced into borrowing money or raising money from somewhere else. And often that ability is also based on things like your credit score. 

Joyce [00:09:28] So if you haven't been able to access the financial system, you haven't built a credit score, and you have real issues in accessing capital or you're asking people are asked to sort of cosign for their loans or put up their house if you're going to access debt that way. Well, if you haven't had a chance to own a home or if your home is in a neighborhood that was really deeply affected—I mean, one of the things we've seen since the last recession is that Black families had a lot of their wealth in their homes. 

Joyce [00:09:54] They lived in neighborhoods that were deeply affected by the subprime mortgage crisis. The value of their homes has not come back. And so they can't, for example, use home equity because of what happened in terms of predation in financial markets. That's where we get into the structural and systemic pieces of this that really affect people's ability to get capital into their businesses. 

Kinsey [00:10:16] Yeah. And I think it perfectly paints this picture that I wanted to try to establish going into this conversation—that racial justice and economic justice are conversations that have to be had in unison. They are so tethered to one another. All right, Joyce, I want to talk about the specific actions that the banks are taking, both in terms of the fringe players you referenced previously in some of these bigger financial institutions that we're used to reading and talking about on this podcast. 

Kinsey [00:10:42] We're going to take a short break to hear from our sponsor first, and then we'll do that when we come back. — All right. And now back to the conversation with Joyce Klein. So, Joyce, obviously when we're talking about the timeliness aspect of this conversation, it all has to do with PPP, accessing small business association loans. It's everything that we're talking about in the last three or four months. But what is the role of the traditional bank in all of this? How does this banking sector come into play when we're talking about this intersection of racial and economic justice? 

Joyce [00:11:18] Yes. So I would say that it was pretty typical for the government, when it does interventions in capital markets and credit markets, to go with the main players in our financial system. So it's not unusual for when Treasury and the Federal Reserve are looking at a relief program or a disaster program, they go through the SBA and they go through banks, which are the main delivery system for those kind of products. And the issue is when it comes to issues of access to capital, particularly for people of color, for women, for other groups. What the issue is that they don't have banking relationships. 

Joyce [00:11:54] They're not served by traditional banks. And so the issue is that they haven't run the program through delivery systems that serve and reach those businesses. We do a lot of work with organizations called Community Development Financial Institutions—CDFIs. They're lending organizations. Sometimes they're banks and credit unions, but also often they're nonprofit community-based loan funds. And they're mission-first. And they collect resources from a lot of different sources to make the kinds of loans that banks don't want to make because they're too risky or because they're too expensive or both. 

Joyce [00:12:30] They have a much stronger record of lending to people of color and entrepreneurs of color. They also do other kinds of loans besides business loans. So sometimes they're lending to consumers or families, but sometimes they're lending to businesses. They have much stronger records of lending to people of color, of lending to low- and moderate-income communities that are the ones that typically don't have access. 

Joyce [00:12:50] And with the PPP, very few of those CDFIs were allowed to be part of the first round of the PPP. More of them were allowed in in the second round of the PPP. And they are much more willing to do the smaller dollar loans than the larger banks are. And I think we saw a lot of coverage of banks going first to their existing customers. They went to people who had a relationship with them. And interestingly, it wasn't just, do you have a business checking account? It was, do you have a loan from this financial institution? 

Joyce [00:13:23] Which is a smaller universe. And I will say there were some reasons for banks to make that decision. There are certain things you need to do as a bank, about knowing who your customer is and fraud prevention. And if you have an existing customer, you have that information already. It's easier to process that loan. But it absolutely excludes people that have already been unable to access credit through banks. 

Kinsey [00:13:50] Yeah, and that was a question I wanted to ask. What makes for a relationship with a bank? Is it just I have a debit card with Bank of America. Does that give me a relationship? And it's interesting to hear that the answer is no. It needs to be something more, something deeper than that in so many cases. So the idea of the size of this loan, I think, is also something that's particularly intriguing to me. We had someone on the podcast before, Chamath Palihapitiya, who's a venture capitalist and who was basically doing a teardown of capitalism on the show. 

Kinsey [00:14:16] But, he made the astute comment that if you owe the bank a $100, that's on you. If you owe the bank a $100 million, that's on the bank. That it is entirely dependent on the size of the deal that's happening. Who's going to speak for it? Who's going to make sure that this gets paid or doesn't get paid or what have you. So talk to me a little bit about why small businesses in particular are not an attractive business deal for a lot of these bigger banks. What makes this a riskier deal or what makes this a less profitable deal? 

Joyce [00:14:45] A lot of it has to do with the size of the loan as much as, or more than, the risk of the loan. So, business loans tend to be more expensive to make than consumer loans, because you have to look at a lot more factors. You have to assess the health of the business and the ability of them to repay the loan. 

Joyce [00:15:04] And so it's not as easy to boil it down. A lot of the way that we've scaled and increased the returns on mortgage lending and credit card lending is through using credit scores, which boils things down to a pretty easy numeric score that banks use. And they've used that not only to make loans, but to securitize them and really scale the level of financial transactions. It's much, much harder to do that with a business loan. 

Joyce [00:15:33] So what that means is if a business loan is small and you don't really reduce the cost—you can reduce the cost somewhat of underwriting a smaller loan than a big loan maybe, because you might not have all this collateralization that you do and valuing collateral and things like that. You may be looking more at things like credit score and cash flow. But there's only so low you can reduce it. And if a loan is small, unless you charge a really high interest rate, you don't just earn that much money on it. 

Joyce [00:15:57] It's not going to cover the cost of not only originating the loan, but servicing that loan over time. If it's a loan of less than $25,000 at rates that banks want to lend at, because they don't want to be at a super-high interest rate, they're going to lose money. And even if it's less than $100,000, there's lots of other places they can make more money than they're going to make on that small business loan. And so I will note that after the Great Recession, we saw a big contraction in small business credit. 

Joyce [00:16:28] And since that time, even before the pandemic hit and the current recession related to that, the small business lending market for loans less than $250,000 coming out of banks had not recovered. Banks were still doing less, even after what people considered a multiyear-long recovery. Banks had not come back to doing the level of lending in amounts less than $250,000 that they were doing before the recession. And a lot of that has to do with we could just make more money elsewhere. 

Kinsey [00:16:55] Interesting. So are these banks going to make money off these PPP loans? I mean, there are certain things you have to do to get loan forgiveness, but even if there's widespread loan forgiveness, who's making the money here? Are the banks going to profit from all this? 

Joyce [00:17:08] I think it probably depends a lot on loan sizes. I do know that for the CDFIs—the community-led financial institutions that we work with that have originated a lot of the smaller loans—they have real questions on their minds about how they're going to be able to service those loans over time. So part of this is just, like, I have to send out the payments. If someone's not paying, I have to follow up with them. I have to figure out what's happening. I have to figure out what I'm going to do. 

Joyce [00:17:33] But there's also the question of, for many of them, because they have deep relationships with their customers, they want to help them get forgiveness. And for many of them, they're working with businesses that may not have the sort of paperwork and documentation that it takes to easily get the loans forgiven. And so they're going to be spending time working with them to try to make sure they get those loans forgiven. So, I think they're not going to make money off this lending program. 

Joyce [00:17:57] And they sort of knew it, but they went into it anyway because they're mission-first, and they knew that these businesses in their communities needed them. 

Kinsey [00:18:04] Altruism in banking. It does exist. OK. So, Joyce, we've talked a lot here about the experience of borrowing money as a small business in general. I want to zoom in a little bit here on the experience of running a small business as a member of a minority community. Before I do that, just a little bit of background just because we have had a crazy news cycle. I want to remind people of all of the numbers and everything that happened with PPP. 

Kinsey [00:18:29] So, Congress set aside about $349 billion for the paycheck protection program, PPP, that we've been talking about, in April as part of a $2 trillion-stimulus package. Money ran out. They authorized more spending that included about $60 billion set aside for small businesses. And the general consensus coming out of those authorizations was that small businesses owned by minority business owners were not getting access to the loans that businesses owned by white business people would. And that was a widespread valuation of what had happened. But there are also a lot of numbers to back it up. 

Kinsey [00:19:03] We saw even the SBA's inspector general found that businesses owned by people of color might not have received the loans that they were intended to under the paycheck protection program. And that's something I really want to talk about here—that there was intention to protect minority-owned businesses that just never happened. It never came to fruition. There was an estimate that upwards of 90% of businesses owned by people of color, either at this point, in April, had been or would likely to have been shut out of PPP entirely. Wasn't it designed so that that wouldn't happen? What happened? What failed so that that ended up being the reality—that 90% of minority-owned businesses weren't getting the money they needed? 

Joyce [00:19:42] So I would say that part of this is a delivery system question, which I said before. If you're going to run it through banks, banks have traditionally not been great about serving those businesses. And even if you look at the SBA's programs generally, the ones that have the highest levels of lending to minority is they're micro-loan program, which is not run through banks. The ones that go through community financial institutions have much higher levels of lending to entrepreneurs of color. I think some of this also has to do with size and the size of the businesses. 

Joyce [00:20:13] Firms owned by people of color tend to be smaller. They tend to be smaller because of all these structural and systemic issues we talked about. You have less capital. You start businesses in industries that need less capital, which tend to have lower revenues and be less profitable. And you have occupational segregation. You tend to start businesses also in businesses that have lower revenue levels and tend to have lower margins. And so you can only absorb smaller amounts of debt. 

Joyce [00:20:42] And you're talking about those smaller loans, which there are disincentives with a program that's the way it's paid for is based on a percentage of the loan amount, so the lender gets paid a percentage of the loan amount. You make a bigger loan. You make more money. And you're gonna go where you make more money. But you have to make a really difficult choice about, like, am I going to make a loan that I can't earn money on, that I'm going to lose money on? 

Joyce [00:21:05] And if that's where entrepreneurs of color are, it's a problem. The Federal Reserve does a small business credit survey. This is just in a regular economy. And what they found in their most recent data was that 76% of Black entrepreneurs, and I think it's 63% of Latinx entrepreneurs, were looking for loans less than $100,000 when they were looking for business credit. And people who were looking for PPP loans generally that were smaller than what they would look at in a normal credit market. 

Joyce [00:21:31] So, wrong size is a big piece of this. And then I think a lot of this also has to do with the smaller businesses tend to have—they don't have the financial advisers, they don't have the lawyers to help them parse through, like, this is a new program, we don't quite understand what the rules are. There were 17 different changes to the rules in that program when it came out. It wasn't clear what forgiveness was going to entail. So bigger businesses had more lawyers to help them figure it out or accountants to help them figure it out. 

Joyce [00:22:00] Bigger businesses might think, you know, I'm going to take this loan out and I'm big enough where if I don't get it forgiven or I don't get it all forgiven, it's kind of a long-term loan with a low interest rate, and I think I can still afford to pay it back even if I don't get it forgiven. Whereas for some businesses, it's like, if this isn't forgiven, it's a real problem for me. 

Kinsey [00:22:19] Right. And I think it is generally a confusing process for so many people. You know, you read how many stories of I don't know how to do this. I feel like I might be getting into some sort of fraud. At what point do I call in help if I can even afford to have help? 

Joyce [00:22:32] Right. Like, I don't wanna get audited by the SBA. Like, I can't afford it. I'm gonna get in trouble. Like, I don't need, like, yeah, I don't need this. 

Kinsey [00:22:40] Right. Right. It's not worth the headache. Part of, I guess maybe, if you can [laughs] hear frustration in my voice, is that I'm having trouble understanding. We talked about the bottom-line decision of loan size makes a huge impact. And we know that the loan size is often dependent on who's owning the business and what kind of sector the business is in. But I just have to wonder if, already we have all these statistics out, that the minority-owned businesses didn't get what they needed or didn't get even what they expected or they are going to go under first. 

Kinsey [00:23:08] We have all of these predictions about what's gonna happen to minority-owned businesses already in three months. So my question is, who was responsible for making sure that this didn't happen? And where did they fall short or where did they fail in designing these programs? Is it, you know, does the buck stop at the banks? Does it stop at DC? Who should we look to remedy this situation? Is there any one place to pass blame? 

Joyce [00:23:31] Well, let me think a little bit more about how to fix it going forward, because hopefully we're not—I hope we're not done with stimulus because clearly we have a lot of issues ahead of us. And we've been thinking and talking about a few things. I think one piece is that there's an opportunity here to get more support to community development financial institutions and minority depository institutions. 

Joyce [00:23:54] Those are like banks and credit unions that are really led by and serve minority communities that actually have a really good track record of lending to these businesses and these communities and typically have had difficulties growing because they're not as profitable or because they're structured differently. So they need different kinds of money. 

Joyce [00:24:14] One of the things we've been talking about a lot is that the Federal Reserve has done a lot to prop up capital markets. They've propped up the corporate bond market. They're doing the Main Street lending facility. They've supported certain industries. We think the Fed should create a liquidity facility that supports community development financial institutions. Let's give them the financial capacity to grow and be stable and do the kinds of lending they do, to particularly to businesses owned by people of color, but also to communities that are led by people of color. It's an opportunity to think about how we build that part of the system. 

Kinsey [00:24:51] Do you think that that is a realistic future, that that could happen? What's the Fed's current take on these CDFIs? Do they have any sort of opinion on them? 

Joyce [00:25:03] There are absolutely parts of the Federal Reserve that have historically been focused on this part of, you know, sort of the lending landscape, I would say. The Feds have community affairs divisions that have, for a long time, been interested in community financial institutions. It tends, I think, not to be part of the main infrastructure of the Fed. I think when it comes to who's going to design a credit facility in the Fed, those are different people. And it may well take an educational process and a learning process and for them to talk to people who have experience in what those organizations do. 

Joyce [00:25:36] And I think there has been some interest in this. I've definitely heard different leadership from the Fed's board of governors and the presidents of the regional banks. Really thinking about, like, as we think about intervening in capital markets, are we doing it in a way that increases or in a way that addresses racial inequities, which we already know exist in our economy? So I'm hoping that that's important. The other thing is, is if the Fed intervenes—they don't like to lose money or they can't lose money. 

Joyce [00:26:09] And so the Treasury can provide what they call a credit backstop and say we're willing to take some of the losses that might happen if you intervene in the credit market in that way. So Congress can play a role in appropriating and directing Treasury to take some of those steps. Treasury can step up and say this is a part of the capital markets we need to fix and we're willing to partner with the Fed around it. And I think the Fed can do some things. 

Joyce [00:26:31] The other thing I will say is, the other piece is that, you know, for any lender who's gonna step into this, it's gonna be a more risky environment to lend in. And a lot of lenders are not going to be able to do that unless they have some kind of credit support or loss insurance. And, in a lot of cases, both the federal government, sometimes state governments, can play a role in doing some of that. So how do we get the small business lending markets involved, you know, active again by certain kinds of programs that provide some kind of credit enhancement? 

Kinsey [00:27:05] Right. I think there's obviously the moral aspect of the conversation, that we should be doing all we can to help the people who need the most help right now. But when I think about this from maybe a more clinical perspective—when we look at the ones and zeroes here—so often we talk in the business world, in the business media world, about too big to fail, and we have to protect these certain financial institutions because without them, everything would go to shit. Pardon my French, but that's the reality. 

Kinsey [00:27:32] But I think when we consider the small business community in America, it is large. How do we think about it in context of the broader economy? At what point do you think that the small business conversation becomes big enough to be considered too big to fail? Would there ever be some sort of widespread, systematic failure in the small business community here in the U.S.? 

Joyce [00:27:53] First of all, I think we may be well be looking at it right now. There are some projections—I mean, I think we haven't seen—we've seen some really concerning numbers about how many businesses have seen a decrease in revenues. How that's particularly problematic and particularly affected businesses owned by people of color. But I think there are some folks who think we could see 40% of small businesses fail in the U.S. Small businesses are about 48% of employment in this country. So there's real employment implications here. 

Joyce [00:28:27] I'd say a couple other things. One is rates of business start and rates of small business ownership are higher among people of color than they are among white Americans. And so they are a source of what we call dynamism in our economy. Small firms that have been growing in terms of their percent of exports, they're accounted for by small firms in our economy. So they've been declining as a sort of percentage of employment or GDP. But in terms of exports, they're really important. The other thing that's interesting to think about is, like, when you think about innovation, a lot of it happens in small firms. 

Joyce [00:29:00] So if you think about, like, even in the tech sector, we tend to think about the giants like Facebook and Microsoft. Where do they innovate? They buy small startups. So even interestingly, we do a lot of work with a community financial institution in Chicago that recently started out. Got this place called the hatchery. And it's sort of an incubator for food businesses. And what's interesting is a lot of big food companies invested in it because they realized that smaller companies were much more agile in terms of innovating around, like, what do people want to eat and how do they want to eat it? 

Joyce [00:29:36] And they viewed incubating these small businesses as a way for them to get innovative ideas into their main business because they're not very good at it. So I absolutely think that this is about the dynamism of our economy. It's not just about, you know, who owns the business or, you know, sort of a negligible piece of the employment picture. 

Kinsey [00:29:59] Right. And I think that speaks so well to the point that I want to make with this episode, is that this is important. These are conversations that need to be had. Nothing like a Facebook example to really drive it home for people. [laughs] But it's such a great point. You think about the people out there who are listening to this, who work for a big company. The innovation, even at a big company, if it's not buying a smaller one, it's on a small team of people who are working together. 

Kinsey [00:30:22] It's always the small increments of people that are actually innovating and getting things done. So that, I think, also just speaks so well to this conversation. The convergence of these two conversations of racial and economic injustices and how we solve them, which I want to talk more about, how we solve them and the solutions that are being put forth in just a moment. Quickly going to take a short break to hear from our sponsor. — 

Kinsey [00:30:46] And now back to the conversation with Joyce Klein. So Joyce, we touched briefly on some of these solutions to the problems that we have spent [laughs] the last several moments talking about, being from the Fed and the Treasury and from Congress and lawmakers, CDFIs. What else is out there? A big part of the conversation has been around these smaller lenders. They have become a huge part of the conversation when it comes to smaller businesses accessing smaller, even micro loans. How should we be thinking about fintech in this conversation? 

Joyce [00:31:16] Yeah, so I think I would say optimistically, but carefully. [laughter] I talked about one of the issues with small dollar loans is that they're more expensive to make and technology can be a really important way of reducing costs by doing a lot of things more easily, by decisioning more quickly, and using more data. There's a lot of things that technology can do. In some cases, it was really important, even for some of the big banks, to be able to leverage technology to be able to lend in the PPP. So that's really important. 

Joyce [00:31:48] And at the very beginning of PPP, the fintech lenders were not allowed to lend directly. One thing I would just say, first of all, fintech is in some ways sort of two different things. There's fintechs that are lenders. And then there are fintechs that provide technology to financial companies. So it's important to separate those. So on the latter case, the technology to financial companies, in particular, is really sort of helpful because it can really reduce the costs. In the beginning, in terms of the PPP, the fintechs who were lenders weren't allowed to be part of that program and they were allowed in later in the program, in the second round. 

Joyce [00:32:25] And if you look at the data that the SBA has put out, they did a nice job in terms of doing small dollar loans. Their average loan size was much lower than across what the banks did. So that's really helpful when you think about potentially the ability to reach entrepreneurs of color. The challenges that we've seen as technology-enabled companies have come in to lending and tried to fill the small business lending gap is that some of them offer really good products and have good practices and some of them don't. 

Joyce [00:32:53] And one of the things that our program has been working on with a coalition that's focused on responsible business lending is trying to understand what are some of the products and practices that are actually, in the long term, undermining the health of small businesses because they're sort of like payday loans for small businesses or because there isn't the kind of transparency around pricing and terms that you see in consumer loans and people don't really understand what they're getting into. 

Joyce [00:33:20] And we created something called the Small Business Borrowers Bill of Rights, actually sort of defines what we think a responsible business loan looks like and we ask lenders to sign on if they upheld those standards. And we've been trying to think about how, from a policy perspective, like I think as we think about how do we sort of reactivate the credit markets, there's always this balance between expanding access while at the same time not opening people to predatory practices or really problematic practices. 

Joyce [00:33:50] And so we have to keep that balance in mind and we have to think about what are the products and practices that we are supporting in the marketplace and are we allowing in companies that actually have good products and practices? Or are some of them going to undermine businesses in the long term? 

Kinsey [00:34:06] Do you think that change will happen? Do you think this moment will affect change for the next decade? 

Joyce [00:34:12] I'm trying to stay [laughs] optimistic about that. I mean, I hope so. I've been working on this a long time, and other people have been working on it even longer. You know, Dr. King connected economic justice and racial equity and other people have been working on it for much longer. I will say, like, I think not just me, but I mean, I think others who I've worked with for many years on these issues are heartened by the protests and the activism and the fact that young folks are really engaged on these issues. The fact that people of many races and ethnicities are active on this issue, it's not just like a Black-led fight anymore. 

Kinsey [00:34:49] Right. 

Joyce [00:34:50] So I'm hopeful that there will be some attention. And like I said, I think there's real economic reasons. The equity and the justice issues are really important and the economic reasons are important as well. 

Kinsey [00:35:02] Yeah, I always think I'm a sucker for a silver lining, but I think that if we can walk away from the last four or so months with any positive outcome, I hope that part of that positive outcome is that when we were faced with an economic crisis and a justice crisis, we recognized that the two are not mutually exclusive. That maybe sitting at home for the last three months has been good for us. 

Kinsey [00:35:24] We've understood the struggles that have been going on, in not only the United States, globally for however many decades now, centuries even, of these injustices in business and just in life in general. I guess I'll join you in some optimism here, hoping that we remember these conversations moving forward once we do get back to a bull market that this conversation does not end. And we continue to consider it at the forefront of conversation around business in general and the economic health of the U.S., et cetera. 

Joyce [00:35:53] Can I make one more comment about that? 

Kinsey [00:35:55] Sure. 

Joyce [00:35:56]  I want to go back to your opening preface, like this whole American dream thing. There's this piece of the American dream thing, which is about like pulling yourself up by your bootstraps. And that is not how our economy is built. And it's not how it works. [laughs] And that narrative is really, I think, problematic. 

Joyce [00:36:14] So much of the challenge—we talked a lot about access to capital, but so many of the factors that contribute to business success have to do with—if you look at the research, like, who succeeds in business, it's access to capital. It's do you have money? It's do you have an education? It's what industry is your business in? It's do you have a credit score? And so much of all of those factors is determined by where you live, where you go to school, how much money you've been able to earn. Have you been able to accumulate wealth or have you been preyed upon? 

Joyce [00:36:48] It's all such a factor of systems and structures that the way to actually enable people to take advantage of their entrepreneurial potential—just change that narrative and change those systems and structures. 

Kinsey [00:37:00] Yeah, it almost feels sometimes like a giant game of Jenga, you know, like business success is one aspect of economic success and racial justice and all of that. But, there are all of these different pieces below that. There's the racial gap in education, the racial gap in healthcare, that all build on one another and compound on one another. And we, you know, I'm not saying that we're going to solve it all overnight. I've said that on this podcast before. 

Kinsey [00:37:24] But I think that we have to consider that this is not just, can I get a loan? This is, can I be put in the situation in which that would be even a possibility for me? I'm glad that we're talking about it now. I do wish that maybe we'd considered it more and, myself included, considered it more earlier on and recognize that these problems are persistent and have been for centuries. But thank you, Joyce, for all that candor. I appreciate your honest and transparent take on all of these thorny topics and ones that have been historically difficult to comprehend at a large scale. 

Kinsey [00:37:57] So now we are going to have a little bit of fun and I'm going to take out our Business Casual. We're going to do some rapid-questions really quickly before I let you go. So, we're remote. I'm gonna to spin the wheel for you. [sound of wheel spinning]

Kinsey [00:38:12] And it landed on [sound of a ding] Follow for Follow. So do you have somebody who you suggest that our listeners follow? Could be on social media, or the work that they're doing that you admire and think would be worth a follow? 

Joyce [00:38:23] Well, I hope people follow Rush Cheney, who has done some amazing work on opportunity in America and actually just did some really interesting stuff, some interesting research with a number of other folks about the impact of the Cares Act and the PPP and other loans, in particular looking at it by ZIP code and who's benefited and who hasn't. So. 

Kinsey [00:38:42] All right. That's a good one and concise answer. I appreciate it. All right. Taking another spin. [sound of wheel spinning] [sound of a ding]

Kinsey [00:38:49] All right. Landed on Day in the Life. So what is a day in the life like for you right now? You mentioned you're in Arlington and we're easing out of [laughs] some major lockdown in New York. But, what's your quarantine day in the life like right now? 

Joyce [00:39:01] I get up in the morning. I try to force myself to work out [laughs] because I don't want to go back to the gym yet, even though some of our gyms have opened up. But I'm not ready to do that as yet. I walk into my room in the house. My husband works from home. I have two daughters who are working from home who are with us right now. I finally got myself a standing desk so I can stand for part of the day, and I mostly work. And then hopefully we have dinner together and occasionally maybe we'll go have socially distance drinks with some of our friends. But — 

Kinsey [00:39:33] I know, it's such a strange time. But that sounds like you got it figured — you have a standing desk which beats where I am recording this podcast, which is the floor of my bedroom, so — [Joyce laughs] All right. One last spin around the wheel. [sound of wheel spinning] Yep. [sound of a ding]

Kinsey [00:39:48] OK, here, here's a good one. Let's do The One Thing. So what is one thing—could be a class, a mentor, a book, anything, or a quote—one thing that you feel has had the most outsized impact on your career. 

Joyce [00:40:03] It's actually a person. 

Kinsey [00:40:04] Perfect. Yeah. We'll take that. 

Joyce [00:40:06] Well, I was lucky early on in my career to work with someone—a guy named Bob Friedman—who started an organization that's now called Prosperity Now. It was called something different when I started. He was always really eloquent about the fact that low-income people in this country, people of color, women, those who were sort of, were challenged to make way in our economy, always had more capacity than they had opportunity. And our obligation and the key to our sort of long-term economic success, as well as justice, was about finding ways to match opportunities to their capacities. 

Kinsey [00:40:46] I like it. Opportunity and capacity. That's like the perfect bow to tie on this episode. [laughs] So thank you so much, Joyce, for coming on Business Casual, for using such wonderful examples, and helping drive these points home. I really, really appreciate it. And I definitely learned something. I'm sure all of our listeners did as well. So thank you. 

Joyce [00:41:03] Thank you. It's been great being here. 

Kinsey [00:41:13] Thank you so much for listening to this episode of Business Casual. And that conversation with Joyce had me nerding out a little bit on my econ and business topics. But it also brought up a big question that I want to hear your perspective on. Do you think that the biggest corporations in America, that are big business here in the U.S., should be eligible for paycheck protection program loans? Let me know your thoughts by emailing me at kinsey@morningbrew.com. That's k-i-n-s-e-y@morningbrew.com. And I will see you next time. [sound of a ding]