Editor’s note: Morning Money is a free version of POLITICO Pro Financial Services morning newsletter, which is delivered to our s each morning at 5:15 a.m. The POLITICO Pro platform combines the news you need with tools you can use to take action on the day’s biggest stories. Act on the news with POLITICO Pro. MM kicked off the week with a rundown of why financial technology startups are facing a tough 2023 in Washington. Let’s dig into one under-the-radar fight where the Biden administration is trying to give fintechs a boost and is finding itself at odds with bankers and a bipartisan group of lawmakers. The battle centers on a 2022 proposal by the Small Business Administration to allow fintech startups, which tout algorithms and digital-native operations as boons to borrowers, to begin offering government-backed loans under the department’s flagship “7(a)” program — long the domain of traditional lenders. The SBA rolled out the plan with an assist from Vice President Kamala Harris. She included it in a slate of actions announced in October to help entrepreneurs — particularly people of color — underserved by banks. The proposal is emerging as a major new front in a banks-versus-fintech lobbying war that is playing out across the financial policy space. Here’s why. — Trade groups including the American Bankers Association and the National Association of Government Guaranteed Lenders are warning that the SBA is ill-equipped to regulate the fintech firms that would want to participate. Bank lobbyists argue that, coupled with loan underwriting changes the department is also proposing, the new entrants could end up being a financial burden on the program and its borrowers. “Congress will have to take action to slow this down,” said Tony Wilkinson , president and CEO of the trade group representing government-backed lenders. “We’re staring at a potential problem. Congress and SBA can head it off or they will have to clean it up.” — The fintechs counter that banks are just trying to protect their turf and have done a bad job serving the smallest businesses. “What they’ve developed is a 7(a) oligopoly that looks a lot like the taxi cab medallion scheme,” said Scott Stewart, who leads the Innovative Lending Platform Association. — But as with almost all things fintech in 2023, there’s political baggage. The fintech lenders at issue played a big part in delivering emergency Paycheck Protection Program loans to the smallest businesses during the outset of Covid-19, while traditional banks faced complaints that they were catering to their existing customers. But the startups have been dogged by accusations that they exposed the SBA to scammers. The House’s lead coronavirus crisis subcommittee said in a December report that fintechs failed to stop “obvious and preventable fraud,” leading to the needless loss of taxpayer dollars. Why you should care: The Biden administration’s implementation of the proposal will be a key indicator of the fintech world’s political capital in Washington. The House Small Business Committee’s top Democrat, Nydia Velazquez, and outgoing top Republican, Blaine Luetkemeyer, have warned the SBA about the plan. Velazquez told MM in a statement: “SBA must take the time to address the issues uncovered by Congress and exercise extreme caution before making changes to the flagship 7(a) program.” The view from SBA is that the fintech fraud problem was isolated to a couple of firms that have since been sanctioned. The agency argues that opening the program to more firms will increase competition among lenders and lower borrowing costs. “We must recognize that small business lending in 2023 is vastly different than in 1982,” an SBA spokesperson said in a statement. And that was your brief reprieve from Kevin McCarthy — Thanks for sticking with MM during this historic week. Please send tips to zwarmbrodt@politico.com and ssutton@politico.com.
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