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How big banks decided the futures of America's small businesses: The inside story of how $349 billion in government cash was doled out in just 12 days, leaving thousands of entrepreneurs without relief

Stimulus PPP thumb

  • The launch, rollout, and exhaustion of the first round of the Paycheck Protection Program was as high stakes as it was complicated.
  • Banks had to reconfigure how they worked and contend with antiquated government tech.
  • Larger customers often got hands-on treatment from bankers, while the smallest businesses had to go through online portals.
  • A huge backlog has already built up for the next round of PPP, and banks are warning there won't be enough to go around.
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The floodgates opened on April 3, just before 9 a.m. on the East Coast, as applications for Bank of America's small business loans started pouring into its new online portal.

Across the US, thousands of bank employees logged on remotely to field customers' anxious calls. They reviewed what would become 390,000 applications requesting north of $50 billion in the coming weeks, funneled in from small businesses desperate to survive the coronavirus pandemic.

Among the 3,000 Bank of America staffers redirected from their everyday roles to deal with the onslaught of requests, there were some 700 green financial advisers-in-training. They were told just the day before that their training would be paused to take on new roles supporting the small business and consumer segments.

The sprawling firm, headquartered in Charlotte, North Carolina, started shipping out equipment like computers, docking stations, and telephones to the homes of selected trainees and employees from other bank divisions. Behind the scenes at the second-largest US bank, teams scrambled to get the pieces in place to support a workforce that would grow to 8,000 employees in helping clients navigate the economic fallout of coronavirus. 

They scrambled in order to deliver the final step of the Paycheck Protection Program, or PPP, the federal rescue brokered by banks and agencies and meant to help the 7.5 million US small businesses at risk of closing permanently over the next five months.

Wall Street banks have swung into small business lending in a big way, but not without complication. 

Over the past few weeks, Business Insider spoke to dozens of business owners from New York to Texas to Minnesota to the Bay Area whose experiences with local banks, big banks, or fintech platforms ranged from smooth to disastrous. The most common theme was the role customer service played in their chances of getting a loan. Some felt abandoned, others are eternally grateful — either way, bank employees were the frontline workers of the American economy and inside connections were the ventilators.

In moments of triage, some people get chosen for aid. Others don't.  

With the next round of applications launching Monday, it's crucial to learn why. 

instinct dog training

$300 billion goes so fast

A week before Brian Burton's business was thrown into chaos by a pandemic, he was down in Florida for a Yankees' spring training game. Had he known he were sitting on the brink of a crisis, the cofounder of Instinct Dog Training Inc. in New York City wouldn't have put all of his hope in the government to help him out. 

"The next week we would have to start laying people off," he told Business Insider. "They were talking about potential shutdowns coming, but it took a little too long for it to become real."

Instinct lost $110,000 in cancellations within about six days of the initial wave of shutdowns and travel warnings. Between March and April, the business lost at least 75% of its revenue. He furloughed 60% of his employees, continuing health benefits for those who were eligible. 

Burton wants to make sure Instinct is around for frontline workers, high-risk people who can't walk their dogs, and other folks otherwise unavailable to care for their canine companions, so he has stayed open, selling services at heavy discounts. Just shutting the company down would have made better business sense, he said. Cash reserves are down to a month or two, and then it's retirement savings. 

The entrepreneur was counting on $278,000 in PPP loans, the maximum amount he could get based on his payroll. Before the program rolled out, he was excited to get funding that could be game changing for his business. He applied to three banks when applications opened, but experienced alternating bouts of radio silence and inconsistent communication, with the requirements of which documents to submit changing seemingly on the fly. 

Burton thought getting an early start and having applications in multiple locations, would surely lead to something. "I thought I had a good chance at it," he said. "Clearly that was wrong." 

On April 3, it was off to the races for Burton and others for a first-come, first-serve loan program with a finite pool of $349 billion. It would be gone just 12 days later, with larger, better-sourced, and better-networked firms nabbing funds before the pot ran dry.

Bank of America's frontline shuffle is indicative of what a massive (and massively complicated) endeavor launching the first round of PPP would prove to be. For the financial sector, PPP was a chance to showcase helping the community and improve images still tarnished by the 2008 financial crisis. What happened instead was public backlash.

The stimulus initiative, lauded as "incredibly aggressive" and a "historic achievement" by Treasury Secretary Steve Mnuchin when passed by Congress, has prompted personal frustrations of business owners since launch and waves of public outcry as details regarding who got what funding have trickled into the press. 

More than $500 million in PPP loans went to 134 publicly traded companies, including Shake Shack and Ruth's Chris Steakhouse, both of which promised to give back their hauls. Yet, as the beat of the news cycle has made abundantly clear, the mom-and-pops usually associated with the moniker of "small business" largely couldn't get loans before the first round of funding ran out. Many were left to figure things out on their own, often attempting to go through bank employees shuffled from other departments and trained up in the blink of an eye. Meanwhile, larger businesses had the benefit of their lawyers or regular bank contacts who could provide white-glove service through the convoluted process. 

Just days out from the launch of the second round of funding, Main Street's outlook is grim: JPMorgan is already telling customers to look elsewhere if they want to join the queue for the fresh round. And Bank of America told staff that it is "widely recognized that it will likely not be enough to meet the extreme need and demand." 

But laying the bulk of the blame on banks would be a mistake. The PPP, by design, is a Rube Goldberg machine of economic stimulus: designed by Congress, revised by the Treasury, executed by banks, received by companies. Each of these groups have their own incentives and concerns. And in speaking with banks, lawyers, and business owners, Business Insider discovered that Washington wrote a check that Wall Street couldn't cash. 

Here's what we know already happened with the first round of funding, why it happened, and what it all means for the next round. 

Or rounds.

Big banks, awkward fits

Banks warned things could get messy.

The desperate dash to stabilize the economy and provide a salve to ailing businesses had created expectations for lenders they'd never live up to — and they knew it. 

Before long, banks were contending with thousands of angry customers, a media firestorm, and a disapproving glare from Congress

In the week between the passage of the CARES Act and the launch of PPP, Treasury Secretary Steve Mnuchin had been assuring businesses that funds would be deployed rapidly, telling the public "you'll get it the same day."

But as the deadline loomed, banks notified customers this was unlikely to be the case. JPMorgan Chase, the largest US bank, said it wasn't ready and to expect delays, since the firm had yet to receive critical guidance from the Small Business Administration and the Treasury. Mnuchin, nonetheless, reiterated his timeline for the program's rollout.

Federal guidance on the program's rules ultimately arrived just hours before midnight the night before, putting banks on their heels for the opening day of the program. 

Even ones that started accepting applications on Friday, like Bank of America and JPMorgan, encountered problems. Other industry giants, like Wells Fargo, Citigroup, and PNC, delayed their launch. 

And it wasn't just the banks. The Small Business Administration, a small agency that last year handled $28 billion in loans, was ill-equipped to handle a $350 billion onslaught over a matter of weeks, not to mention ongoing cybersecurity concerns.  The agency faced critiques over its handling of stimulus funds after the September 11 attacks, Hurricane Sandy, and the Great Recession, and the  unprecedented size, scope, and speed of the PPP presented a litany of technological, legal, and operational challenges.

On the tech side, the SBA's old-school digital platform called E-Tran, through which banks would be required to manually enter applications, requiring about 15 minutes per submission by some accounts.

E-Tran transported banks to a bygone era because, unlike the SBA, the largest banks have spent billions in recent years developing technology platforms that allow automation of tedious work. Simply grappling with the antiquated system presented a major problem for large banks. Michael Brauneis, who runs the North American Financial Services industry practice at Protiviti, a consulting firm that has been helping banks design and implement their PPP platforms, compared the surge of applications into E-Tran to "cramming a football through a garden hose." 

When the time came for E-Tran to shine, it fell short. Errors or misentered information forced bank workers to restart an application. The systems crashed frequently early on and remained offline for long stretches, further delaying each application

JPMorgan, which spends nearly $11 billion on technology annually, was the largest PPP lender with $14.1 billion doled out across roughly 27,000 loans. It still has 300,000 applications in its pipeline haven't been funded. 

Eventually, the SBA stabilized its systems and some banks implemented technology to streamline the process, compressing the time to submit an application.

Protiviti, for instance, has helped banks build bots to process applications, lifting data from a lender's system and automatically keying it into E-Tran. That cuts down processing time to less than two minutes, and avoids "the risk of fat fingering or having manual data typed in incorrectly," Brauneis said.

Some banks, like JPMorgan, were part of a pilot program testing out a direct connection to the SBA's systems through an application programming interface, or API, enabling high volumes of applications to be submitted quickly. In the last two days of the first round, JPMorgan was processing hundreds of applications in an hour thanks to such improvements, according to a source familiar with the matter. That API connection will be used more broadly for the second round of applications. 

Big banks, big regulation

Banks also had to navigate uncertainty about how the lending would be regulated and what due diligence they'd be required to perform. Although the SBA is responsible for managing the program, the Treasury has largely taken the lead at every turn — even when its guidance is at odds with how the SBA is used to doing things.

Bank of America, first out of the gates among lenders, became a magnet for social media outrage for rejecting many applicants and opting initially to work only with businesses with which it had a previous lending relationship. 

The approach wasn't unusual, though — banks typically favored lending to existing customers that it already vetted and telling others to seek relief from a preexisting banking relationship.

The approach is in part motivated by practical concerns and a desire to steer clear of thorny regulatory scrutiny. 

The federal government mandates under the Bank Secrecy Act that financial institutions vet and proactively police their customers and weed out potentially illegal behavior.

Under anti-money laundering (AML) rules, banks have to adhere to "know your customer" protocols to ensure they're not being used as a conduit for corrupt or illicit activity — like when HSBC paid $1.9 billion in 2012 and served a five-year probation over lapses that allowed Mexican drug cartels to launder hundreds of millions of dollars. Knowing your customer means vetting their identity and personal information, but also looking out for sanctioned or suspicious potential clients. 

"It is an extremely high priority in the banking system that you know who you're doing business with," said Joseph Lynyak, a partner at law firm Dorsey & Whitney who specializes in regulatory compliance. "You have to be able to identify who the owners of the business are. Who owns a certain percentage of the business. And it slows everything down."

Financial institutions, chastened by the multibillion-dollar penalties levied against some big banks, have invested heavily in beefing up their vetting systems.

With PPP, regulators provided some relief for banks, putting the onus on small businesses to certify their information is accurate, rather than expecting banks to weed out fraud. Still, dealing with existing customers significantly speeds up the process— a critical advantage given how quickly PPP funds disappeared. 

"I'm much more comfortable with them dealing with an existing customer," said Jeremy Rosenblum, a partner at law firm Ballard Spahr who has been advising banks on PPP "The SBA has made it clear they don't have to redo their AML processes for existing customers."

Even with existing customers, SBA guidance still requires lenders to "perform a good faith review, in a reasonable time, of the borrower's calculations and supporting documents concerning average monthly payroll cost." 

Yet the risk of fraud remains: The bankers, lawyers, and consultants BI spoke with all said they believe the speed of the rollout and its lax provisions — minimal borrower requirements, guaranteeing the loans, and making them forgivable —  all but guarantees foul play, which the Treasury has said it will aggressively investigate.

Limited access versus 'white glove' service

Within banks, the level of service a company receives depends on what division it belongs in. Larger companies pay more to banks with a firm's commercial division, which provides access to dedicated bankers to provide advice or trouble-shoot issues. Small business clients typically pay for a level of service more akin to the average American's banking experience.

Not all banks were equipped to move across these different customer segments and work outside of their specialties. While the third-largest US bank by assets, Citigroup is focused on the needs of large corporations, governments, and running a massive credit-card operation. Work on the retail side, including with small businesses, is minor compared to competitors.

A lack of experience handling heavy volumes with E-Tran, coupled with new complicated rules for the untested program, presented challenges initially, according to a person familiar with the bank's PPP effort. Technology needed to be upgraded, or in some cases created from scratch, to assist in integrating DocuSign and payroll verification software, and the firm worked with fintech partners to custom build a digital platform for PPP lending.

There's obviously asymmetry among customers as well: Larger companies may have financial officers, lawyers, and accounting teams to vet applications. They're also more likely to have standardized payroll documentation via an outside firm like ADP. Mom-and-pop shops without such resources were left to figure it out through trial and error.

When the Paycheck Protection Program went live on that fateful Friday of April 3, small business owner KB Brown first tried to submit an application through Wells Fargo's website to fund his Minneapolis print shop.

But the bank was not yet able to accept applications, and other major banks like Chase and Bank of America were limiting access to customers with existing business account relationships.

Over the weekend, Brown scheduled an appointment — a safety requirement in order to maintain social distancing —  to visit his local Wells Fargo branch on Tuesday, April 7. A client with the bank for decades, Brown said he and his wife figured it "only logical" to head to the branch. "We were basically laughed out," he said.

After trying in vain to get information about the new federally backed PPP loans from branch employees, Brown left dispirited and empty-handed. 

"We never even got to put in the application because we were told that there was no need of putting it in because it wouldn't be accepted," he said.

Brown, who sits on his state advisory board for the Main Street Alliance small business advocacy group, left his contact information with an employee, who told him to wait for a call from the branch manager. Brown says the call never came before the PPP's funds ran out. When reached for comment, a Wells Fargo representative said that the bank couldn't speak to individual client interactions.

Like millions of other small business owners across the US, Brown was counting on the banks to fulfill an ambitious promise made by Congress. 

And yet, entrepreneurs like Brown felt sidelined and excluded because they lacked the money and connections to ensure that their applications for economic relief would be treated with the urgency and priority that was given to larger borrowers before the $349 billion fund ran out.

The distribution of PPP reflects inequality familiar to the financial sector. Research by the Center for Responsible Lending and other groups has found that business owned by women and people of color got only small slices of PPP, namely because they were less likely to have the pre-existing relationships that accelerated the lending process. A fleet of lawsuits have alleged that major banks "prioritized corporate greed" when handing out government cash meant for struggling businesses. 

Brown's struggle to submit an application — much less receive a loan — contrasts starkly with reports of wealthier clients at JPMorgan, Citibank, and U.S. Bank, receiving preferential treatment to fast-track the process.

According to the New York Times, nearly all of the private and commercial clients at JPMorgan and Citibank who applied for a loan got one, while other customers faced long queues, system delays, and exhausted funds. In response, Citi said that each division — retail, commercial, and private — worked separately and that there was no preferential treatment within those divisions.

Only 4% of loans from the first round of funding were over $1 million, but they used up nearly half of the funds allocated to the program, according to data from the Small Business Administration. Chase, which told Business Insider and other media that it was the largest individual lender of PPP dollars, favored larger loans, according to SBA data. The bank's average loan size was $515,304 — more than twice the overall average of $206,000.

While business owners like Brown waited anxiously for updates, their applications sat in E-Tran and the money dwindled away, exhausting the $349 billion limit in less than two weeks. 

The second tidal wave arrives next week

As banks ready themselves for round two of PPP and another $310 billion, many problems that plagued the first round have been ironed out. 

Lenders have faster technology and better guidance for processing loans, but there are new issues to reckon with.

A primary concern is whether the SBA systems will withstand the second tidal wave of applications that's waiting. 

JPMorgan has at least 150,000 applications — roughly half of the applications in its pipeline — processed and ready to submit to the SBA the moment the starter pistol fires, according to a person familiar with the matter. 

Citigroup, a smaller lender in round one, also now has a large pipeline of completed applications. 

Other lenders have similarly continued to process their piles of applications while waiting for another tranche of funds. 

Bankers, as well as lawyers and consultants advising them, told BI that they believe the volume of already approved loans is sufficient to tap out the second wave of funding.

While the SBA has stepped up its game — after the initial crashes and outages following the rollout, the agency upgraded its portal with the help of Amazon Web Services — the industry is wary of its systems cracking. (Maria Contreras-Sweet, who served as SBA Administrator in the Obama administration, told BI that when she arrived in 2014, many community banks "were still processing their SBA loans over fax machines.") 

Meanwhile, recalibrating operations inside the banks handling small business requests has been a historic task. Firms were already grappling with trying to keep intricate global business lines humming along remotely.

That's the tale of PPP: Intensity, scale, and uncertainty.

Burton, the owner of the dog training business in New York City, is already prepared for round two on Monday with applications in at another crop of four banks. "The only problem is I don't know if we're running a 26-mile marathon or a 100-mile ultra marathon right now," he said. 

Editing by Drake Baer, Meredith Mazzilli, and Bartie Scott.

SEE ALSO: America's small-business owners hoped a $349 billion lifeline from Washington would pull them through the pandemic. Here's the inside story of how its launch spectacularly unraveled in 24 hours.

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