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Banks have been fighting a secret robot war with government tech to get to the front of the line for $670 billion in small business bailouts. Here's the inside story.

Treasury Secretary Steven Mnuchin, with his wife Louise Linton, at far left, and U.S. Treasurer Jovita Carranza, right, hold up sheets of new $1 bills, the first currency notes bearing Mnuchin and Carranza's signatures, Wednesday, Nov. 15, 2017

  • The Small Business Administration was called on to save America's economy over the past two months, administering $670 billion in federal aid to beleaguered businesses.
  • But the SBA's loan approval system, called E-Tran, was an obscure tool designed for low volume — and it kept crashing.
  • In a normal year, E-Tran processes roughly $20 billion in loans from fewer than 1,800 banks. By the time this crisis is over, the system is expected to dole out more than $1 trillion in loans in just a few months from over 5,400 lenders. 
  • "Little did we know how critical it would be," said Maria Contreras Sweet, who led the overhaul of E-Tran during her term as SBA Administrator under Obama.
  • It's likely that E-Tran wouldn't have melted down to such a dramatic extent without the digital tools in the hands of large and small banks alike. 
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As the coronavirus pandemic started to ravage the US economy, Congress and the Trump administration had a short window of time to find a readily available tech platform that could quickly distribute hundreds of billions of dollars to small businesses in desperate need of cash. 

Amid what sources described to Business Insider as warnings from a wide array of industry participants, lawmakers tasked the Small Business Administration's E-Tran platform with carrying out the emergency loan program known as the Paycheck Protection Program, which grew in size over two installments to a staggering $670 billion. 

But Congress had little choice if it wanted to move quickly. 

A little-known website prior to the outbreak, E-Tran was designed to handle an average of $20 billion in loans per year — and it generally performed as intended. But when it became the lifeline for entrepreneurs across the US, E-Tran experienced high-profile failures that blocked many small businesses from obtaining funds. 

"I was holding my breath when I heard that it went out for a little bit there," said former SBA head Maria Contreras Sweet, who led an overhaul of the platform during her tenure under former President Barack Obama. "We put so much effort into that program, and we never anticipated it would be tested in such an unprecedented way."

The looming technology problems should have been easy to anticipate, according to industry sources who recounted to Business Insider the rush to warn lawmakers and administration officials of the shortcomings of E-Tran as the PPP advanced through Congress.

Instead, when the program went live, banks using advanced robotic automation technology were able to flood the E-Tran system with thousands of applications at once — eventually forcing the SBA to prohibit financial institutions from automating aspects of the submission process. 

This is the inside story of an obscure, backwater platform doomed to crash from the start, and the banking technology that overloaded it.   

The SBA declined to comment for this story, instead issuing a statement that it was working with the Treasury Department "around the clock to help small businesses and their lenders during this unprecedented time." 

A spokesperson for Sen. Ben Cardin of Maryland, the Senate Small Business Committee's top Democrat, told Business Insider that "the Administration was consulted on the cost of implementing the programs, which is why the agency was appropriated $675 million by the CARES Act."

Spokespeople for the Treasury and the Senate Small Business Committee Chairman Marco Rubio did not respond to requests for comment. 

SBA E Tran

A technological crisis within a financial crisis

Shortly after the work day began on Monday April 6, banks rushed to submit PPP applications.

It was the second day of the first round of PPP funding and, among other issues, lenders already reported problems with E-Tran crashing.

During the second round of funding, lenders grew frustrated with the system timing out when they were trying to process loans of more than $1 million. Others simply couldn't access the site's homepage.

Oakland, California-based Beneficial State Bank has long been a preferred SBA lender, and CEO Randell Leach told Business Insider that the way his team interacted with E-Tran before the launch of the PPP initiative is a far cry from the way it's using it now.

Leach described E-Tran as a legacy system that his team used in a very small-scale way. "In this environment, when the volumes are thousands and hundreds of thousands, it just isn't designed for that," he said.

When it became clear that PPP funding was insufficient to help the legions of desperate businesses "that anxiety and panic created its own set of communication challenges and pressures on the industry," he added. 

At NextTier Bank in Pennsylvania, Senior VP Maria Amoruso told Business Insider about the difficulties her team faced as it loaded hundreds of loan applications into E-Tran late into the night during the first and second rounds of PPP funding.

E-Tran, she said, "just couldn't handle it. The SBA is processing more on a daily basis than they normally process in a year."

NextTier has now processed nearly a thousand PPP loans by hand — a process that Amoruso said takes about 10 minutes per filing.

"The most challenging part is making sure you have all of the details required by the system – date business started, ZIP+4 for the applicant and principal, and NAICS code are a handful of the data points that you need to have in advance of entering the application," she said.

It used to be fax machines

When Contreras Sweet took the helm of the SBA in 2014, she saw tremendous disparities in the technology capacities of the agency's partner institutions across the country.

"Many of the community banks were still processing their SBA loans over fax machines," said Sweet. "When we said we wanted them to go online, they would scan and then send them to us. That's not what we meant by digitization." 

Under Sweet's tenure, the agency took action to try to expand and improve the E-Tran system. 

"When we got there, it was a proprietary system," she said. "We moved really aggressively to a plug-and-play so we weren't wedded to one vendor, and it gave us a lot more latitude."

As an often-overlooked agency within the federal government prior to the outbreak — one that both Trump and Obama sought to minimize with budget cuts — SBA was never going to receive enough annual funding from Congress to keep up with the pace of innovation within the financial industry.

Looking at the SBA's financial portal today is like peering into a fintech time capsule.

Indeed, five years is a lifetime in that industry, and while the SBA was attempting its own modernization efforts, Wall Street giants like JPMorgan Chase and Bank of America were spending billions of dollars annually to harness advanced tech like artificial intelligence and blockchain. 

At a small scale, the system could handle tools like automation that SBA-specific lenders used prior to the coronavirus recovery program. But the tech improvements weren't enough to handle the coming onslaught of applications. 

Contreras Sweet told Business Insider that the challenges faced by lenders and borrowers alike were to be expected given the scale of the $2.2 trillion CARES Act.

"We're trying to do something that is unprecedented in our country's history," she said. "So no question, there's going to be some challenges around it."

E-Tran was never built to handle this capacity

The platform was never intended to be used as the mechanism to underpin one of the largest economic recovery packages in history. 

In a normal year, E-Tran processes roughly $20 billion in loans from fewer than 1,800 banks. By the time this crisis is over, the system is expected to dole out more than $1 trillion in loans in just a few months from over 5,400 lenders. 

But industry insiders said Congress and the administration were left with little choice apart from E-Tran. 

"To do this as quickly as possible, there was no other game in town," said Charles Potts, chief innovation officer at the Independent Community Bankers of America. 

"There is no other platform or mechanism by which a lender could be the intermediary to money from the federal government and distribute it to small businesses," he added. 

It's perhaps unsurprising that IT ended up as the main point of contention with the PPP, given that the federal government did not have a good track record on technology to begin with. 

The Obama administration, for example, spent hundreds of millions of dollars to build Healthcare.gov — the portal that Americans used to sign up on the exchanges created by the 2010 healthcare law — only for it to crash at launch. 

The digital divide

E-Tran likely wouldn't have melted down to such a dramatic extent without the plethora of digital tools in the hands of banks. 

The IT team at KeyBank, for example, scrambled the night before PPP launched to build a proprietary portal that would seamlessly connect its systems to E-Tran. 

Among other tools, the Cleveland-based financial giant employed what is referred to as robotic process automation, or RPA, to speed the operation along. The technology allows companies to automate office tasks like filling out basic forms.

KeyBank wasn't alone. Because of the PPP's promise to award loans on a first-come, first-serve basis, financial institutions of all sizes employed automation tools in the race to get documentation to the SBA as fast as possible.

Beneficial's Leach said his team decided to forgo submitting loan applications by hand in favor of an automated service from a third-party provider that Leach had worked with before. The lending team spent the weekend after the PPP launch training on the new software and had it up and running the following Tuesday. The tool enabled Beneficial to submit 333 applications during the first round of PPP funding, which Leach said saved over 8,000 jobs. 

While small banks hoped automation would help them nab a place in the competitive PPP queue, it became a problem during the second round of funding when industry giants like Bank of America and JP Morgan Chase began dumping their backlogs of hundreds of thousands of applications into E-Tran all at once. 

In response to the overload, the SBA prohibited the use of RPA in submissions and later set aside an exclusive window of time for smaller lenders.

Max Mancini, an executive vice president at Automation Anywhere, a California-based developer of robotic process automation software, argued that limiting access to tech would hamper community banks' efforts to level the playing field with the industry giants.

"Because it's first-come-first-served, the people with the best technology win. That's the reality. And that tends to not favor smaller players," he told Business Insider. 

And smaller players were wary of investing capital in tech capabilities that might only have been needed for this one-time program. 

"It's been a very manual process for us," said Southern Bancorp CEO Darin Williams. "We know this is short-lived, so we didn't invest in — and try to learn — some new technology platform."  

For a company like Arkansas-based Southern Bancorp, spending money on a tool it would only tap to process PPP loans in the short term did not seem like a logical investment. 

"No doubt technology would allow us to increase our volume," Williams added."I can't do the volume that Bank of America can do."

SEE ALSO: 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

SEE ALSO: How KeyBank's tech overhaul got the 195-year-old firm processing 33,000 small business loans during the coronavirus pandemic — up from 550 per year

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