October 14, 2020

We are posting this episode in the midst of great uncertainty about rescue lending to small businesses impacted by the COVID-19 pandemic. Congress and the White House have not yet agreed on a new round of funds for the SBA Paycheck Protection Program, or PPP, despite widespread agreement on the need for it. Meanwhile, the prior two rounds of the PPP are coming under the microscope, with early investigations suggesting both that fraud rates are high, and that fintech lenders accounted for a disproportionate share of the problem. That finding may bode ill for the sector, given that the PPP emergency was the first time that non-depository lenders were allowed into SBA loan guarantee programs, and also that they performed extremely well in reaching very small businesses — the kinds of ventures that can be a critical pathway into entrepreneurship for women and people of color.

All this makes it an opportune time to be talking with today’s guest:  Sam Graziano, the CEO of Fundation. He and I recorded this conversation several months ago, but his insights seem more timely today than ever.

In this episode, Sam tells us about Fundation’s journey, starting with his own very usual mix of skills and then the company’s launch as a direct line-of-credit lender to small businesses. He describes their epiphany, a few years back, in realizing that the technology platform they built was exactly what banks need in order to automate their own small business lending. Fundation had developed automated risk models that enable banks to say yes to business customers that, under traditional standards, would be rejected. Today, the company has a 50/50 split between direct lending and bank partnerships.

When the pandemic hit, suddenly threatening America’s small businesses with mass extinction, Fundation was positioned for action. Congress passed the emergency PPP to come to the rescue, confronting both the SBA and the banking industry with an unprecedented challenge — the need, literally overnight, to figure how to convert old, slow 20th century technology to meet this 21st century crisis. This meant quickly shifting processes into online and digital channels that could move fast, while still maintaining risk and quality controls.

In our conversation, Sam tells the PPP story from his vantage point in helping banks achieve this metamorphosis. He describes “the gauntlet” of the PPP rollout; the unavoidable uncertainties everyone faced as guidance unfolded; the widespread use of manual processes at the start; the challenges of KYC and fraud; the pattern of banks serving existing customers first; and, as he says, the “toxic” impacts of the first-come, first served sequencing in the first round.

We at AIR had the opportunity to work with Fundation on the PPP TechSprints we held last spring, working on these challenges.

Sam talks about lessons learned, and especially whether this crisis is a catalyst — an accelerant — for trends that were already underway toward transforming small business lending. He also has a vision for how bank small business services should evolve, leveraging open architecture and tech-driven unbundling of services to create really new possibilities that could change the small business lending landscape.

Sam assesses the risks ahead, including the huge dangers of synthetic identity fraud. Overall, though, you’ll be interested to hear the reasons he is optimistic for the future, and where he sees new seeds of change taking root, in places the pandemic has broken.

Meanwhile, I want to alert you to some very exciting news coming up later this week, which I will break on my upcoming podcast with Linda Lacewell, Superintendent of the New York State Department of Financial Services. Please watch for that!

More on Sam

Sam Graziano cofounded Fundation and has served as its Chief Executive Officer since 2011. He is also an advisory board member for the Coalition for Responsible Business Finance, which provides education and information to government, industry and others on how technology can help broaden access to capital to small businesses.

Prior to founding Fundation, Mr. Graziano spent more than a decade in investment banking and private equity, where he developed an expertise in strategic, financial and operational issues for banks, specialty finance companies, asset managers, broker/dealers and other institutions throughout the financial services sector. Previously, he served as Principal with Centerview Partners, where he provided strategic and financial advisory services to some of the nation’s largest and most recognizable financial services companies. Mr. Graziano’s experience includes serving as a Vice President with Keefe, Bruyette & Woods, the nation’s largest boutique investment bank focused on the financial services sector, where he executed dozens of mergers and corporate finance transactions. He cofounded the firm’s private equity practice.