Karen Mills on how Fintech could change the game for small businesses
Following her talk at the Cambridge Union, we interviewed Karen Mills, former member of Obama’s Cabinet and Senior Fellow at Harvard Business School, on how she thinks technology will revive the ‘American Dream’.
Mills served as the administrator of the Small Business Administration (SBA) under Obama during the Great Recession. During her tenure, she told the Tab Cambridge, she was frequently awake at night "worrying about half the jobs in the country" as 48% of Americans are employed by small businesses.
The SBA stepped in when banks stopped lending to small businesses during the Great Recession. Mills explains how, during her tenure, "The SBA guaranteed loans to encourage banks to invest in small businesses. We were in charge of a portfolio of $100 billion and, with a lost rate of under 5%, the SBA supported $95 billion successful loans".
As it stands, the rate of entrepreneurship in the US is slowing down. This is a fact which, Mills suggests, has put the "American dream under siege". She cites access to capital as one of the biggest obstacles facing small businesses: "Currently, small businesses have to put together a huge stack of paperwork and wait for weeks, maybe months, for the bank to respond. Technology has the ability to transform this experience. Big data and algorithms have the potential to suck up piles of data from your bank account, your credit card and create a model of whether or not you should get a loan."
Will the banks continue to dominate the market for small-money lending? Mills suggests perhaps not: "I think that the marketplace is going to be the first people who adopt Fintech. Banks could be amongst the winners if they use this technology. Bigtech, such as Amazon, Square and Paypal, already have the customers and the ability to create a positive customer experience and, as we've seen with Alibaba in China, they could become the next banks."
One of the potential problems surrounding the use of this technology are "black boxes" – algorithms that operate at such a high level of complexity that their decision trees are often indecipherable to humans. If decisions about loans to small businesses are going to be made by unaccountable black boxes, where does accountability lie for their decisions? Mills pointed to the widespread use of these technologies already in big tech companies, small fintechs and banks. Further, questioning the assumption that such algorithms were immune to inspection, she suggested that the "data sets on which they are trained can be screened for bias and mitigating the risk of their misuse".
According to this Brookings report, Amazon abandoned its use of a recruiting algorithm as it replicated implicit gender biases. Mills admitted that similar concerns surround the world of Fintech: "it is quite likely that the algorithms used will not make as many loans to women-owned businesses and minority-owned businesses. In the US we have laws that say you can't discriminate, but we don't have laws about how you look inside algorithms and how you deal with this new data".
Mills spoke admiringly of the steps already taken in Europe to implement data protection rules through the General Data Protection Regulation (GDPR). Moreover, she was hopeful that the system of open banking in the UK, which allows customers and small to medium-sized businesses to request their data from a bank that passes it on to a Fintech or service provider, would eventually be implemented in the US. However, as it stands, these changes have "not really caught the attention of Congress and US regulators".
Whilst Karen Mills' ambitious project for a "small business utopia" poses exciting prospects for businesses and banks, further regulation and policy-making are required to ensure Fintech is used responsibly. Moving forward, Mills suggests, the most important dilemma this generation faces is how should we think about the principles to govern and regulate the use of data.
Photos by Levente Koroes for the Cambridge Union.