Protocol | Fintech
The people, power and politics of fintech, every Tuesday and Friday.
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What was fintech’s role in PPP loan fraud?

A PPP form.

Hello and welcome to Protocol | Fintech! This Friday: a look back at fintech's role in PPP loan fraud, Square's hardware chief and yet another Binance.US CEO.

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The Big Story

Fintech fraud — or a flawed report?

The Paycheck Protection Program kept millions of small businesses from going under during the pandemic. But now, an academic study that says a huge chunk of PPP loans were fraudulent, turning the spotlight on fintech lenders who played a critical role in the government initiative.

The report from the McCombs School of Business at the University of Texas, Austin provocatively asked "Did Fintech Lenders Facilitate PPP Fraud?" in its title. It flagged at least one potential indicator of fraud in about 1.8 million loans, representing a whopping $76 billion — and it said much of the blame lay with fintech lenders.

But at least one fintech lender mentioned in the report is pushing back. The key question: Is fast and tech-enabled synonymous with fraud?

There were lots of suspicious loan applications. Hoping to help small businesses survive the COVID crisis, the federal government, through the Small Business Administration, issued nearly $800 billion in roughly 12 million PPP loans, hoping to reach entrepreneurs and mom-and-pop shops.

  • The need was so dire that the SBA, which typically worked with traditional banks, authorized non-bank fintech lenders to participate in the program.
  • But worries quickly emerged that fintechs, known for their speedy approvals, could facilitate massive fraud. Media reports described how fintechs became PPP scammers' "lenders of choice."
  • The University of Texas report, "the first academic paper to examine wide-scale potential PPP loan misreporting," appears to confirm those fears. Fintechs were "responsible for a disproportionate share of suspicious loans," about half of the "flagged loans," valued at roughly $21 billion, the report said.
  • Some fintech lenders "seem to specialize in questionable loans," the report argued. Fintech lenders did help expand the reach of the PPP, the report said, but "this may [have] come at the cost of facilitating fraudulent credit."
  • When American Express bought most of Kabbage last year, it left behind its PPP loan unit, now known as K Servicing. Kabbage lent millions to nonexistent businesses, according to a ProPublica report, and legitimate borrowers have struggled to apply for loan forgiveness.

Not all fintechs are alike. Cross River is mentioned prominently in the report. The New Jersey-based bank, authors said, was one of the three largest fintechs that "exhibited high and increasing rates of both misreporting and lending volume."

  • Cross River called the University of Texas study unfair: It used "significantly flawed data, gross assumptions and unsubstantiated claims," a spokesman told Protocol.
  • The report was prepared by people "who clearly do not understand fintech and bank partnerships," the spokesman said.
  • Cross River is both a bank and a fintech, depending on how you look at it. Founded in 2008, Cross River is a state-chartered, FDIC-insured bank. It embraced technology — but it's best known for serving fintech partners, like Affirm and Rocket Loans.
  • The report does make the point that not all fintechs are alike. Some even did a fairly good job on PPP loans. The University of Texas academics praised two prominent fintechs, Intuit and Square, for having "among the lowest suspicious loan rates of all lenders."

"Online lending does not appear to be the problem in and of itself." That's one of the conclusions of the report which said fintechs like Intuit and Square succeeded because they had "established relationships with customers based on a broad suite of payment, accounting, payroll, and other financial support services."

In other words, fast and tech-savvy doesn't always mean fraud-free. But there are times when fintechs can make a meaningful difference — especially during a crisis.

— Benjamin Pimentel

A MESSAGE FROM SINGAPORE EDB

Singapore is fast becoming a global hotbed of tech innovation. It's easy to see why. Nearly 80 of the world's top 100 tech firms have set up outposts there, including Google, Facebook, Stripe, Salesforce and homegrown unicorns like the super-app Grab.

Learn More

From Protocol | Fintech

Meet the Apple veteran building Square's crypto wallet. Thomas Templeton, Square's general manager for hardware, said the goal is to grow the bitcoin market.

PayPal dropped BNPL late fees. The payments giant will no longer charge late payment fees on "buy now pay later" customer purchases, matching Affirm's policy.

Overheard

  • "We heard from experts that people in Vietnam have a history of gambling, and the young, tech-savvy people don't have much to do with their funds in terms of investing in a traditional ETF, both of which drive crypto adoption."Kim Grauer, director of research at Chainalysis, on why crypto is taking off in the Asian nation.
  • "If demand for transactions in Dogecoin declines and is not replaced by new demand for other cryptocurrencies available for trading on our platform, our business, financial condition and results of operations could be adversely affected." Robinhood in an SEC filing after its June-quarter earnings report.
  • "I'm trying mining with Compass Mining too." —Square and Twitter CEO Jack Dorsey, on taking up a third job as a bitcoin miner.

3 Questions With...

Craig J. Lewis, CEO, Gig Wage

What fintech trend are you most excited about?

I'm most excited about "buy now, pay later." I think it's a huge innovation around how credit is handled. I'm excited because it provides a lot of access to consumers and allows them to participate in the economy in a way that they may not have had before.

What fintech trend is most troubling for you?

I do think fintechs come with certain risks that aren't really present (or prominent) with traditional banking. I think it's important to consider a lot of the challenges with fintechs around money laundering, fraud and other related risk components to fintech as we continue to innovate and move with speed and scale. There are a lot of vulnerabilities around fintech that maybe didn't exist quite as much with traditional banking, but I think those challenges will also provide opportunities for solutions and will eventually get solved as well.

What's been your biggest professional blunder and how did it help you?

My biggest professional blunder is probably when I started this company with a different idea around payroll and payments, and thought that there was no possible way that this initial idea wasn't the thing that I was supposed to bring into the world. What it taught me was that you really need to be grounded and rooted in principle, and you need a real vision and a real outcome at scale, but how you get there doesn't quite matter as much.

Need to Know

  • Brex acquired Weav for $50 million. The financial services software company said buying the Israel-based API software company will help its global expansion.
  • Visa is forming a BNPL partnership. The payments giant has teamed up with i2c, a payment and banking software company, to offer "buy now, pay later" capabilities in North America.
  • Payscale acquired CURO. The Seattle-based compensation data company said it is buying the Scotland-based pay equity and compensation management software firm.

Making Moves

Deal Flow

  • Branch raised $540 million. The earned wage access company's Series B round was led by Addition.
  • Bitpanda raised $263 million at a $4.1 billion valuation. The Austrian cryptocurrency broker's funding round was led by Valar Ventures.
  • Certik raised $24 million. The blockchain cybersecurity startup's Series B round was led by Tiger Global and GL Ventures.
  • Breeze raised $10 million. The insurance tech company's Series A round was led by Link Ventures.
  • MobileCoin raised $66 million. The cryptocurrency payments software startup's Series B round included several investors, including Alameda Research, Berggruen Holdings and Coinbase Ventures.
  • FinTech Collective raised $250 million. The venture capital firm, which invests in traditional fintech and emerging digital assets, said the new investments bring its total assets under management to $500 million.

A MESSAGE FROM SINGAPORE EDB

Business leaders say they choose Singapore for its modern tech infrastructure, strong government support, robust pipeline of talent and pro-business regulations (the World Bank ranks it No. 2 in the world for ease of doing business). Plus, its location in the heart of Southeast Asia serves as a launchpad into the bustling Asian-Pacific market.

Learn More

Data Point

$250 billion

That's the value of transactions processed by Dutch payments software company Adyen in the first half of 2021, up 67% from the first half of 2020.

Correction: Tuesday's newsletter had the wrong first name for Makara CEO Jesse Proudman. Apologies, Jesse!

Thanks for reading — see you Tuesday.

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