Protocol | Fintech
The people, power and politics of fintech, every Tuesday and Friday.

How PPP loans shredded Kabbage

That's a lot of cabbage.

Hello and welcome to Protocol | Fintech! This Tuesday: the DOJ probes PPP loan mistakes, the SEC weighs in on crypto ETFs and a community banker gets creative.

(Was this email forwarded to you? Sign up here to get it in your inbox every week.)

The Big Story

Fintech fumble

For fintech companies serving small businesses, the pandemic was a time to shine. They became a critical conduit for Paycheck Protection Program loans, the federal aid that kept millions of small businesses from going under.

But now the Justice Department is reportedly investigating if some online small-business lenders — despite promising that their vaunted technology would make for faster and more efficient loan processing — made serious mistakes in the way they disbursed PPP funds.

Did small businesses get the right loans? The Small Business Administration has disbursed roughly $780 billion in PPP loans to nearly 11 million borrowers since the program began last year. These loans may be forgiven if they're used for important expenses, led by payroll.

  • The DOJ is trying to find out if Kabbage and other fintech companies miscalculated the loan amounts given to businesses, partly because of confusion over how to take payroll taxes into account, the report said.
  • American Express bought most of Kabbage last year for around $850 million, but not its PPP loan unit. It referred questions to that business, now known as K Servicing, which could not immediately be reached for comment.
  • Reuters also reported late last year that some federal agencies were already investigating possible errors in the way fintechs disbursed loans, leading some businesses to get more than they should have and others less.
  • There's no suggestion that the DOJ was looking into intentional wrongdoing. After all, the PPP's rollout was marked by confusion.

But PPP fraud was rampant. And fintechs have found themselves in the hot seat as scammers took advantage of the crisis loan program.

  • Seventy-five percent of PPP loans that were flagged as fraudulent by the DOJ were issued by fintechs, according to a Bloomberg report in October. Some fintechs approved funds for businesses that didn't exist or weren't in good standing in their state.
  • A more brazen example emerged this week when the New York Times reported the story of a California man who secured $5 million in PPP loans for companies that were no longer in operation — and used the funds to buy a Ferrari, a Lamborghini and a Bentley, and for expensive vacations.
  • A side note: A big chunk of PPP loans, around $4 billion, went to venture-backed tech startups. Fifteen of these startups, each valued at more than $200 million, went public after receiving the assistance.

What does the DOJ probe say about fintech business lending? The reported DOJ probe is striking because it's focused on a company known as a leader in online business lending. Kabbage managed to do what traditional banks never could: give business owners access to huge amounts in just minutes. Its potential legal woes shouldn't worry other SMB fintech startups — which raked in more than $3.3 billion in VC funding the first quarter, up 150% from the year-ago period.

Meanwhile, small businesses have another problem. The funding for the second round of PPP loans approved by Congress this year is set to run out next week.

-- Ben Pimentel

JOIN US

Data is more valuable to the enterprise than ever before. But that's also true for the hackers who are constantly trying to steal it. And the potential for reputation damage due to improper access or usage is only increasing as governments around the world impose more stringent privacy regulations. That's why balancing operational gains against the risk is one of the most pressing topics on the minds of business leaders today. This event explores these tensions, with insight from those on the front lines.

RSVP for this event

From Protocol | Fintech

Credit Karma CEO on merging with Intuit: Ken Lin has had to learn to say "no" to his new colleagues, but the union has led to faster growth.

Square's secret crypto weapon: Kirupa Pushparaj is building IP protections for blockchain businesses.

Overheard

  • "To Simple customers converting to BBVA: This has not been a good conversion experience for many of you. We know this, and we sincerely apologize." —BBVA in a message to Simple bank users, who were unable to access their accounts after the larger bank shut down the pioneering neobank it acquired.
  • "Some women may feel there's a lack of cultural understanding by certain financial advisers and may not feel seen."Ramona Ortega, founder of My Money My Future.
  • "The SEC has made their priorities clear, and vetting crypto ETFs is not one of them. Given that the SEC has bigger fish to fry, and taking Gensler's recent remarks regarding crypto ETFs into account, I think the odds we'll see a Bitcoin ETF approved in 2021 are very low."Ben Johnson, Morningstar's global director of ETF research.

3 Questions With...

Wendy Cai-Lee, CEO, Piermont Bank

What fintech trend are you most excited about?

I am curious to see what the confluence of fintechs and traditional banks will look like. Fintechs are not taking over banks. While there is some slight progress with fintechs successfully getting a bank charter, the number is too small in the grand scheme of things. Having gone through the de novo process myself, and serving on the New York State Charter Advisory Board, I don't think getting a charter is a viable option for many fintechs due to various reasons. On the other hand, I think the U.S. banking industry is now at an inflection point where small community banks need to define their growth strategies and quickly embrace technologies and business innovation. Fintechs and banks are both here to stay, but who will most likely be the winner?

What trend are you most worried about?

Speed of growth comes at a cost. Fintechs are quickly expanding and offering banking services through APIs at a rapid pace. In bank-fintech partnerships, compliance is one of the most significant issues and a typical source of misalignment between them. Banks are equipped with solid risk management and regulatory expertise, but for fintechs, they have not been asked to hold the same regulatory compliance standards. It won't be long before the regulators start to act on this. While fintechs are very strong as technology companies, I don't know if they can build the compliance expertise quickly enough to bridge the gaps, or if they will be able to lean on their bank partners to get through the hurdle.

What was your biggest professional blunder and what did you learn from it?

Earlier in my career, I looked at banking as a risk management business, only to learn that it is a people business first. When you have good people, it makes everything else that much easier, including sound risk management. I built Piermont Bank as a hybrid bank that bridges the gap between banks and fintechs, and the talent need that comes with that approach is unique. For example, we need compliance officers to think both critically and creatively. Creativity is not a characteristic you would expect from a bank compliance officer, but it's crucial to our business model. We need operations managers to have a much broader knowledge base, ability to think outside of the box, while in most banks, they are trained to follow set procedures.

Need to Know

  • Zelle moved $106 billion in the first quarter. The real-time payments network run by Early Warning Services — owned by a consortium of seven banks — saw 392 million transactions in the quarter. Thats up 74% in value and up 61% in transactions year-over-year. Close to 8,000 financial institutions use Zelle.
  • Klarna will double its U.K. headcount. The Swedish "buy now, pay later" company opened a new London office and plans to increase staff to 400 over the next year.
  • PayPal's going retro. It will soon roll out high-yield savings, check cashing and stock investing. Here's a fun fact: PayPal predecessor X.com offered mutual funds and checking accounts in 1999.
  • Coinbase changed its pay policies. The crypto company says it's increasing compensation targets, eliminating pay negotiations for new hires and moving to one-year equity grants, instead of grants with three- or four-year vesting schedules.

Deal Flow

  • Canada's Nuvei bought crypto startup Simplex for $250 million. The Israel-based crypto payment processor has clients such as Binance and Huobi.
  • Babel Finance raised $40 million. The crypto startup, which provides crypto asset management products, raised a series A from investors including Sequoia Capital China and Tiger Global.
  • Challenger bank Fair launched with $20 million funding. The bank, which caters to immigrants, offers interest-free lending among other features.
  • FinLync raised $16 million. The startup, which provides software for corporate finance and treasury departments, raised the funds in a round led by Point72 Ventures.

Data Point

$40,000

That's the size of the bonuses UBS is offering to its analysts for promotions, seeking to hold onto younger employees burned out working at home.

A MESSAGE FROM INTEL AND MICROSOFT AZURE

Financial fraud isn't waning, and as it increases, security tools designed to protect the data in use need to get stronger to combat more complex fraud. Confidential computing is going to play a big role in the future of financial services.

Learn more

Thanks for reading — see you Friday.

Recent Issues