May 11, 2021
Photo: Leonie Vreden/Unsplash
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.
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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.
But PPP fraud was rampant. And fintechs have found themselves in the hot seat as scammers took advantage of the crisis loan program.
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
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.
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.
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.
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.
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.
Thanks for reading — see you Friday.