Bank Policy Institute, "With FinTechs, Money Moves Fast. So Does Fraud" (Sept. 1, 2021)

Summary

A Bank Policy Institute article by BPI Staff, "With FinTechs, Money Moves Fast. So Does Fraud," dated September 1, 2021. The article states that fraud in the Paycheck Protection Program was disproportionately concentrated among FinTech lenders, which it says were almost five times more likely than traditional lenders to be involved with potentially fraudulent PPP loans. It cites an August study by the University of Texas at Austin's McCombs School of Business, as cited by Bloomberg, that nine of the top 10 lenders with the highest rates of suspect loans were FinTech firms and that FinTech fraud could add up to $76 billion in questionable PPP loans. It argues that FinTechs offering banking services should be subject to the same supervisory and regulatory standards as banks.

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      With FinTechs, Money Moves Fast. So Does Fraud
      BPI Staff | September 1, 2021


         When the Paycheck Protection Program (PPP) commenced, FinTechs were typically boastful about the speed with
         which they were processing loans, heaping scorn on banks who were more deliberate. The obligatory stories about
         the innovation and creativity of non-banks were produced. However, as we and numerous others predicted and
         rigorous, after-action reports are now showing, that innovation actually took the form of relaxed due diligence and
         a high tolerance for fraud, at a massive cost to taxpayers who foot the bill. The question now is whether
         nonbanks—which operate free of the types of the federal examination and enforcement visited even on small
         banks a fraction of their size—will ever be held to account through the supervision that gives consumers and
         policymakers confidence in banks. Is anyone minding this store?




         It’s inevitable that an unprecedented program like the PPP, meant to get money into the hands of lockdown-
         battered small businesses and their employees as quickly as possible, would suffer from some amount of fraud.
         But this fraud was disproportionately concentrated among FinTech lenders, which were almost five times more
         likely than traditional lenders to be involved with potentially fraudulent PPP loans. Of the top 10 lenders with the
         highest rates of suspect loans, nine were FinTech firms, according to a study released in August by the University of
         Texas at Austin’s McCombs School of Business and cited by Bloomberg. Broadening the scope even further to the
         top twenty lenders demonstrates that 19 of those 20 are nonbanks, with the 20th being a community bank.

         This FinTech fraud could add up to $76 billion in questionable PPP loans, the study said. And those
         misappropriated dollars have real economic consequences for Americans. Each illegitimate dollar of PPP money
         effectively robs actual small businesses and their employees of much-needed support.




Bank Policy Institute | bpi.com                                                                                                  1
          In contrast, banks engaged in Bank Secrecy Act/Anti-Money Laundering (AML/BSA) and other due diligence
          obligations—in some cases beyond what the program required—before making PPP lending decisions and thus did
          not approve suspicious PPP loans to as concerning of a degree as FinTech lenders, which are not subject to the
          same BSA/AML requirements. Nor do these FinTechs have banks’ extensive experience in conducting due diligence
          in connection with reviewing loan applications. And, while FinTechs did prove to be adept at providing PPP loans to
          minority borrowers, BPI research has shown that the largest retail banking institutions were instrumental during
          2020 in providing PPP loans to smaller-sized businesses and to firms located in predominantly minority
          neighborhoods.1

          And consumer harm wrought by FinTechs goes beyond the pandemic. Sometimes, it’s as simple as not giving
          customers their money back when they ask for it. Chime, a FinTech app that advertises itself as “banking that has
          your back,” recently came under scrutiny for closing customer accounts, sometimes without returning the funds.
          That’s in addition to the trouble Chime got in for calling itself a bank when it’s not—an incident that captures the
          essence of the problem—financial-services businesses that claim to be just like or even better than banks, but
          without being subject to the expansive regulatory and supervisory framework that ensures banks’ safety and
          soundness.

          In short, FinTechs’ promises of nimbleness should be a warning sign, not a marketing draw. The areas where they
          save on costs—such as anti-money laundering safeguards, robust cybersecurity infrastructure and fraud detection
          procedures—enable fraud.

          Policymakers must ensure that FinTechs implement appropriate risk management frameworks on a variety of
          fronts. Indeed, FinTechs offering banking services should be subject to the same supervisory and regulatory
          standards—from the full suite of AML rules to prudential regulation and data security and privacy standards—as
          banks.




          __________


          Disclaimer: The views expressed do not necessarily reflect those of the Bank Policy Institute’s member banks, and
          are not intended to be, and should not be construed as, legal advice of any kind.




          1 As we noted, 30 percent of the loans originated by the nine largest retail banks were to areas with greater than 50 percent minority
          population, compared to 23 percent of the loans of smaller banks and nonbank PPP participating institutions. About 28 percent of loans
          originated by all banks larger than $50 billion in assets went to majority-minority neighborhoods. To place our discussion in the appropriate,
          broader context, it is important to note that the original PPP during 2020 had prioritized the preservation of small business jobs, through
          incentivizing the retention and rehiring of employees. Previous BPI research showed that PPP dollars per employee tended to be higher in areas
          experiencing more severe economic disruption due to the pandemic, consistent with program objectives. Also, more PPP dollars per employee
          were distributed to neighborhoods with a relatively high minority population share. These lending patterns were particularly evident among
          large banks.
                                                              Bank Policy Institute | bpi.com




Bank Policy Institute | bpi.com                                                                                                                            2


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