FinTechs failed the American government during the pandemic, while traditional banks wisely sat things out.
That’s the short version of a new congressional report that is blaming FinTech companies for causing tens of billions of dollars in losses incurred by the U.S. government due to the high volumes of fraud that sullied the coronavirus-era Paycheck Protection Program (PPP). The PPP initiative provided small- to medium-sized businesses (SMBs) employing under 500 workers with low-interest loans of up to $10 million.
Many of these loans were forgivable, but many of the companies receiving them turned out to be fraudulent or ineligible, and the FinTech companies facilitating these loan transactions did not have in place the proper controls to mitigate the impact of these bad actors; or were perhaps blinded by the fees they were reaping, which in certain cases exceeded $1 billion.
According to the December report, FinTechs, in turn, blame the President Donald Trump administration’s mismanagement of the program for the excessive levels of fraud.
The head of policy at Kabbage, one of the FinTech firms involved in the PPP loan distributions, is reported as writing, “At the end of the day, it’s the SBA’s shitty rules that created fraud, not [Kabbage].”
Internal documents reveal that Kabbage missed obvious signs of fraud in many of the PPP applications it processed, giving taxpayer-funded loans to companies that included fake farms, among other instances.
Kabbage has not replied to a request for comment from PYMNTS.
After Kabbage was acquired by American Express in October 2020, a little more than half a year into the pandemic, PPP borrowers using the platform were shoehorned into a spin-off company that was unable to properly service their loans and would eventually file for bankruptcy.
The PPP provided vital relief to American businesses during a unique economic environment, and to ensure that the mission-critical funds were distributed quickly to the SMBs in need, the government turned to a mix of both traditional and non-traditional, or emergent, financial firms to assist in getting the money to the companies in need as quickly and easily as possible.
Industry advocacy groups lobbied the government for the inclusion of FinTechs, saying that their use of technology and innovation would allow them to better administer the PPP loans than traditional financial institutions (FIs).
Traditional FIs were refusing during this time to take on new business that did not have an existing relationship with them, creating a giant white space opportunity for FinTechs — many of which were newly established or had not engaged in SMB lending before.
Regrettably, that same addressable gap, and the fresh-faced actors servicing it, also caught the eye of scammers and fraud-minded actors.
The investigation by the Select Subcomittee found that, “many FinTechs, largely existing outside of the regulatory structure governing traditional financial institutions and with little to no oversight from lenders, took billions in fees from taxpayers while becoming easy targets for those who sought to defraud the PPP.”
PYMNTS research has found that FinTechs who consider fraud costs to be a challenge impose twice as many frictions on their accountholders as those that do not worry about fraud.
The underlying reason traditional banks weren’t taking on new PPP business was because their due diligence and fraud prevention controls would not allow it. These entities applying for loans needed to be able to prove that they, in fact, existed and were eligible, and a pre-existing relationship was one of the better ways to do this.
Two FinTech firms, Womply and Blueacorn, took on the bulk of the extraordinary responsibility of administrating the PPP relief program, facilitating around one in every three loans processed through the initiative.
Womply took more than $5 million in PPP loans for itself and had net revenue of more than $2 billion for fiscal year 2021.
Blueacorn, which was slightly absolved in the congressional report, received more than $1 billion in processing fees but spent just $8.6 million on fraud prevention, a ratio of less than 1%.
Womply is now a new company, called Solo. Blueacorn remains in operation and still states on its website that, “Blueacorn helps self-employed and 1099s qualify for a Forgivable PPP loan from the [Small Business Administration (SBA)].”
Neither company has replied to PYMNTS’ request for comment.
The way FinTechs address, or fail to address, fraud impacts their end user experience, particularly customers’ ability to add and remove funds from their accounts easily and seamlessly.
For more information, see the findings in PYMNTS’ free-to-download report, “The FinTech Fraud Ripple Effect.”
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