Paycheck Protection Program (PPP) loans presented trouble for FinTech lenders, a University of Texas study released Tuesday showed. The study, which examined more than 10 million loans for potential red flags, showed 9 out of 10 of the highest rates of suspicious loans being approved by FinTechs.
To some extent, this dubious distinction makes some sense; more than 70% of all PPP loans distributed to date originated with FinTech lenders, with their digitally facing tools more readily available and – quite possibly – convenient for borrowers. Unfortunately, the urgency with which these funds needed distribution led to a situation in which strict KYC standards were somewhat lax – which is a challenge that faces newer FinTechs as they move to catch up with the established policies of legacy institutions.
And that fraud figure adds up quickly – almost 2 million loans flagged as suspicious in the study, with a final bill to taxpayers coming in at $76.3 billion.
The news isn’t all bad, however – as others have found, in many cases FinTech lenders offer enhanced speed and accuracy over traditional lenders in terms of loan screening. So how did things go wrong with PPP?
For one thing, the bulk of the suspicious loan rates went to new FinTech lenders that did not start making PPP loans until the third round, well into the pandemic. Square and Intuit were among the lowest suspicion rates of all lenders – not just FinTechs – and that almost certainly owes to a longer institutional memory that allowed them to have longer established relationships with customers based on a broad range of transactions – rather than a PPP loan as the point of first contact.
“Due to the focus on the rapid distribution of funds, the PPP did not include robust verification requirements,” wrote John Griffin, Samuel Kreuger and Prateek Mahajan, the study’s authors. “Traditional bank may have been more apt to follow standard practices anyway… FinTech lending, though quite successful at adapting to new environments and quickly disbursing funds, needs to improve due diligence practices.”
It’s an important reputational lesson for challenger banks to keep in mind — while the digital transformation has brought the customers to market, without carefully nurturing those customer relationships, enforcement actions and penalties could end up fouling things for the whole industry.
