- Fintechs have made it easier and faster to bank, invest, and make payments.
- But recent reports have called into question fintech’s role in facilitating fraud via that ease.
- Insider spoke with eight experts, analysts, and VCs about fintech’s messy relationship with fraud.
A report from a short-seller alleging fraud on Cash App, a personal finance app that’s part of Jack Dorsey’s fintech giant Block, highlights concerns some have about the wider industry.
Block has vehemently denied the allegations, and some experts question the validity of the report. Still, industry insiders are concerned that the speed and accessibility these digital-native companies offer can come with a dark side.
Much of the value fintechs offer consumers is ease of use, especially when it comes to onboarding. Signing up and getting approved for a fintech is oftentimes quicker and easier than getting an account at a traditional bank.
A speedy sign-up process can also help expedite growth, which is always a key consideration for a startup early on. For many consumer-facing fintechs, the number of users has often translated into the company’s growth, and therefore its value, several sources told Insider.
But it’s a double-edged sword, since fraudsters and other bad actors can also onboard with ease, according to several analysts, venture capitalists, founders, and fraud experts who spoke with Insider.
“With fast growth comes fast fraud,” Frank McKenna, a longtime fraud expert who works with banks, lenders, and fintechs, told Insider. “A fintech may think they are originating legitimate customers and be amazed at their fast growth — but they might actually just be an amazingly easy fraud target.”
In many ways, the fraud issues fintechs might be dealing with are the growing pains of the industry.
“If our general theory is that as a society we want everybody using modern digital financial products, then Jack Dorsey, first through a seller business and then through Cash App, figured out the way to do it, which is to have a low friction and say yes, and then follow up and weed out the bad apples,” Matt Harris, a partner and fintech investor at Bain Capital Ventures, told Insider.
Cash App’s onboarding process has come under scrutiny
Block’s stock price dropped as much as 27% on Thursday after Hindenburg Research released a report accusing the company of facilitating fraud and enabling illicit activity on Cash App. The report claims that Cash App’s lax onboarding requirements resulted in a prevalence of fraudulent accounts.
Cash App only requires a zip code, debit-card number, and either an email or phone number to create an account. Meanwhile, other players in the space require a user’s date of birth and/or a government identifier like a Social Security Number.
Hindenburg’s report referred to Cash App’s compliance strategy as a “Wild West” approach and claimed 40% to 75% of Cash App accounts reviewed by former employees were “fake, involved in fraud, or were additional accounts tied to a single individual.”
Block issued a public statement the Thursday responding to the “inaccurate short seller report.”
“We are a highly regulated public company with regular disclosures, and are confident in our products, reporting, compliance programs, and controls. We will not be distracted by typical short seller tactics,” part of the statement read.
Cash App’s alleged fraud problem could also be the result of its large, active customer base, which numbers some 44 million, according to the company’s 2022 annual report. More customers means more instances of fraud, Jason Lee, founder of DailyPay and Salt Labs and a former managing director at Goldman Sachs, told Insider.
“Bad people will find a way to do bad things regardless of what you ask of them,” Lee said.
To be sure, Hindenburg has skin in the game as a short seller. It is to the firm’s benefit if Block’s share price goes down.
Bain Capital Ventures’ Harris took issue with the report’s characterization of interchange as “some Machiavellian scheme,” he said, despite being a standard revenue stream in the industry.
“It felt very self-serving. It definitely made some good points, but it made some bad points and quite deliberately kind of framed everything negatively,” he added. “So my net reaction is there’s definitely something to be concerned about there, but it’s radically overstated.”
Another fintech analyst said much of the report was “open secrets.”
“I don’t think there’s an investor on the street who was not aware that Cash App is relatively widely used for illicit activities,” the analyst told Insider. “At the end of the day, I don’t think anyone is shocked by any of that.”
Apps make payments easy — but too easy?
The fact that Cash App offers peer-to-peer payments exacerbates the fraud issue, according to McKenna, the chief fraud strategist at Point Predictive, an anti-fraud software company.
“It makes the money movement that much faster,” he said.
P2P payment services allow users to send and receive money instantly via a mobile device. As a free, fast, and convenient alternative to traditional wire transfers, P2P services have risen in popularity over the past decade.
Big banks have even gotten in on the action. The success of PayPal’s Venmo and Block’s Cash App led to the launch of Zelle in 2017 via Early Warning Signs, a bank-owned consortium.
However, all seem to have their own issues with fraud, whether it’s scammers impersonating bankers to get customers to send money through Zelle, or bad actors using bots to create new accounts to take advantage of rewards and incentive programs, as was the case with PayPal. Some of the apps have drawn scrutiny from regulators and D.C.
“They are targets for fraud partly for some of the very same reasons why we love them,” Ted Rossman, a senior industry analyst at Bankrate.com and CreditCards.com, said of P2P payments apps. “They’re instant, it’s hard to reverse those transactions, they can be fairly anonymous. It’s almost like, is it a feature or a bug? The fraud part is a bug, but it’s kind of rooted in some of the features that we like,” he added.
Exposing the dark underbelly of fintech
However, fraud isn’t just an issue among P2P services.
Digital-only bank Chime has had its own issues with fraud, Jason Mikula, a fintech analyst and consultant, told Insider. The neobank’s issues reportedly reached the point where some merchants, like hotel and car rental companies, wouldn’t accept its credit or debit cards following a pattern of users pulling money out of their accounts before pre-authorized payments could be settled.
Fintechs were also singled out for facilitating fraud in the Paycheck Protection Program, when an 18-month-long investigation by the House Subcommittee called out fintechs for having little to no fraud prevention efforts in place to stop obvious and preventable fraud.
Indeed, fintechs built their businesses off the fact that they could make banking easier, faster, and more convenient — and they soared in popularity over the past few years as aspects of life, from work to finances, moved online. But concerns are mounting that ease of use has led to ease of fraud.
When Mary Ann Miller saw the Hindenburg report estimate that roughly 40% to 75% of Cash App accounts reviewed by former employees were fake or involved fraud, she told Insider she wasn’t shocked at all. Miller is a 30-year fraud expert who has worked at and with banks, fintechs, and neobanks.
Miller said that fintechs, by and large, have conflicting objectives when it comes to balancing growth and risk management.
“One is to grow, grow, grow,” Miller said of fintechs’ competing priorities. “And then you have the risk teams that probably don’t have the voice that they need at the table.”
Correction: March 29, 2023 — An earlier version of this story didn’t make clear that Hindenburg’s report alleging 40% to 75% of Cash App accounts were “fake, involved in fraud, or were additional accounts tied to a single individual” was an estimate by former employees among accounts they reviewed.
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